Thursday, December 3, 2015

Markets retreat after Yellen comments and ECB stimulus plans

Dow sank 252 (closing near the lows), decliners ahead of advancers better than 4-1, & NAZ fell 85 (nearing 5K).  The MLP index fell a whopper 10+ to the 277s (new multi year low) & the REIT index was off 4+ to the 314s.  Junk bond funds were mixed to lower & Treasuries yield shot up 15 basis points, dragging down bond prices.  Oil surged 3% on hedging ahead of the OPEC meeting (see below) & gold climbed higher.

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Janet Yellen is counting on continued strength in the US economy to support a central bank move to slightly higher interest rates while the manufacturing sector struggles with the stronger dollar's drag on exports.  “Household spending growth has been particularly solid in 2015,” Yellen told Congress.  She noted that auto sales have been strong, while increases in home & stock prices, along with reductions in debt, have boosted personal balance sheets.  The Chair’s comments represent the conclusion that various shocks to the economy this year -- from the slowdown in China's growth rate to the bust in the oil industry & weaker exports -- haven’t leaked into other areas, & won’t obstruct the first rate increase since 2006.  The Fed is widely expected to raise rates later this month even as the ECB eases policy further.  Yellen acknowledged that investor expectations of policy divergence had driven the dollar higher, while emphasizing the resilience of the non-export sector.

The Fed chair also signaled several times during the hearing that monetary policy can't solve all economic problems.

Yellen Looks Beyond Global Drags and Likes What She Sees in U.S.

US services sector activity slowed in Nov but a resilient labor market suggested the economy remained on a steady growth path.  The Institute for Supply Management index of non-manufacturing activity fell to 55.9 from a reading of 59.1 in Oct.  A reading above 50 indicates expansion.  Coming on the heels of a report this week showing manufacturing contracted in Nov for the first time in 3 years, the soft services sector report could raise concerns of a significant slowdown in the economy.  However, the labor market remains solid.  Even as manufacturing is struggling from a strong dollar & energy sector spending cuts, some industries are showing strength.  In a separate report, global outplacement consultancy Challenger, Gray & Christmas said US-based firms announced 31K job cuts in Nov.  That was the smallest number since Sep 2014 & down 39% from Oct.  There were 1355 oil-related job cuts, the fewest since Jun.

Service-Sector Growth Slows More than Expected

Cash-strapped OPEC nations from Venezuela to Iran are piling pressure on Saudi Arabia to reduce oil output, yet the group’s biggest producer remains opposed to a cut unless countries outside the organization join the effort.  A year after Saudi Arabia spearheaded OPEC’s decision to maintain production amid slumping prices, the group is grappling with crude near a 6 year low as supply swamps demand.  Venezuela & Ecuador want OPEC to agree to output cuts tomorrow when members meet in Vienna, while Iran says the group must cut to accommodate an increase in its own output next year.  The strengthening protest against OPEC production policy contrasts with the mild criticism from members at the group's last summit in Jun.  This time, the continued decline in prices has prompted less-wealthy states to clamor for change, with officials from Venezuela meeting with Ecuador, Algeria, Iraq & Iran to rally support for cuts.  “The OPEC member countries have lost so much money,” Iranian Oil Minister Bijan Namdar Zanganeh said.  “It doesn’t seem that we can change the situation in the short term, it needs a long-term strategy."  OPEC's annual revenue may fall to $550B from an average of more than $1T in the past 5 years, the International Energy Agency said.  Faced with dismay among members unable to balance their books, de facto leader Saudi Arabia has adopted a conciliatory tone, promising to listen to all before a policy decision is made.  Yet the country dismissed as “baseless” a report that it may propose an eventual 1M-barrel-a-day cut.  OPEC pumped 32.1M barrels a day in Nov, exceeding its 30M-barrel target for an 18th month.  Iran plans to produce an additional 500K barrels a day once intl sanctions over its nuclear program are lifted.  The country won’t accept any cuts that would bring its output below the pre-sanctions level of 4M barrels a day, Zanganeh said.  A year of low prices has widened the traditional OPEC divide between the haves & the have-nots.  Saudi Arabia & allies Kuwait, the United Arab Emirates & Qatar have multibillion-dollar sovereign wealth finds that they can tap to counter the decline in oil revenue.  Venezuela, Iran & Iraq don't possess similar wealth, making them more vulnerable to the market slump.

OPEC States Push for Output Cuts in Face of Saudi Opposition

Stocks did not like what they heard  today, especially the guidance that an interest rate is really coming this time.  The big jobs number will be released tomorrow & likely not deter the FOMC from raising rates.  OPEC is a key player & should announce what it plans to do with its production quota.  Monthly production is already at record levels with Iran due to add more.  The stock market is back on defense.

Dow Jones Industrials


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