Friday, August 26, 2016

Markets rise after Yellen's remarks

Dow climbed 84, advancers over decliner a solid 3-1 & NAZ added 28.  The MLP index went up 3+ to the 313s & the REIT index added 2 to the 364s.  Junk bond funds were bid higher & Treasuries also gained.  Oil & gold were each higher.

AMJ (Alerian MLP Index tracking fund)

Crude Oil Oct 16

Gold Dec 16

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Federal Reserve Chair Janet Yellen said the case to raise interest rates is getting stronger as the US economy approaches the central bank's goals.  “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said.  She added that the economy is “nearing” the Fed's goals of full employment & stable prices.  But she didn't discuss the specific timing of a rate move.  Despite repeated intentions to raise the rate again, officials have skipped a hike at all 5 meetings this year & futures markets have priced in about a 30% chance of another hike at the Sep 20-21 policy meeting.  “While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Yellen said.  “Looking ahead, the FOMC expects moderate growth in real GDP, additional strengthening in the labor market, and inflation rising to 2 percent over the next few years,” Yellen said in her prepared remarks.  “Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”

Yellen Says Rate-Hike Case ‘Has Strengthened in Recent Months’

Consumer confidence eased in Aug to a 4-month low as Americans become less optimistic about their finances for the year ahead.  The University of Michigan final index of sentiment stood at 89.8 this month compared with 90 in Jul.  The projection called for 90.8 after a preliminary reading of 90.4.  The share of households that expected their finances to improve fell to 29%, the smallest since late 2014, as views dimmed among those younger than 45.  While long-term inflation expectations dropped to the lowest on record, consumers anticipated smaller income gains.  “Confidence eased back in late August to register a trivial decline from the July reading,” the Michigan survey said.  “Less favorable personal financial prospects were largely offset by a slight improvement in the outlook for the overall economy.”  This figure compares with an average consumer sentiment reading of 92.9 in 2015 & 91.7 in the first 7 months of this year.  The current conditions index, which measures Americans' perceptions of their personal finances, dropped to 107 from 109 in the prior month.  The gauge of expectations 6 months from now rose to 78.7 from 77.8 in Jul.  Respondents expected the inflation rate in the next year will be 2.5%, compared with 2.7% in Jul.  Over the next 5-10 years, they also project a 2.5% rate of price growth, the lowest on record, after 2.6% in the prior month.  Meanwhile, the presidential election continues to be a source of uncertainty for consumers in terms of future economic policies.

Consumer Sentiment in U.S. Eased in August to Four-Month Low

The US economy grew less than previously reported in Q2, a sign consumer spending will need to continue to drive expansion, Commerce Dept figures showed.  GDP rose at a 1.1% annualized rate, revised down from an initial estimate of 1.2% (the forecast was 1.1%).  Household spending grew at a 4.4% pace, revised from an initial estimate of 4.2% (forecast was 4.2%) & added 2.94 percentage points to GDP growth.  Biggest downward revisions compared with initial estimate were in state & local gov spending, inventories, net exports. Gross domestic income climbed just 0.2%.  Corp pretax earnings fell 4.9% from a year earlier; they were down 1.2% from the prior qtr  The economy’s failure to develop a sustained pickup has helped keep the Fed from pulling the trigger on an interest-rate increase so far this year.  A Q3 rebound is projected driven by household purchases & more stockpiling, & the report showed wages & salaries were revised sharply higher, indicating consumers have the wherewithal to continue spending.  A weakening picture for profits casts a shadow over the outlook for already-sluggish business investment & possibly for hiring, which has been robust so far this year.

Economy in U.S. Grew at 1.1% Rate, Less Than Initial Estimate

Stocks liked what was said by Janet, although the reasoning is unclear.  It sounds like she is thinking about a rate hike which stock traders fear.  However the future is uncertain & her remarks were greeted warmly.  The Fed meeting is still a few weeks away.  A lot can happen in that time span, especially with traders returning from vacation.

Dow Jones Industrials


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