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Monday, September 12, 2016
Mixed markets prepare for Fed rate hike
Dow gained 31, decliners barely ahead of advancers & NAZ went up 18. The MLP index lost 2+ to the 308s & the REIT index added 1+ to the 351s. Junk bond funds were little changed & Treasuries declined (see below). Oil fell (see below) & gold was also sold.
Federal Reserve Bank of Atlanta pres Dennis Lockhart repeated
his call for a “serious discussion” about raising interest rates at the
central bank's meeting later this month, even after some recent
disappointing economic indicators. “Notwithstanding a few recent weak monthly reports -- from the Institute for Supply Management, for example -- I am satisfied at this point that conditions warrant that serious discussion,” Lockhart said. The FOMC meets next week. Recent
comments from committee members point to a division over the need to
raise interest rates. Fed Governor Daniel Tarullo repeated a
cautious assessment of the economy, while Boston Fed pres Eric
Rosengren argued there was a reasonable case for gradual tightening. Minneapolis Fed chief
Neel Kashkari said he saw no urgency to
act and preferred to see more upward movement in core inflation. “After relatively weak growth over the first half of the year, I
expect a stronger second half,” Lockhart said, citing the bank's estimate. Q3 growth was tracking at 3.3% on Fri, according to
the Atlanta Fed's tracking estimate. The
economy is “making progress” toward full employment, Lockhart added,
though progress in moving inflation toward the 2% goal may have
stalled. “The inflation data overall have not been suggesting
disinflation or deflation, but the flat trend line is enough below
target that, in my opinion, the shortfall cannot be considered
immaterial,” he said. “I find this to be an awkward state of affairs.”
Oil extended declines following the biggest drop in more than a month
after US producers increased drilling & OPEC boosted its estimate
for rivals' output next year. Futures slid 2.5%, after losing 3.7% Fri. Rigs targeting crude rose
for a 2nd week to 414, the most since Feb. OPEC flipped its forecasts for rival supplies in 2017, predicting an increase in output from
outside the group instead of a decline.
Oil
has fluctuated since rallying in Aug amid speculation OPEC &
Russia would agree on measures to stabilize the market later this month. All solutions are possible, Algeria's energy minister said. A deal to
cap production was proposed in Feb but a meeting in Apr ended
with no final accord. Meanwhile, US drillers have been adding rigs after slashing costs. West Texas Intermediate
for Oct delivery slipped 71¢ (1.6%) to $45.17 a
barrel after
dropping $1.74 to $45.88 Frid. The
US rig count gained by 7 last week, boosting the numbers of
machines added since the start of Jul to 84. US crude stockpiles are at 511M barrels, the
highest seasonal level in at least 3 decades, according to the
Energy Information Administration.
Treasury prices fell further, pushing yields higher as
expectations that the Fed will soon raise interest rates
continued to drive financial markets. The yield on the 10-year Treasury note rose 1 basis point to 1.688%. The interest rate on the
benchmark note on Fri climbed 5.7 basis points to 1.671%, it's
highest level since Jun 2 (the day of the Brexit vote). The rise in
yields came after Boston Fed pres Eric Rosengren on Fri said a
"reasonable case can be made" for raising interest rates, fueling
expectations a rate hike could happen as soon as next week. The CME
FedWatch Tool is currently indicating a 24% probability of a tightening
at the Sep 20-21 meeting & an almost 60% chance for an
increase in Dec. The yield on the 2-year Treasury note (most sensitive to a rate change), gained 1 basis point to 0.7942% today.
Stocks were sold at the opening, then buying came in. There has been a lot of talk by Fed officials about a rate hike. That could be their way of giving warnings, so markets can prepare for a rate hike (something the bulls fear). Oil continues to slosh around in the mid 45s, hanging on every word that mentions the big oil meeting at month's end. It will remain volatile, another major driver for stocks when economic fundamentals get so little attention.
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