Wednesday, April 16, 2014

Markets climb after Yellen's speech

Dow rose 162 & closed at the highs, advancers over decliners almost 4-1 & NAZ went up 52.  The MLP index jumped 3+ to go over 480 (a new record) & the index rose 2 to 290.  Junk bond funds gained & Treasuries fell as Janet Yellen said the central bank has a “continuing commitment” to support the recovery even as policy makers see full employment by late 2016.  Oil retreated from a 6-week high after a gov report showed that supplies rose more than 10M barrels last week.  Gold crawled above 1300, a key support level.

AMJ (Alerian MLP Index tracking fund)

Treasury yields:

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CLK14.NYM....Crude Oil May 14....103.65 Down ...0.10  (0.1%)

Live 24 hours gold chart [Kitco Inc.]

Yellen Says Fed Committed to Accommodation to Support Recovery
Photo:   Bloomberg

In her first major speech as Federal Reserve (FED chair, Janet Yellen said US central bankers must be mindful of how short the FED is of its goals of full employment & price stability.  “The larger the shortfall of employment or inflation from their respective objectives, & the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” Yellen said.  The gap, in both cases, is large, with a jobless rate of 6.7% more than a percentage point higher than the top end of the FOMC’s estimate of full employment.  Inflation, by the FED’s preferred measure, is more than a percentage point below its 2% goal.  It will take at least 2 years for the economy to close in the FED’s goals, adding that the Fed’s forecasts in the past were disrupted by negative surprises, not positive ones.  In her address, Yellen told investors to pay attention to shortfalls in both inflation & the jobless rate for signals on the FOMC’s decisions on interest-rate policy.  “This approach underscores the continuing commitment of the FOMC to maintain the appropriate degree of accommodation to support the recovery,” she said.  She is encouraging investors to look at the flow of economic data to judge when the benchmark interest rate is likely to rise above zero after the FED dropped a link to a specific level of unemployment.  At the same time, she indicated that the economy needs continued support from the central bank.  “Thus far in the recovery and to this day, there is little question that the economy has remained far from maximum employment,” she said.

Yellen Says Rates to Stay Low as Long as Jobs, Price Gaps Remain

The FED said the US economy continued to expand in most regions as businesses benefited from a bounce back from harsh winter weather earlier in the year.  8 of 12 districts characterized growth as “modest or moderate,” the FED said in its Beige Book business survey, based on reports gathered before Apr 7.  Economic growth in Chicago “picked up” while New York & Philadelphia saw a rebound from weather-related slowdowns, the report said.  The Cleveland & St. Louis districts reported declines.  The Beige Book gives the FOMC anecdotal information about the state of the economy before it meets Apr 29-30 to discuss monetary policy.  The committee last month decided to reduce monthly bond purchases to $55B from $65B & scrapped its pledge to keep interest rates low as long as unemployment was above 6.5%.  “Consumer spending increased in most Districts, as weather conditions improved and foot traffic returned,” according to the Beige Book.  “Auto sales were up in the New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, and San Francisco Districts” & “assessments of tourism were generally positive.”  “Labor market conditions were mixed but generally positive,” according to the report.  “The New York, Cleveland, Richmond, Chicago, Kansas City, & Dallas Districts reported difficulty finding skilled workers.”  Still, “in most Districts, wage pressures were contained or minimal.”

Fed Saw Continued Growth Across U.S. as Winter Weather Abated

A Showroom in Haikou
Photo:   Bloomberg

China's home sales fell & new property construction declined 25% in Q1, as credit remained tight, adding to signs of a slowdown in the world’s 2nd-largest economy.  The value of homes sold fell 7.7% to 1.1T yuan ($177B) from the same period a year ago, the National Bureau of Statistics said.  The last time home value sales dropped in Q1 was in 2012.  New property construction declined to 291M square meters (3.1B square feet).  China’s broadest measure of new credit in Mar fell 19% from a year earlier & money supply grew at the slowest pace on record, according to People’s Bank of China.  China’s expansion slowed to the weakest pace in 6 qtrs in Q1, adding to risks of missing an annual growth target of about 7.5%.  Unlike his predecessor that imposed nationwide property curbs, Premier Li Keqiang last month said the gov will regulate the housing market differently in different cities to take into account local conditions.  Investment in homes, office buildings, malls & other types of real estate climbed 17% to 1.53T yuan in Q1, according to the statistics bureau.  Overall real estate sales, including commercial buildings, dropped 5.2% to 1.33T yuan from a year earlier.  China’s property market is expected to worsen in the coming months with developers posting yearly & monthly declines.  Home sales area fell 5.7% in Q1 to 178.3M square meters from the same period a year earlier.

China First-Quarter Home Sales Post Decline on Tight Credit

Stocks liked what they heard from Janet & remained higher after her speech.  Nothing really new.  She recapped the work by the FOMC since the recession & said she they see (are forecasting) full employment by late 2016.  Reductions in the bond buying program should continue this year, but the rise in interest rates is a long way off.  That means pretty much off the radar screen at the FED.  She also watches inflation closely.  Monthly squiggles which don't mean much will give the FED one more reason to postpone raising interest rates.  However the news out of China shows all is not well elsewhere.  Dow remains in the red YTD, off 130.

Dow Jones Industrials

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