Wednesday, November 16, 2016

Markets ease lower on expectations of a rate hike next month

Dow gave back 68, decliners slightly ahead of advancers & NAZ was up 4.  The MLP index lost 1+ to the 301s & the REIT index was fractionally higher in the 324s.  Junk bond funds were weak & Treasuries were little changed.  Oil was sold & gold crawled higher.

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Light Sweet Crude Oil Futures,J

Gold Feb 17

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Output at US manufacturers rose for a 2nd month in Oct, a sign the industry is gradually recovering from a prolonged period of weakness.  Production at factories, which make up 75% of production, climbed 0.2% for a 2nd month, according to the Federal Reserve.  The forecast called for a 0.3% gain.  Warmer temps led to a drop in utility use, resulting in little change to total industrial production, which also includes mining.  Factories are benefiting from steady household spending growth at the same time the drag on industrial output from the oil sector wanes as prices recover & drillers employ more rigs.  Nonetheless, a bigger boost to manufacturing is unlikely without stronger export markets and more domestic business investment.

Manufacturing accounts for about 12% of the economy.  The projection for Oct was for a 0.2% advance.  Utility output dropped 2.6% after a 3% decrease the previous month.  Mining production, which includes oil drilling, increased 2.1%, the most since Mar 2014, reflecting a gain in coal output.  Oil & gas well drilling jumped 9%, the biggest advance since Jan 2010.

U.S. Manufacturing Output Rose for a Second Month in October

Federal Reserve Bank of St. Louis pres James Bullard said there's a chance the US economy could get a medium-term boost if Trump boosts infrastructure spending & reforms taxes.  While Bullard offered that possibility, he said it’s still too soon to say how the economy may be affected by the election & he hasn't changed his near-term outlook for growth or monetary policy.  A “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting,” he said.  The FMOC said Nov 2 that the case had strengthened further to raise rates.  “You’d have to have to have a surprise I think at this point” to stop a Dec rate increase he said.  Fed officials project one rate increase this year & 2 in 2017.  Bullard has argued that the economy has been saddled with persistently low growth, so there is little need to raise interest rates much.  He's also previously called for one increase this year & to then keep them on hold for an extended period of time.  Bullard said markets had coped well with Trump's surprise victory in the election.  He highlighted 2 particular policies that could support growth: a “targeted fiscal infrastructure package aimed at increasing U.S. productivity growth” & tax reform to allow repatriation of corp profits to lift investment.  That impact on the economy would probably come in 2018-2020, he said.  Over the longer term, he said new trade arrangements & immigration reform could have an important effect.

Fed’s Bullard Sees Medium-Term Boost From Trump Spending

Wholesale prices in the US were unexpectedly weak in Oct as declines in the costs of services offset increases in goods, in a sign inflation is struggling to gain traction.  The unchanged reading in the producer-price index from the previous month followed a 0.3% rise in Sep, according to the Labor Dept.  The forecast called for a 0.3% increase.  A 0.3% drop in services prices was driven by a decline in the cost of securities brokerage, investment advice & related services.  While Federal Reserve officials are widely anticipated to raise interest rates next month, relatively tame price pressures in the economy may potentially limit any further increases in borrowing costs.

From a year earlier, producer prices rose 0.8%, the fastest gain since Dec 2014, after a 0.7% increase in the prior 12-month period.  Goods prices were up 0.4% from the previous month & energy costs rose 2.5% from the prior month for a 2nd straight time.  Food prices showed a 0.8% decrease.  Excluding food & energy, wholesale prices dropped 0.2% from the previous month following a 0.2% rise.  Those costs were up 1.2% from Oct 2015.  Excluding volatile components such as food, energy, & also eliminating trade services, producer costs dropped 0.1% after climbing 0.3% the previous month.  Compared with a year earlier, this core measure rose 1.6% after a 1.5% gain.

Wholesale Prices in U.S. Were Weaker Than Forecast in October

After a stellar run, the Dow is taking a breather.  This market is vastly overbought, up about 1K in a week.  Thoughts about higher interest rates always shake traders who have become addicted to low rates.  Earnings from retailers are coming this week & they may not inspire stock buying.

Dow Jones Industrials


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