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Monday, August 22, 2016
Markets retreat on concerns of higher interest rates
Dow dropped 62, decliners over advancers more than 2-1 & NAZ lost 7. The MLP index gave back 3+ to the 312s & the REIT index was little changed at 360. Junk bond funds fluctuated & Treasuries went up in price. Oil pulled back (see below) & gold traded lower.
Federal Reserve Vice Chair Stanley Fischer signaled that a 2016
rate hike is still under consideration, saying the US economy is
already close to meeting the central bank's goals & that growth will
gain steam. “We are close to our targets,” Fischer said. “Looking ahead, I
expect GDP growth to pick up in coming quarters, as investment recovers
from a surprisingly weak patch and the drag from past dollar
appreciation diminishes,” he added. Fischer's remarks come less than a week before Janet Yellen speaks Aug 26 at an annual symposium in Jackson Hole, Wyoming. The central bank boosted borrowing costs in Dec & has left the benchmark
lending rate unchanged at its 5 meetings. Fischer said the behavior of employment has been “remarkably resilient”
even as the economy has passed through several shocks, while GDP growth
has been “mediocre at best.” While the economy has done “less
well” in moving toward the Fed’s 2 percent inflation target, Fischer
said the central bank's preferred price benchmark, minus food & energy
costs, at 1.6% was “within hailing distance of 2 percent.”
Fed
officials at their most recent policy meeting in July debated progress
on inflation, with most continuing to forecast it would rise to their 2% target over the medium term versus a minority group which saw
downside risks to prices. Fischer spent
much of his speech discussing the slowdown in worker output per hour,
or productivity, noting that it increased 1.25% per year on
average in 2006-2015, compared with 2.5% in 1949-2005. “A
1.25 percentage point slowdown in productivity growth is a massive
change, one that, if it were to persist, would have wide-ranging
consequences for employment, wage growth, and economic policy more
broadly,” he said. Fischer added that monetary policy isn't equipped to
boost productivity growth. He said the “key” to boosting output per hour
“is more likely to be found in effective fiscal & regulatory
policies,” citing improved public infrastructure, better education &
incentives for private investment.
Oil fell after the longest run of gains in 4 years as Iraq sought
to increase exports amid a global oversupply & Nigerian militants
called an end to hostilities. Futures dropped 3% after climbing 16% the previous 7 sessions. Iraq will boost crude shipments about 5% in the next few days following an agreement to
resume exports from three oil fields in Kirkuk. The Niger Delta Avengers
declared an end to attacks on oil infrastructure & will conduct talks
with the gov.
Oil
had entered a bull market on Thurs, having climbed more than 20% since dipping below $40 a barrel earlier in the month.
Speculation that informal OPEC talks next month may lead to action to
stabilize the market had pushed prices higher, yet some oil-producing
nations may be reluctant to cap output as crude's 2-year slump
continues to erode revenue. Iraq will increase exports 150K barrels a day as shipments
resume from the Baba Gorgor, Jambour & Khabbaz fields, Fouad Hussein, a
member of the oil & energy committee of the Kirkuk provincial
council, said. The nation is the 2nd-biggest OPEC
producer, pumping 4.36M barrels a day last month.
China stocks closed lower as some investors took profits on
infrastructure & transportation shares, leaving the blue-chip CSI 300
index with its worst loss in 3 weeks. The CSI300 index, which tracks the largest listed companies
trading in Shanghai & Shenzhen, fell 0.8% to 3336,
its biggest percentage fall since Aug 1 & the Shanghai Composite Index closed down 0.7% at 3084. Analysts expect further capital inflows to boost sentiment over the long run. Infrastructure & transportation sectors were among the top
losers, with sub-indexes, falling 1.3% & 0.9%, respectively. The 2 sectors rose last week as state media reported that
investment by Chinese firms into "One Belt, One Road" countries along
the new Silk Road trade route has already reached $51.1B.
The markets are extremely overbought, selling has to be anticipated in the 2 weeks prior to Labor Day. Trading is light & price movements are rarely significant. Most importantly, the popular averages remain essentially at their record highs.
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