Wednesday, November 23, 2016

Mixed markets on concerns of a Fed rate hike in December

Dow gained 59 to another record, decliners slightly ahead of advancers & NAZ lost 5.  The MLP index was up 1+ to the 303s & the REIT index fell 1+ to the 326s.  Junk bond funds crawled higher & Treasuries were sold again (more below).  Oil was off pennies & gold plunged, going below 1200 (more on both below).

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Federal Reserve officials saw a strengthening case to raise interest rates as the labor market tightened, with some saying a hike should happen in Dec, according to minutes of their Nov meeting.  “Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting,” the record of the FMOC meeting showed.  Many officials said a rate rise could be appropriate “relatively soon,” data permitting, it said.  Fed officials will hold their final meeting of the year on Dec 13-14.  Uncertainties surrounding what economic policies Trump will pursue haven't shaken expectations that officials will raise rates next month.  Investors see a 100% probability of a move.  The minutes showed diverse views on the amount of labor-market slack & the risks surrounding their 2% inflation goal.  The minutes also showed officials emphasized that near-term changes in the benchmark borrowing cost would be dependent on economic data, with the expectation that “only gradual increases” would be warranted. FOMC members noted that labor market conditions had improved “appreciably.”  “It was noted that allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC’s 2 percent objective over the medium term,” the minutes said.  Since officials last met Nov 1-2, they've seen strength in domestic consumption with retail sales in Sep & Oct showing the biggest back-to-back gains since 2014, & new records in stock indices, boosting household wealth.  The unemployment rate last month stood at 4.9%, only slightly above Fed officials' estimate of full employment, & core inflation measures are just below the Fed 2% target.  The personal consumption expenditures price index, minus food & energy, rose 1.7% in the 12 months thru Sep. At the same time, rates on a 30-year mortgage have jumped to 3.94% versus 3.54% at the start of the month, & the $ is 4% stronger against major currencies, possibly making exports less competitive.
Most Fed Officials Expect Rate Hike Relatively Soon

For months, Russia has told OPEC its preferred option in any eventual oil-supply deal was to freeze production, rather than to cut it.  It's dawning on the group that Russia may actually mean it.  While Russia talked about a freeze, Saudi Arabia & its allies privately expected it would eventually join a cut if OPEC delivered its own reduction.  Several OPEC members are adamant Russia must reduce supply if the plan to ease a global glut is to succeed.  But one week before OPEC's meeting, that prospect seems less likely.  The 2 views are set to clash on Nov. 28 in talks between OPEC & non-OPEC nations. The outcome may decide whether there is any eventual agreement. Russia,  If Russia & other non-OPEC producers balk at the idea of cutting output, Saudi Arabia could reconsider pushing ahead.  Russian Energy Minister Alexander Novak today said that a delegation plans to meet Saudi Arabia & others on Mon, but that it was too early to say whether the nation would join the formal OPEC meeting Nov 30.  It’s easy to see how the Saudis and other OPEC members may have gotten it wrong.  Russia never explicitly ruled out cuts, merely saying it favored a freeze at current levels, a record 11.2M barrels a day.  But recently the message from the Russia, at least in public, has been more uncompromising.  “There is no difficulty for us to freeze production,” pres Putin said on Sun after a regional conference, in comments that some OPEC delegates have taken as all but ruling out cuts.  Even as Russia talked about a freeze, it continued to ramp up output.  Since Sep, when Putin & Saudi Deputy Crown Prince Mohammed bin Salman sat down for the last round of bilateral oil talks, Moscow has added another ½M barrels of daily production.

Latest Headache: Russian Reluctance to Cut Oil Output
The $ rallied to the highest level in more than a decade & bonds tumbled after Federal Reserve minutes & economic data bolstered wagers on higher US interest rates.  Stocks fluctuated.  The greenback rose against most of its major peers, Treasury yields surged to a 16-month high & the S&P 500 was little changed after climbing to a record.  UK gov bonds slumped after the Chancellor of the Exchequer said he would borrow more to increase spending, while euro-area notes slid as policy makers were said to be considering lending out the securities to avert a market freeze.  Gold fell below $1200 for the first time since Feb, while oil traded near $48 a barrel.  Traders pushed down the value of bonds after better-than-estimated data including demand for durable goods & manufacturing supported the case for higher borrowing costs in the US.

Dollar Climbs to Decade High as Treasuries Tumble on Fed Wagers
The short rally looks very tired.  Hopes on an improving economy are riding high, but even good intentions will take time to benefit companies & their stocks.  The stock market was not meant to go straight up & this vastly overbought market needs time to digest its gains.  Fri will be shortened day.  Next week more traders will return.

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