Thursday, July 3, 2014

Dow tops 17,000 for the first time

Dow rocketed ahead 92 to a new record, advancers over decliners a modest 4-3 & NAZ rose 28.  The MLP index slumped 4+ to the 519s after soaring to new records earlier this week & the REIT index fell 1+ to the 301s.  Junk bond funds sold off & Treasuries dropped again (see below).  Oil continued sliding lower & gold ran into profit taking.

AMJ (Alerian MLP Index tracking fund)

CLQ14.NYM....Crude Oil Aug 14....104.08 Down ...0.40  (0.4%)

Live 24 hours gold chart [Kitco Inc.]

The US trade deficit narrowed more than forecast in May on record exports, signaling a pickup in global growth that can be a boost for American manufacturers.  The gap shrank 5.6%, the biggest drop since Nov, to $44.4B from the prior month’s $47B, according to the Commerce Dept.  The forecast called for a contraction to $45B.  Sales to foreign customers climbed 1% on growing demand for autos & parts, petroleum products & aircraft engines.  Economic expansions abroad that are gaining traction will probably continue to invigorate demand for American goods.  A narrowing deficit would mean trade becomes less of a drag on GDP in Q2 after the economy contracted in Q1.  Exports climbed to $195.5B from $193.5B in Apr.  Imports decreased 0.3% to $239.8B as demand for petroleum dropped to the lowest level since Nov 2010.  Excluding petroleum, imports rose to a record as Americans bought more autos and parts, industrial machines & drilling equipment.  After eliminating the influence of prices, which generates the numbers used to calculate GDP, the trade deficit narrowed to $52B from $53.9B in Apr.  The average so far in Q2, at $52.9B, exceeds the $49.3B in Q1, signaling trade is poised to again subtract from growth, although less than in Q1.  GDP in Q1 shrank at a revised 2.9% annualized rate, the worst reading since 2009, as a widening trade gap shaved 1.53 percentage points from growth.

Trade Gap in U.S. Shrinks More Than Forecast on Record Exports

Bill Gross from Pacific Investment Management said wage growth that is keeping inflation below the Federal Reserve’s target will keep the central bank on course for slow & below-average interest-rate rises.  A gov report showed employers added 288K workers in Jun, exceeding forecasts, & the unemployment rate fell to an almost 6-year low of 6.1%.  Average hourly earnings rose a meager 0.2% for a 2nd month & increased 2% during the past 12 months, which compared with an annualized rate of 2.1% last month.  “It’s actually the wage number that is critical and the jobs that takes second seat,”  Gross said.  “In order to get to the 2 percent inflation target that the Fed wants to get to, assuming a 1 percent productivity number, you are going to have to see wages at 3 percent plus. So the Fed is willing to stay put here.”  The benchmark 10-year Treasury yield rose to the highest in 2 months after the report, reaching 2.69% & the 2-year note yield increased 3 basis points to 0.51%.  “Markets are doing what they are doing today and it’s good to have higher interest rates for those that have cash,” Gross said.  Given where Treasury yields are, “what we see is a market that is over-anticipating what the Fed will do.  That they think in years 2016, 2017, and 2018 it will be close to 3 percent federal funds rate, but we believe it will be closer to 2 percent as the economy simply can’t stand those levels of levered yields.”  Pimco is betting on a “new neutral” era characterized by global growth converging toward lower, more stable speeds & interest rates that remain below their pre-crisis equilibrium.  The 10-year Treasury yield is likely capped at 3%, as yields above those levels would slow the housing market & the pace of growth overall, Gross said.  The unemployment rate needs to fall to about 5.5%, what he sees as the natural level of unemployment for the US, before the Fed is likely to be concerned that growth is at levels that could begin to spark inflation.

Gross Says Slow Wage Growth Outweighs Jobs for Fed Policy

While stocks had a good day on very encouraging economic news, there was not a lot of conviction behind the buying.  Market breadth should have been stronger, at least 2-1.  Hot sectors, particularly yield securities, saw profit taking.  Tues evening, Alcoa kicks off earnings season & then comes the big banks.  There is a lot of nervousness about these reports after negative GDP growth in Q1.

Enjoy the 4th of July holiday!!!

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