Wednesday, November 30, 2016

Mixed drift lower while they assess a Fed Rate hike in December

Dow went up only one with selling into the close, decliners ahead of advancers more than 4-3 & NAZ lost a very big 56.  The MLP index surged 11+ to the 303s (although continued its sideways trend for months shown below) & the REIT index fell 3+ to the 328s.  Junk bond funds edged higher & Treasuries were sold with the yield on the 10 year Treasury rising to 2.37%.  Oil surged to 49 (more below on the OPEC meeting) & gold sank to 1172.

AMJ (Alerian MLP Index tracking fund)

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Live 24 hours gold chart [Kitco Inc.]

The US economy continued to expand from early Oct thru mid-Nov with little inflation as retail sales, real estate markets & business service firms saw rising activity, a Federal Reserve survey showed.  The Beige Book economic report, based on information collected on or before Nov 18 by regional Fed banks, said “outlooks were mainly positive” with ½ of the 12 districts “expecting moderate growth.”  “A tightening in labor market conditions was reported by 7 districts, with modest employment growth on balance.”  “Districts noted slight upward pressure on overall prices.”  The job market is getting so competitive in the Chicago region that “it is getting more and more difficult to fill positions at any skill level,” citing local business contacts.  Construction work was delayed because of difficulties in finding workers.  There were several references to the presidential election scattered throughout the regional summary.  The Richmond & St. Louis district contacts said softer vehicle sales “might be attributed to uncertainty surrounding the presidential election.”  Cleveland contacts reported that election “jitters” contributed to a decline in job openings & placements.  Futures traders have priced in a 100% probability of at least a ¼-point hike as the economy gets closer to the central bank's mandate of full employment & stable prices.  “As in the past four Beige Books, wage growth was characterized as generally modest,” the summary said.  The strong $ was cited as a “a headwind to more robust demand” for manufactured goods in a few districts.  The Chicago Fed saw “numerous reports of businesses” seeking to refinance loans ahead of future rate increases.  The Cleveland said “overall capital spending” continued to decline with 2 firms “postponing investment decisions” until more is known about the tax policies of the next president.  The Atlanta Fed reported labor shortages in nursing & construction.

Fed Says U.S. Economy Continued to Expand Across Most Regions

Federal Reserve policymakers should put less emphasis publicly on the short-term outlook for interest rate increases & more on the economics driving monetary policy & the uncertainty of forecasts, Fed Governor Jerome Powell said.  He said that a diverse set of views at the Fed, with 12 regional bankers & a Washington-based board who set their own public speaking schedules, helps strengthen the democratic framework of the central bank.  But he said the now frequent speeches by Fed officials have led to too much emphasis on the timing of the next rate increase, de-emphasized the primary influence of the Fed chief in setting policy, & underplayed the amount of uncertainty facing the central bank.  The Fed under its former chairman, Ben Bernanke, started putting more emphasis on public communications, but proliferation of speeches has led some to regard the central bank's approach as confusing.  "The public expression of our diverse views helps sustain public support for the Federal Reserve as a public institution," Powell added.  But "it is wise not to read too much about the path of policy into all of this communication ... There is a single (Federal Open Market Committee) participant who has most of the leverage in our policy discussions. Observers would be well-advised to listen carefully to what she says."  Powell said that in his own remarks he planned to put more emphasis on economic conditions & uncertainty while downplaying short-term rate increase issues.

Fed's Powell Says Fed Speakers Have Focused too Much on Rate Increases

The US economy needs higher interest rates although the Federal Reserve will closely scrutinize the expected changes in America's fiscal, trade & immigration policies, Cleveland Fed pres Loretta Mester said.  Mester did not specifically refer to proposals by Donald Trump to slash tax rates, boost infrastructure investment & curtail immigration.  But she said changes in these policy areas appeared likely to change & the central bank would have to weigh how they affect employment & inflation.  "The devil will be in the details," Mester said.  Since Trump's victory, Fed officials have warned the central bank might have to raise rates more quickly if the gov heats up the economy by ramping up deficit spending.  At the same time, it remains "very uncertain" how much fiscal & other policy changes will change, she said.  Mester dissented at the Fed's last 2 policy meetings when the central bank kept interest rates steady.  She voted in favor of ¼ percentage point increases in the Fed's targeted range for overnight lending between banks, which has been 0.25-0.5% since Dec.  She still backed a rate increase, which investors widely expect will come at the Dec 13-14 policy meeting.  "I view another increase in interest rates as a prudent step to take," Mester said.  She said the employment market appeared to be at full strength & that postponing rate increases would raise the risks the Fed would have to hike quickly, potentially triggering a recession.  "I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion," she added.

Fed's Mester Says Devil Will be in Details on Fiscal Policy Changes

Oil prices soared more than 8% to the highest in a month as some of the largest producers agreed to curb production for the first time since 2008 to support prices.  Crude prices were also on track to have risen over 5% this month but were are unlikely to skyrocket further in reaction to the deal, & may even be short-lived.  OPEC agreed to cut production by around 1.2M barrels per day (bpd) (over 3%) to 32.5M bpd, from Jan.  The cut will put production at the low end of a preliminary agreement struck in Sep, reducing output from a current 33.64M bpd.  The group's de facto leader Saudi Arabia said it will take the lion's share of cuts, reducing output by almost 500K bpd to 10.06M bpd, to get the deal done.  Iraq, OPEC's 2nd largest producer which had previously resisted cuts, providing a hurdle to an agreement, agreed to reduce output by 200K bpd to 4.351M bpd.  Iran was allowed to boost production slightly from its Oct level, a major victory for Tehran, which has long argued it needs to regain market share lost under sanctions.  Non-OPEC member Russia, which had long resisted cutting output & pushed its production to new record highs in recent months, agreed to cut output by 300K bpd.  OPEC will meet with non-OPEC producers next week.  West Texas Intermediate crude futures for Jan delivery rose $3.99 to $49.22 a barrel (8.8%), the largest one-day move since Feb, & Brent crude futures for Jan went over $50 a barrel.  Oil prices will continue to strengthen on the deal, but sharp gains will be limited as market skepticism lingers about how effective the cuts will be.

Oil Jumps Over 8% as OPEC Finalizes Output Cut Deal

Stocks are digesting the gains in Nov.  But traders are also calculating what the Fed rate hike (& it is coming in Dec) along with what Trump will do for the economy.  The stock market is very overbought & a correction is needed before the next advance (if there is one).

Dow Jones Industrials


Dow rises to a record on news from OPEC meeting

Dow gained 51 to a new record, decliners over advancers almost 5-4 & NAZ fell 21.  The MLP index jumped up 9+ to the 302 on the OPEC news & the REIT index dropped 4+ to the 327s.  Junk bond funds were a little higher & Treasuries were sold.  Oil soared to the 48s on the OPEC news (more below) & gold dropped to 1175.

Dow Jones Industrials

Crude Oil Jan 17

Gold Futures,Feb-2017

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OPEC clinched a deal to curtail oil supply, confounding skeptics as the need to clear a record global crude glut, & prove the group's credibility, brought about its first cuts in 8 years.  The group will reduce production by 1.2M barrels a day to 32.5M a day, according to leakers.  Benchmark Brent crude rose 8% to over $50 a barrel.  After weeks of often tense negotiations, OPEC's 3 biggest producers (Saudi Arabia, Iraq & Iran) resolved differences over sharing the burden of cuts.  It appears the Saudis accepted that Iran, as a special case, can raise production to 3.9M barrels a day.  The agreement is also likely to include an additional reduction of about 600K barrels a day by non-OPEC countries.  The deal promises to revive the tattered finances of countries from Venezuela to Libya & restore flagging confidence in the producer bloc that controls 40% of the world’s oil.  But the consequences will reverberate far beyond OPEC, giving a boost to US shale drillers crippled by a 2-year price rout.  Russia, the biggest producer outside the bloc, has said if OPEC agrees on individual country quotas it's ready to participate, including possibly reducing its output (a reversal of its previous position).

OPEC Agrees to Cut Production in Drive to End Record Glut

Personal spending increased at a more moderate pace in Oct after the biggest gain in 5 months, while faster income growth signaled demand will be sustained.  Purchases rose 0.3% after a 0.7% Sep advance that was stronger than first estimated, Commerce Dept figures showed.  The forecast called for a 0.5% advance in Oct.  Incomes jumped 0.6%, the most since Apr.  Consistent job growth, projected to be reinforced with the Fri report on Nov payrolls & a firming up of wages are allowing households to spend a little bit more freely.  The report also showed the Fed's preferred inflation gauge climbed to the highest since Oct 2014.  Wages rose 0.5% in Oct for a 2nd month, exceeding the 0.4% forecast.  The gain in worker pay helped propel income growth after a 0.4% increase in Sep that was more than previously reported.  The personal spending report showed the price index tied to consumer purchases increased 0.2% for a 3rd month in Oct.  It rose 1.4% from a year earlier.  This inflation gauge (preferred by Fed policy makers) while making progress, hasn't met the 2% goal since Apr 2012.  Disposable income, or the money remaining after taxes, rose 0.4% from the prior month after adjusting for inflation, the strongest advance this year.  The saving rate increased to 6% from 5.7% in Sep.

Companies in Nov added the most workers to US payrolls since Jun, data from the ADP Research showed.  Private payrolls climbed 216K (forecast was 170K) after a 119K gain in Oct that was revised down from 147K.  Goods-producing industries, which include manufacturers & builders, reduced headcounts by 11K after a 20K decrease.  Service providers boosted payrolls by 228K after a 138K increase.  Hiring managers’ need for more workers is helping to sustain the job-market progress that Federal Reserve officials have noted ahead of their Dec meeting, when they're expected to raise interest rates.  The ADP report may also help bolster forecasts for private payrolls before the Fri release of Nov employment data.  “There is little evidence that the uncertainty surrounding the presidential election dampened hiring,” Mark Zandi, chief economist at Moody's Analytics said in a statement (Moody's produces the figures with ADP).

ADP Says Companies in U.S. Added 216,000 Employees in November

The big picture is a little fuzzy.  Dow wants to set a new record but market breadth is negative & techs are being sold.  It looks all countries still need to sign the production agreement.  That could become tricky given OPEC's record of a lack of cooperation by its members.  Stock purchases coming from gut reactions has proven to give false signals in the past.

Dow Jones Industrials