Friday, October 28, 2016

Markets climb higher on GDP data

Dow rose 64, advancers over decliners 3-2 & NAZ gained 13.  The MLP index lost 1+ to the 304s & the REIT index went up 2+ to the 332s.  Junk bond funds inched higher & Treasuries remained under selling pressure.  Oil continued weak (more below) & gold was higher.

AMJ (Alerian MLP Index tracking fund)

Light Sweet Crude Oil Futures,D

Gold Futures,Dec-2016

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US economic growth picked up in Q3 after an uninspiring H1 as a build in inventories & a soybean-related jump in exports helped cushion softer household spending.  The 2.9% annualized increase in GDP was the biggest in 2 years & followed a 1.4% gain the prior qtr, according to Commerce Dept data.  The forecast called for 2.6% growth.  Consumer spending, the biggest part of the economy, rose a less-than-projected 2.1%.  The data are in sync with the views of Fed policy makers that the economy is making slow & steady progress.  At the same time, solid employment & steady income gains are a sturdy base for households to continue in the role as the economy's main driver of growth, a contrast with the drag from business investment.  Consumer purchases grew at about ½ the pace as in Q2 & corp investment in equipment declined for a 4th straight qtr, the longest such stretch of the current expansion.

Inventories rebounded in Q3 after shrinking in the prior qtr, contributing to growth for the first time since early 2015.  Exports accelerated, adding the most to GDP since Q4-2013.  To get a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories & exports.  Such sales grew an annualized 1.4 % last qtr after a 2.4% increase in Q2.  Central bank officials can point to evidence that growth is healthy enough to warrant raising interest rates, just not necessarily at the Fed's gathering next week.

U.S. Economic Growth Rebounds on Inventory, Export Boost

Consumer confidence dropped more than previously reported to match the lowest level since 2014, with Americans less upbeat about both current & future conditions in the weeks before the presidential election.  The University of Mich final index of sentiment fell to 87.2 from 91.2 in Sep.  The projection called for 88.2 after a preliminary reading of 87.9 earlier this month.  Long-term inflation expectations declined to a record low.  The drop in sentiment suggests that consumer spending may continue to moderate.  While hiring has been solid & wages are rising, the uncertainty of the election could also be weighing on confidence.  “Prospects for renewed spending gains will depend on continued growth in jobs and wages as well as low inflation and interest rates,” Richard Curtin, director of the University of Mich consumer survey, said.  Asked about the year-ahead outlook for the economy, 35% expected good times, the lowest reading since Nov 2013.  “This may be due to the temporary impact of uncertainty aroused by the election,”  This figure compares with the average of 91.4 in the first 9 months of this year.  The current conditions index, which measures Americans' perceptions of their personal finances, declined to 103.2, the lowest in a year, from 104.2 in the prior month.  The gauge of expectations 6 months from now decreased to 76.8, the weakest since Sep 2014, from 82.7 in the previous month.  Respondents expected the inflation rate in the next year will be 2.4%, the same as in the Sep survey.  Over the next 5-10 years, they project a record-low 2.4% rate of price growth, after 2.6% in the prior month.

Consumer Sentiment in U.S. Matches Lowest Reading Since 2014

Crude is set for the first weekly drop since mid-Sep as an OPEC committee meets to discuss how deeply some of its members should cut production to comply with the group's pledge to reduce supply.  West Texas Intermediate oil slid more than1.3%.  Brazil will attend the OPEC gathering tomorrow in Vienna as the bloc that controls about 40% of world production seeks non-member cooperation on reducing output.  Brazil will join other producers from outside the group, including Russia.  OPEC may agree on a collective cut and postpone difficult decisions on individual quotas.

The outcome of the group's committee meeting, which will try to resolve differences over how much individual members should produce, will have ramifications for the market in the medium to long term, Sec General Mohammed Barkindo said.  He called for members to “forge ahead together” after Iraq this week demanded to be exempt from any cuts.  West Texas Intermediate for Dec delivery slipped 48¢ (1%) to $49.24 & prices are down 3.2% this week.

Stocks liked the GDP data, although it gives a somewhat mixed picture.  Maybe they figure it's mixed enough to keep the Fed in its hold pattern when considering a rate hike.  The consumer data is chilling as it suggest chaos around the election is having a negative effect on consumer spending.  The Dow continues going nowhere fast, although the bulls are happy that the 18K support has held with all this uncertainty.

Dow Jones Industrials


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