Monday, April 4, 2016

Lower markets as new factory orders decline

Dow was off 55, decliners over advancers 5-2 & NAZ gave up 22.  The MLP index lost a whopping 11+ to the 259s & the REIT index fell fractionally to below 341.  Junk bond funds slid lower & Treasuries rose while stocks were declining.  Oil dropped to the 35s (see below) as its bull market seems to be over & gold was also lower, heading towards the important 1200 support level.

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CL.NYMLight Sweet Crude Oil Futures,M36.10 Down 0.69 (1.9%)

Live 24 hours gold chart [Kitco Inc.]

New orders for US factory goods fell in Feb & business spending on capital goods was much weaker than initially thought, the latest indications that economic growth remained sluggish in Q1.  The Commerce Dept said new orders for manufactured goods declined 1.7% as demand fell broadly, reversing Jan''s downwardly revised 1.2% increase.  Orders have declined in 14 of the last 19 months.  The Feb drop was in line with expectations.  Orders were previously reported to have increased 1.6% in Jan.  Weak consumer spending & trade data in suggesting economic growth failed to pick up at the turn of the year after slowing to a 1.4% pace in Q4.  Manufacturing has been pressured by a strong $ & weak global demand, which have undermined exports of factory goods, & efforts by businesses to reduce an inventory overhang.  The sector has also been slammed by investment cuts by energy firms as they adjust to reduced profits from cheap oil. 
But the worst of the factory slump appears to be over, with a survey last week showing manufacturing activity expanded in Mar for the first time in 6 months.  In Feb, factory orders fell broadly, with orders for transportation equipment tumbling 6.2%.  Orders for machinery dropped 3.4% & bookings for electrical equipment, appliances & components decreased 3.6%.  Orders for non-defense capital goods excluding aircraft, seen as a measure of business confidence & spending plans, fell by a steeper 2.5% instead of the 1.8% drop reported last month.  Shipments of these core capital goods, used to calculate business equipment spending in GDP, fell 1.7% in Feb & not 1.1% as previously reported.  Inventories of factory goods dropped for an 8th straight month, suggesting factories were making progress in reducing the inventory glut.  While that could support future manufacturing production, it suggests inventories will again be a drag on economic growth in Q1.

Federal Reserve Bank of Boston pres Eric Rosengren said that prices in futures markets imply traders may have reacted too strongly to volatility in recent months & warned they could be underestimating the possible pace of near-term rate increases.  He expects that the "very slow removal of accommodation reflected in futures-market pricing could prove too pessimistic," adding that, "if the incoming data continue to show a moderate recovery -- as I expect they will -- I believe it will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial-market futures. " Turbulence in financial markets picked up at the start of the year because of shocks from abroad & concerns about the health of China & Europe, in particular.  But he added the US weathered that volatility "quite well" & it was surprising how much federal-funds futures rates dropped in response.  "My own sense is that financial markets may have reacted too strongly," said Rosengren.  He called for a gradual pace of rate increases, but said with volatility in markets subsiding relative to the ugly start to the year, a "stronger economy, at essentially full employment and with gradually rising inflation, will lead to more tightening than is currently priced into the futures market expectations for the next two years."   Rosengren, long one of the more hesitant Fed officials about rate rises, is a voting member of the FOMC this year.  In Feb he said, "the normalization of monetary policy should be unhurried."

Fed's Rosengren Sees Possible Rate Increases Sooner Than Markets Imply

Oil held around its lowest in a month as investors ditched some of their bullish bets on another price rise & the chances that top exporters will agree to rein in overproduction appeared to fade.  Iran will continue increasing oil production & exports until it reaches the market position it enjoyed before the imposition of sanctions, Oil Minister Bijan Zanganeh was quoted as saying.  Saudi Arabia, which spearheaded an initial proposal in Feb for producers to limit output, said last week that it would not join any effort to do so unless Iran were on board, while Russia reported its highest oil production in 30 years.  This has cast doubt on the ability of the world's largest exporters to reach an agreement when they meet this month to discuss how to align global supply & demand.  Hedge funds last week cut their bullish holdings of crude oil futures for the first time in 6 weeks.

U.S. Crude Lower on Output Agreement Skepticism

The bulls finally threw in the towel today.  But this market decline can not be described as a correction.  It only represents a daily fluctuation.  Dow is still up about 1.8K from the market lows in Feb.  Earnings season is around the corner with oil already resuming its bearish market.   For what it's worth, Dow is up 300 YTD.

Dow Jones Industrials


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