Thursday, September 4, 2014

Higher markets on economic data & ECB rate cuts

Dow jumped 64 to a new record, advancers ahead of decliners almost 2-1 & NAZ added 26. The MLP index was off fractionally in the 536s & the REIT index slipped a fraction to the 311s.  Junk bond funds slid lower & Treasuries fell back.  Oil dropped & gold was weak as stocks climbed higher.

AMJ (Alerian MLP Index tracking fund)

CLV14.NYM...Crude Oil Oct 14...95.07 Down ...0.47  (0.5%)

GCU14.CMX...Gold Sep 14...1,271.10 Up ...2.20 (0.2%)

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Service providers expanded in Aug at the fastest pace in 9 years, a sign of growing momentum in the broadest sector of the US economy.  The Institute for Supply Management non-manufacturing index climbed to 59.6, the strongest since Aug 2005, from 58.7 a month earlier.  The gauge exceeded the highest estimate & the median forecast of 57.7.  Readings greater than 50 signal expansion.  The boom at service providers & faster growth in manufacturing demonstrate a broadening of the economic expansion that’s encouraging businesses to invest in more equipment.  Further improvement in the job market has the potential to spur gains in consumer confidence & spending, particularly if a tighter labor market begins to drive up wages.  The ISM report showed more service providers were stepping up hiring.  The employment gauge climbed to 57.1, the highest since Feb 2006, from 56 the prior month.  The business activity index jumped to 65, the highest since Dec 2004, from 62.4 in Jul.  The measure parallels the ISM’s factory production gauge.  The ISM’s measure of new orders to service producers eased to 63.8 from 64.9, & a measure of prices paid fell to 57.7 from 58.  The services survey covers an array of industries including utilities, retailing, health care & finance.  Earlier this week, the ISM said its manufacturing index climbed to 59 in Aug, the highest since Mar 2011, from 57.1 a month earlier.

Service Industries in U.S. Expand at Fastest Pace in Nine Years

Mario Draghi
Photo:   Bloomberg

The ECB cut interest rates & will start buying assets, easing the flow of funding for the region’s economy while holding back for now on larger-scale action.  It “will purchase a broad portfolio of simple and transparent securities,” Mario Draghi said.  While the measures announced today will have a “sizable” impact on the balance sheet, “some of our council were in favor of doing more than presented,” he said.  In committing cash to the market for asset-backed securities, Draghi is making good on his pledge to help rekindle an asset class that can funnel loans to the real economy & ease funding conditions for banks.  While the size of the plan wasn’t given, it probably doesn’t represent the kind of quantitative easing that could directly fend off the threat of deflation.  Euro-area inflation languished at 0.3% last month, far below the ECB 2% target. The ECB downgraded its forecasts for growth & inflation from its previous assessment in Jun.  GDP is now forecast to expand by 0.9% this year & 1.6% in 2015, instead of the previous 1% & 1.7%.  Inflation is expected to be weaker in 2014, forecast at 0.6% this year instead of 0.7% previously.  The inflation outlook for 2015 is unchanged at 1.1%.  “We took into account the overall subdued outlook for inflation, the weakening in the growth momentum in the recent past,” Draghi said.  “The Governing Council sees the risks around the economic outlook on the downside.”  The ECB earlier reduced all 3 main interest rates by 10 basis points.  The benchmark rate was lowered to 0.05% & the deposit rate is now minus 0.2%.  Amid a war between Russia & Ukraine on the euro-area’s eastern flank, mounting deflation risks & faltering output in Germany, Draghi finds himself forced to act for the 2nd time in 3 months to shore up the economy.

ECB Readying Broad Asset-Backed Purchases After Rate Cut, Draghi Says 

Applications for unemployment benefits in the US were little changed last week as an improving economy prompted businesses to retain staff.  Jobless claims rose 4K to 302K, according to the Labor Dept.  The forecast called for 300K.  The total number on benefit rolls fell to the lowest level in more than 7 years.  A stronger pace of hiring is helping brighten Americans’ moods about the labor market & limiting filings for unemployment pay.  The 4 week average of claims climbed to 302K from 299K in the prior week.  The number continuing to receive jobless benefits dropped 64K to 2.46M in the latest week, the fewest since Jun 2007.  The unemployment rate among people eligible for benefits held at 1.9%.

Jobless Claims in U.S. Little Changed as Firings Dwindle

Considering the abundance of good news, ECB rate cuts & service data, it's surprising stocks did not shoot up more.  Throwing money at flagging economies in Europe is just what the bulls want to hear.  But Ukraine is still a mess & conflicts in the MidEast are far from settled.  Dow is at record highs, making the bulls happy.

Dow Jones Industrials

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