Tuesday, June 3, 2014

Lower markets ahead of ECB meeting

Dow dropped 21, decliners over advancers 3-2 & NAZ was off 3.  The MLP index slipped a fraction to the 497s (off its record high) & the REIT index was down a fraction in the 301s (a 1 year high).  Junk bond funds were mixed & Treasuries pulled back after a healthy run in 2014.  There was bargain hunting in oil after more than a week of selling & gold rose, snapping the longest slump in almost 9 months, after equities dropped for the first time in 4 sessions.

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Kansas City Fed President Esther George
Photo:   Bloomberg

Federal Reserve Bank (FED) of Kansas City President Esther George said the FED should allow its balance sheet to shrink before raising the main interest rate, differing from an approach backed by New York Fed President William C. Dudley.  “Allowing the balance sheet to decline due to ‘passive runoff,’ which stops reinvesting the maturing securities, prior to the first rate hike is appropriate,” George said today.  The FOMC will need to decide in the “relatively near future” on how to withdraw accommodation that has pumped up the balance sheet to $4.32T, George said.  Her preference for allowing “passive runoff” in the balance sheet aligns with the FOMC’s exit plan formulated in 2011, she said.  Dudley, who holds a permanent FOMC vote as the panel’s vice chairman, said on May 20 such an approach could imply the FED will raise the benchmark rate earlier than it intends.  Ending reinvestment of maturing securities prior to an increase in the benchmark lending rate “may not be the best strategy,” Dudley said.  “First, such a decision might complicate our communications regarding the process of normalization,” Dudley said.  “Ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions as this might foreshadow the impending lift-off date for rates in a manner inconsistent with the committee’s intention,” Dudley added.  He said the FED has tools to raise the benchmark lending rate even with a large balance sheet.  George voiced an opposing view, calling on the FED not to reinvest the proceeds from maturing securities.  “As the outlook improves, this modest step would begin the normalization process and is in line with the 2011 principles,” George said to business & community leaders.  “Unless there is a major change in the outlook I see abiding by principles that the FOMC reaffirmed last year as important.  Central banks should make efforts to follow through on their plans, otherwise they risk losing credibility.”

George Says Fed Should Allow Asset Runoff Prior to Rate Rise

ECB President Mario Draghi
Photo:   Bloomberg

Euro area inflation slowed more than forecast in May, cranking up pressure on the ECB to deploy measures as soon as this week to kindle prices & drive growth.  The rate fell to 0.5% from 0.7% in Apr, the EU’s statistics office said today.  The forecast was for a decline to 0.6% & the rate has been less than half the ECB’s target for 8 months.  The core inflation rate, which excludes volatile items such as energy, food, tobacco & alcohol, was 0.7% after a 1% reading in Apr.  With ECB President Mario Draghi warning about the risk of a negative price spiral, the Governing Council is considering measures from negative interest rates to conditional liquidity for banks.  The central bank is also contending with high unemployment, which unexpectedly decreased in Apr while remaining near a record, a separate Eurostat report showed.  It has been forecasted that the ECB would become the first major central bank to take interest rates into negative territory by cutting its deposit rate (later this week).  The ECB has prepared investors for the prospect of stimulus when it announces the rate decisions on Jun 5. “We are ready to act,” ECB VP Vitor Constancio said on Fri.  “We are not complacent about the risks from a protracted period of low inflation.”

Slowing Euro Inflation Puts Pressure on Central Bank

Hillshire Brands authorized takeover talks with Tyson Foods (TSN) & Brazil's JBS as the bidding war for the maker of Jimmy Dean sausages & Ball Park hot dogs escalated.  Formerly known as Sara Lee, before spinning off its tea & coffee segment, HSH renamed itself Hillshire Brands in 2012.  It’s since focused on improving lunch-meat quality, creating new hot-dog flavors & winning over more customers with lower-calorie breakfast sandwiches.  Pilgrim’s Pride (PPC), the chicken producer which is 75% owned by JBS, raised its offer to $55 a share from $45.  That topped a $50 a share bid last week from TSN, the 2nd-largest US pork producer.  The $6.7B bid is the 2nd from PPC.  HSH said today that it’s not making any recommendation regarding either of the competing proposals, & it won’t withdraw or alter its advice for the planned acquisition of Pinnacle Foods.  A condition of both Tyson & Pilgrim’s Pride’s earlier offers was that HSH scrap an agreement to buy the Birds Eye frozen-foods maker.  HSH stock jumped $5.08 (9%) to $58.65.  If you like to play with fire (look at the chart below) & want to learn more about HSH, 
Click here for a FREE analysis of HSH and be sure to notice the intermediate time frame

Hillshire Authorizes Talks With Suitors After Pilgrim’s Pride Raises Offer

Hillshire Brands (HSH)

Very little was accomplished today.  The outcome of the ECB meeting on Thurs looms large.  Throwing even more money at the markets should be greeted with a rally.  But this may not help solve fundamental problems of weak economic growth.  NAZ has had a good run off the lows 5 years ago.  While it's up about 60 YTD, its down 120 from its peak in early Mar.  This disconnect with the Dow is not a good sign going forward.

Dow Jones Industrials

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