Wednesday, January 27, 2016

Markets retreat following FOMC statement

Dow sank 222, decliners over advancers almost 2-1 & NAZ tumbled 99.  The MLP index fell 4+ to the 341s & the REIT index dropped 5+ to the 308s.  Junk bond funds were weak & Treasuries slid lower.  Oil rose to the 32s on speculation OPEC will deal with global supply (see below) & gold was bid up. 

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Federal Reserve officials left interest rates unchanged & said they still expect to raise borrowing costs at a “gradual” pace while watching to see how the global economy and markets impact the US outlook.  The FOMC is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”  Since the Fed raised interest rates last month for the first time in almost a decade, turmoil in financial markets & a dimming of the outlook for global growth have spurred investors to expect a slower rise in borrowing costs.  The projection of policy makers’ forecasts in Dec called for 4 qtr-point rate increases in 2016; futures markets indicated ahead of the FOMC statement that traders see just 1 or 2 hikes coming.  Chair Janet Yellen, explaining their unanimous decision to leave the target range for their benchmark federal funds rate at 0.25%-0.5%, said that recent information “suggests that labor market conditions improved further even as economic growth slowed late last year.”  Reiterating the interest-rate outlook from the Dec statement, the FOMC said that it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”  Household spending & business fixed investment have been growing at “moderate rates in recent months,” the FOMC said, after labeling such gains “solid” in the Dec statement.

Fed Leaves Rates Unchanged; Watching Global Developments

Purchases of new US homes surged in Dec to the highest level in 10 months, closing out the best year for housing since 2007.  Sales jumped 10.8%, the most since Aug 2014, to a 544K annualized pace, according to the Commerce Department.  A survey called for a 500K rate.  For all of 2015, purchases of new properties climbed 14.6K to 501K.  Employment gains & attractive mortgage rates combined to push new-home sales forward for a 4th straight year.  Sustained hiring & income growth would provide further impetus for the market, encouraging more construction and contributing to the economy.  Purchases increased in all 4 regions, led by a 31.6% jump in the Midwest.  There were 237K new houses on the market at the end of Dec compared with 231K a month earlier.  The median sales price decreased 4.3% from Dec 2014 to $289K.  The number of homes sold & awaiting the start of construction climbed to 178K in Dec, the highest since Jul 2007 & a sign that builders will be busy leading up to the spring sales season.

As concerns about the global economy have mounted & prompted a flight to the safety of Treasuries, borrowing costs have declined for consumers since the Fed's decision to raise interest rates.. The average rate on a 30-year fixed mortgage was 3.81%, down from 3.97% in mid-Dec.  That's prompted an increase in mortgage applications for home purchases.  The 3-month average of the Mortgage Bankers Association's index that tracks those applications is the highest since 2010.

New U.S. Home Sales Surged in December to a 10-Month High

Oil surged, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years.  Russia's energy ministry said possible coordination with the OPEC was discussed at a meeting with Russian oil companies today.  Top non-OPEC producer, Russia has in the past been unwilling to cut oil output, as it battles for market share with OPEC king-pin Saudi Arabia.  US crude was looking firm before the Russia news on the back of a Energy Dept report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the Northeast.  The Energy Information Administration said inventories of distillates, fell more than 4M barrels, trumping expectations for a rise of about 2M.  The data also showed US crude oil stocks hit their highest on record in the week last week, due largely to increases on the Gulf Coast, a major oil hub.  That inventory surge helped fuel the rally instead of fanning worries about excess supply, amid relief it fell short of an 11.5M-barrel build reported by the American Petroleum Institute yesterday.

Oil Jumps After Russia Dangles Prospect of OPEC Cooperation

This is a very fragile rally if the FOMC statement upset traders.  No news was expected & it delivered.  What's the big surprise?  Oil remains the big mover for the markets.  Despite recent strength, it's in a major bear market.  Even a reduction in production by some countries will not solve the oversupply problems, as Iran is getting ready to pump more oil.  Gold keeps climbing higher (negative bets on the stock market).  The news from Apple (AAPL) & Boeing (BA) has to be disturbing for the bulls.  Dow is back below 16K, down a massive 1.5K this month.

Dow Jones Industrials


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