Wednesday, February 18, 2015

Markets fluctuate after Fed minutes released

Dow dropped 17, advancers just ahead of decliners & NAZ climbed 7.  The REIT index dropped 2+ to 450 (having been stuck near 450 for more than 2 months) & the REIT index went up 2+ to the 343s.  Junk bond funds were mixed & Treasuries rose.  Oil gave up some of its recent gains on worries that rally may have been overdone & gold remained weak.

AMJ (Alerian MLP Index tracking fund)

CLH15.NYM....Crude Oil Mar 15....52.50 Down ...1.03  (1.9%)

Live 24 hours gold chart [Kitco Inc.]

The FOMC after concluding the US economy is recovering at a “solid pace” strategized at its Jan meeting about specific tools for smoothly initiating an interest rate hike.  In addition, the members discussed the importance of communicating those tools & guidance on policy normalization to the public, according to minutes from the meeting.  Most analysts are predicting a mid-2015 rate liftoff, & nothing in the minutes suggests otherwise.  As they discussed the language for their meeting statement, FOMC members “generally agreed that they should acknowledge the solid growth over H2-2014 as well as the further improvement in labor market conditions over the intermeeting period.”  At the same time, the members acknowledged that downward pressure on inflation has increased lately as energy prices have tumbled since mid-2014.  But they shrugged off these dynamics as temporary & held to their long-held predictions that inflation will “gradually” rise to the Fed’s 2% target rate over the “mid-term.”  “A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate inflation,” the notes state.  Stagnant wages also remain a concern on the downward pressure on inflation.  However, the Jan employment report showed one of the strongest gains in monthly earnings in recent memory.  The FOMC members are also keeping a close eye on developments in Europe, where Greece debt problems have once again threatened to upend stability in the euro zone.  Also noted by Fed policy makers was the economic slowdown in China, political & military unrest in the Middle East, the Ukraine and how those situations threatened the US economic recovery.  Fed officials maintained their long-held position that a decision on when to raise rates would remain dependent on economic data, & that the timing of a rate hike could quicken if data improves & slow down if the data sours.

Fed Discusses Rate Hike Strategies, Minutes Show

Factory production rose less than forecast in Jan & home construction fell, showing the US economy is off to a slow start in 2015.  Output at factories climbed 0.2% & figures for the previous 3 months were revised lower, according to the Federal Reserve.  Total industrial production, which also includes mining & utilities, climbed less than projected as oil-well drilling slumped.  Housing starts dropped 2%, according to the Commerce Dept.  The data bolster Fed concern that struggling economies from Europe to Asia, a stronger dollar & the sluggish recovery in housing pose obstacles that warrant keeping interest rates low for longer.  Additionally, while consumers benefit from an improving job market & the plunge in fuel costs that is curbing inflation, American drillers & miners are likely to trim spending, moderating a former source of strength.  The Jan gain in factory output was weaker than the 0.4% advance projected.  The gain in manufacturing output, which accounts for about 12% of the economy, followed no change a month earlier.  Total industrial production increased 0.2% last month after a 0.3% decline.  Mining, which includes oil drilling, fell 1% after climbing 2.1% in Dec.  Drilling of oil & gas wells slumped 10%, the 4th straight decline & the biggest decrease since Mar 2009.  Factory production of motor vehicles & parts fell 0.6% after a 1.3% decline.  A work slowdown at West Coast ports may be hindering automakers.  While output of consumer goods & business equipment rose in January, the gains followed bigger declines a month earlier.  Production of construction supplies fell.

Growth in Slow Start as U.S. Factories Curb Output

US producer prices posted a record decline in Jan, weighed down by plunging energy costs, pointing to very benign inflation pressures in the near term.  The Labor Dept said its producer price index (PPI) for final demand dropped 0.8%, the biggest drop since the revamped series started in Nov 2009, after falling 0.2% in Dec.  It was the 3rd straight month of decline in the PPI.  In the 12 months thru Jan, producer prices were unchanged, the weakest year-on-year reading since records started in Nov 2010, after rising 1.1% in Dec.  Economists had forecast the PPI declining 0.4% last month & gaining 0.3% from a year ago.  Lower energy prices, against the backdrop of softer global demand & increased shale production in the US, & a strengthening dollar are dampening domestic inflation prices.  Wholesale energy prices tumbled a record 10.3% in Jan after sliding 6.2% in Dec.  It was the 7th straight month of declines.  Food prices fell 1.1% after falling 0.1% the prior month.  The volatile trade services component, which mostly reflects profit margins, rose 0.5% following a similar gain in Dec.  A key measure of underlying producer price pressures, which excludes food, energy & trade services, fell a record 0.3% after edging up 0.1% in Dec.  That suggests that some the energy weakness is spilling over to underlying inflation.  This measure had risen 0.9% in the 12 months thru December.

Falling Energy Costs Weigh on Producer Prices

The Fed minutes had no great surprises.  The FOMC is moving slowing, preparing to raise interest in a few months (not all that far away).  Presently it is getting the markets ready for those increases which will likely come in small steps, maybe a 25 basis points increase per meeting.  In the meantime, there is plenty of unrest around the globe & the US economy has not be able to show significant imporvement as crude oil dropped in half.  While energy related industries can be expected to suffer, consumers & the rest of the economy should be benefitting.  So far, the stock market, with popular averages around record levels, is the only beneficiary.

Dow Jones Industrials

3 Stocks You Should Own Right Now - Click Here!

No comments: