Friday, August 19, 2016

Markets waver on Fed interest rate bets

Dow gave back 29, decliners over advancers 2-1 & NAZ went up 1.  The MLP index fell 2+ to the 316s & the REIT index lost 2+ to 360.  Junk bond funds did little & Treasuries were sold.  Oil was flattish after its run (see below) & gold was lower.

AMJ (Alerian MLP Index tracking fund)

Crude Oil Sep 16

Gold Futures,Dec-2016

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Federal Reserve officials have gone out of their way this week to stress the market is underestimating the odds of an interest-rate increase this year, & yet the probability of such a move has fallen back below 50%.  The view policy makers will be on hold for a long time isn’t “consistent” with what the central bank is saying, San Francisco Fed's John Williams said.  NY's William Dudley said the market is underestimating the likelihood of increase.  Investors have shrugged off these comments with Treasuries holding onto their best YTD performance since 2011.  A measure of volatility is close to the lowest since 2014.

The 2-year note yield, among the maturities most sensitive to the outlook for Fed policy, was little changed this week at 0.72% & the price of the 0.75% security due Jul 2018 is 100 2/32.  The benchmark 10-year note yielded 1.54%.  The probability of a rate increase by year-end is 47%, according to fed fund futures.  The measure climbed to 51% on Tues before dropping back the following day.  The chances of a move at the next meeting on Sep 20-21 are just 20%.

While recent Fed rhetoric has been hawkish, minutes of the Jul policy meeting showed officials were split on whether an interest-rate increase was needed in the near future.

Oil is headed for its strongest weekly increase in 4 months after entering a bull market as the market weighed speculation that OPEC talks next month could lead to an output freeze & US inventories dropped.  Futures were little changed & poised for a weekly increase of 8%.  While OPEC is unlikely to reach a deal to freeze production, its plans to hold informal talks in Algiers next month “were the spark” behind the rally.  US crude inventories dropped the most in 5 weeks thru Aug 12, while fuel stockpiles slid a 3rd week, Energy Information Administration data showed.

Oil has climbed more than 20% since it dipped below $40 a barrel earlier in the month, meeting the common definition of a bull market.  Russian Energy Minister Alexander Novak said that the nation was open to discussing a freeze after his Saudi counterpart Khalid Al-Falih said that informal talks in Sep may lead to action to stabilize the market.  While money managers increased wagers on rising oil prices by the most since Jan during the week ended Aug 9, bearish bets on crude remain at record high levels.

Deere posted lower quarterly earnings as the soft global agricultural economy depressed sales of its farming machinery.  EPS was $1.55, versus $1.53 per share, a year earlier (when there was more outstanding stock).  "John Deere's performance in the third quarter reflected the continuing impact of the global farm recession as well as difficult conditions in construction equipment markets," CEO Samuel R. Allen said.  The company increased its fiscal-year earnings outlook to $1.35B from $1.2B.  The stock shot up 4.44.  If you would like to learn more about DE, click on this link:

Deere posts lower quarterly profit, raises full-year outlook

Deere (DE)

This is a sleepy Fri in Aug, with little going on in the stock market.  Not much should happen until the end of Aug when Janet gives a speech which may suggest what the Fed is thinking about doing with interest rates.  The popular market averages remain close to their record highs, hard to believe.

Dow Jones Industrials


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