Friday, June 3, 2016

Markets pare losses, hoping for a delay in interest rate hike

Dow fell 31 (well off the lows in the AM), advancers were slightly ahead of decliners & NAZ retreated 28.  The MLP index was little changed near 310 & the REIT index was up 1+ to the 344s.  Junk bond funds hardly budged in price & Treasuries surged after the jobs report.  Oil was lower & gold surged on the jobs report (see below).

AMJ (Alerian MLP Index tracking fund)

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CLN16.NYM....Crude Oil Jul 16....48.44 Down ...0.73  (1.5%)

Live 24 hours gold chart [Kitco Inc.]

Oil prices extended declines immediately after the release of the Baker Hughes report.  West Texas Intermediate oil for Jul fell 55¢ to settle at $48.62.  Prices climbed as much as 24¢ earlier in the session.  The worst downturn in decades led oil producers to scrap projects & cut spending on drilling, signaling that supply and demand are getting close to being in balance.   Disruptions in Canada & Nigeria took 50M barrels out of the market last month.

U.S. Shale Drillers Restart Oil Rigs as Market Improves

Gold has been rescued by US payrolls. Again. The metal had the biggest gain in 11 weeks after the US added the fewest workers in almost 6 years, weakening the case for the Federal Reserve to raise interest rates.  Before the jobs report, a gauge of volatility in bullion fell to an almost 4-month low, & the volume of futures this week was the least since the start of the year.

Bullion is coming off of its biggest monthly loss since Nov after signs of an improving US economy spurred speculation that the Fed could tighten monetary policy as soon as this month.  Higher rates curb bullion’s appeal against interest-bearing assets.  Those bets retreated today, with the odds of a Jun rate rise dropping to 4%, from 30% a week ago, according to Fed funds futures.  Gold jumped 2.5% to settle at $1242, marking the biggest gain for a most-active contract since Mar 17.  Trading was 14% above the 100-day average for this time.  The addition of 38K workers, the fewest since Sep 2010, followed a 123K advance in Apr that was smaller than previously estimated.  The increase was less than the most pessimistic forecast.  Last week, Janet Yellen suggested an increase in rates would be appropriate if economic growth picks up & the labor market continues to improve. 

Gold Gets a Reprieve as Payrolls Sputter Quashes Fed Rate Bets

Federal Reserve Governor Lael Brainard said a “sobering” US employment report suggested the labor market has slowed, as she continued to warn against moving too quickly to raise interest rates.  “In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals,” Brainard said today.  “Several factors suggest that the appropriate path to return monetary policy to a neutral stance could turn out to be quite shallow and gradual in the medium term,” she added.  She has emerged in the last year as one of the Fed's most cautious officials when it comes to tightening monetary policy.  Brainard said the job numbers “suggest that the labor market has slowed” even as she argued that slack remains in the labor force & wages remain low.  She pointed to the historically low level of employment-to-population in the US as a possible explanation.  She also cautioned that intl risks remained despite the calm in markets since a Jan-Feb period of volatility.  “While the easing in financial conditions since mid-February is very welcome, it is important to recognize that some of the conditions underlying recent bouts of turmoil largely remain in place, and an important reason for the fading of this turbulence was the expectation of more gradual U.S. monetary policy tightening,” she said.  Global markets remain fragile with sensitivity to exchange-rate movements remaining elevated.  That is consistent with research suggesting “cross border financial transmission is likely to be amplified” as long as interest rates set by major central banks remain near zero, she added.

Fed’s Brainard Urges Caution Amid Mixed Data, Global Risks

Stock buyers returned during the trading session, praying the ugly jobs report will delay an interest rate hike.  While many are betting on that, it's far from certain.  The economy continues to muddle along with limited growth.  GDP growth for 2016 is still forecast to be around 2%.  That is nothing to write home about, but similar to rates during the multi year recovery period of the economy.  Dow continues below the important 18K ceiling, it has not been able to break thru in a meaningful way.

Dow Jones Industrials


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