Monday, April 11, 2016

Morning gains lost as earnings season approaches

Dow gave up 20 (well off the highs), advancers over decliners 3-2 & NAZ fell 17.  The MLP index edged up a fraction to the 268s (below earlier gains) & the REIT index climbed 1+ to the 238s.  Junk bond funds went higher & Treasuries drifted a little lower.  Oil remained higher in the 40s (see below) & gold also had a good gain.

AMJ (Alerian MLP Index tracking fund)

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CL.NYM....Light Sweet Crude Oil Futures,M....40.13 Up ...0.41 (1.0%)

Live 24 hours gold chart [Kitco Inc.]

For almost 2 years, Janet Yellen has preached that any decision to raise interest rates will be data-dependent.  Market participants have become more responsive to economic news, according to a study by San Francisco Federal Reserve pres John Williams & Benjamin Pyle, a research associate at the bank.

Source: Federal Reserve Bank of San Francisco
“In the past year or so, market-based measures of data dependence have risen considerably, although they are still below earlier norms,” they wrote.  “This suggests that investors are increasingly viewing monetary policy actions as data dependent.”  While market-based measures of future interest rates, such as bond yields, react to economic data in normal times by rising or falling, that pattern can be short-circuited when borrowing costs are near zero & expected to stay there for a long time.  During the 2010-2014 period, Treasury yields with maturities of one year or less responded relatively little to economic news, according to the report.  “With the economy on the mend and FOMC communications emphasizing the data dependence of policy actions, market-based measures of future interest rates became more responsive to economic news,” Williams & Pyle wrote, referring to the policy-setting FOMC.  “The responsiveness of the longer yields to news increased more significantly,” which “reflects investor expectations that rates will move further away from zero over the subsequent two years.”

Williams Says Market Views Fed as Increasingly Data-Dependent

US consumers' expectations for inflation declined in Mar following a rise from record lows the month before, according to Federal Reserve Bank of NY data.  The numbers, which have been highlighted recently as a potential cause for concern by top officials including Janet Yellen & New York Fed pres William Dudley, may add to the debate over downside risks to the Fed's 2% inflation target.  These risks have contributed to a cautious approach to tightening monetary policy this year following a decision in Dec to raise interest rates.  The median respondent to the Mar Survey of Consumer Expectations expected inflation to be 2.5% 3 years from now, down from 2.6% in the Feb survey.  In Jan, expected inflation 3 years ahead was 2.45%, marking the lowest level in data going back to Jun 2013.

 Consumers' Inflation Expectations Fell Again in March, Fed Says

Oil touched a 4-month high as a rally in wider commodities markets encouraged buying ahead of a meeting of oil producers in Doha next Sun, aimed at freezing current output levels.  After hitting the highest level since Dec 7, oil retreated slightly & then partially recovered.  Data suggested the US will have a smaller-than-expected draw on stockpiles this week, prompting the market to pull back slightly.  Oil was also caught in a generally bullish pattern of trading across commodities.  Gold also touched its highest level in almost 3 weeks, while silver & platinum were up more than 2%.  A weaker $ gave impetus to buyers as commodities priced in the currency became cheaper to purchase.  Traders continue to place hopes on the oil meeting to prop up crude prices that have been severely depressed by a global supply glut.

Oil Hits 4-Month High on Doha Meeting Hopes

Excitement about the meeting of oil producers did not last.  Earnings season is too important.  Alcoa (AA) reports shortly & expectations are for EPS of 2¢, down from 28¢ last year.  Next comes the big banks.  Dow finished almost 200 below its high & up less than 1% YTD.  The bulls have lost control of the stock market going into earnings season.

Dow Jones Industrials


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