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Monday, March 21, 2016
Markets pause after 5 weeks of gains
Dow dropped 37, decliners over advancers almost 3-2 & NAZ was off 6. The MLP index lost 2 to the 272s & the REIT index was up fractionally in the 335s. Junk bond funds inched higher & Treasuries were sold. Oil is now above 41 & gold slid lower.
Federal Reserve Bank of Richmond pres Jeffrey Lacker said that
inflation will rise back to the Fed's 2% target
once energy prices stabilize & the $ stops advancing. “I am
reasonably confident that, barring subsequent shocks, inflation will
move back to the FOMC’s 2 percent objective over the medium term,”
Lacker said. Lacker, who doesn't vote on monetary policy this year, dissented in
Sep & Oct in favor of an earlier liftoff of interest rates
from zero. Consistently
among the most hawkish of officials in favoring action to head off
inflation or asset price bubbles, Lacker didn't comment on
the decision last week to hold its target for the benchmark policy
rate unchanged. “Inflation
has been held down recently by two factors, the falling price of oil
and the rising value of the dollar,” he said. “But neither factor is
likely to depress inflation indefinitely. After the price of oil
bottoms out, I would expect to see headline inflation move significantly
higher.” Oil prices have already shown signs of stabilizing. Lacker described inflation expectations, which he said play a critical role in determining US prices, as “well anchored.” The
Richmond Fed leader said he wasn't bothered by forecasts of inflation
for the next 5 or 10 years of slightly below 2%, which “is not
inconsistent with the expectation that inflation will move back to the
Fed's target.”
Sales of previously owned US homes dropped more than forecast in
Feb after reaching the 2nd-highest level since 2007 as low
inventory levels continue to limit progress in housing. Closings on existing homes, which usually take place a month or 2
after a contract is signed, decreased 7.1% to a 3-month low
5.08M annual rate after a 5.47M pace in Jan, the
National Association of Realtors said. Sales were weaker than the
most pessimistic forecast. Faster growth in residential real estate is being hampered by a
limited selection of available properties that has led to higher
offering prices. While mortgage rates are attractive, affordability
remains an issue for potential first-time & lower-income buyers whose
participation would help broaden the market’s improvement. Purchases of existing homes decreased in all 4 regions last month, led by a 17% slump in the Northeast & a 13% decline in the Midwest. “The question is, is this the beginning
where homebuyers are beginning to show resistance to higher prices or
is this a one-month fluke in the data,” the NAR said. “Now
we are seeing fewer renters interested in buying. They’re indicating
affordability is an issue.” Compared with a year earlier, purchases increased 6.4% on an unadjusted basis. The number of existing properties on the market fell 1.1% to 1.88% from 1.9M a year earlier. At the current pace, it would take 4.4 months to sell those houses
compared with 4 months at the end of Jan & was 4.6 months in
Feb 2015. The median time a home was on the market decreased last month to 59 days from 64 days in Jan. In general, tight inventory levels have helped
boost the values of homes on the market. The median price of an existing
home rose to $210K from $201K in Feb 2015.
Germany could give itself & the euro area a boost if it takes
advantage of low interest rates to finance a public-investment program,
the ECB said, the key finding from a
study just released. It would simulate the effect of an expansion of
public investment equal to 1% of GDP over 5
years in a large euro area country such as Germany &
the stimulus would have a greater impact if it were financed by debt or
higher revenue & accompanied by an expansive monetary policy. “An
increase in public investment will have the strongest short-term demand
effects, including in terms of spillovers to other countries, with an
anticipated accommodative monetary policy,” according to the study. “This finding strengthens the case for increasing public investment in the current low-inflation environment.” Policy
makers outside Germany, Europe’s biggest economy, have been pushing the
country for years to increase spending to help boost growth across the
region. But that's at odds with Chancellor Angela Merkel & Finance
Minister Wolfgang Schaeuble's election promise of continuing to maintain
a balanced budget even in the face of increased spending for the
refugee crisis & negative rates on some German debt.
“A debt or revenue-financed increase in
productive public investment implies significantly larger short-term
output gains compared with an increase in investment financed by cutting
other public expenditure,” according to the report. However, the
effects are not fully self-financing and lead to higher public debt in
the long term. That's why a loose monetary policy is important.
There is not much going on in the stock market today. Dow has shot up from under 16K to the mid 17K area in just 5 weeks. Time to take a rest. Q1 ends next week & that will be followed by earnings reports which are being revised lower.
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