Thursday, December 22, 2016

Lower markets on consumer spending data

Dow pulled back 23, decliners over advancers 4-3 & NAZ dropped 24.  The MLP index added 3+ to the 315s (near the higher end of its trading range for many months) & the REIT index was fractionally lower to the 334s.  Junk bond funds were a little lower & Treasuries were little changed.  Oil crawled higher (more below) & gold was a tad lower.

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The US economy expanded more than previously reported last qtr on bigger contributions from a range of factors including services spending, intellectual property & construction by state & local govs.  GDP rose at a 3.5% annualized rate in Q3, compared with a prior estimate of 3.2, Commerce Dept figures showed.  The forecast called for a 3.3% gain.  The revised growth estimate, still the fastest in 2 years, reflected updated figures on research & development expenses from companies, spending by nonprofit institutions & use of financial services.  The economy is unlikely to sustain such a pace in Q4, instead probably growing at a 2.2% rate, according to the latest projection.  Household purchases, which account for almost 70% of the economy, grew at a 3% annualized rate, stronger than the 2.8% pace previously estimated.  That change reflected primarily higher spending on services by incorporating newly available data from the Census Bureau.  Estimates of the contributions to growth by trade & inventories were little changed.  Stripping out those items, the 2 most volatile components of GDP, final sales to domestic purchasers increased at a 2.1% rate, compared with the prior estimate of a 1.7% pace.  Corp spending on equipment decreased at a 4.5% annualized pace in Q3, compared with the 4.8% drag previously estimated, & subtracted 0.3 percentage point from growth.  Those outlays had declined 2.9% in the prior qtr.

U.S. Economic Growth Revised Up to 3.5% Pace in Third Quarter

US consumer spending increased modestly in Nov as household incomes failed to rise for the first time in 9 months, suggesting economic growth slowed in the Q4.  The Commerce Dept said that consumer spending, which accounts for more than 2/3 of economic activity, rose 0.2% after an upwardly revised 0.4% increase in Oct.  The forecast was for consumer spending advancing 0.3% last month.  Spending in Oct was
previously reported to have risen 0.3%.  When adjusted for inflation, consumer spending edged up 0.1% last month after a similar gain in Oct.  That suggests some cooling in consumer spending in Q4 after it increased at a 3.0% annualized rate in Q3.  But the moderation in consumer spending is likely to be temporary against the backdrop of a labor market that is near full employment & consumer confidence that is at cycle highs.  Still, last month's modest gain in consumer spending came on the heels of weak industrial production & housing starts in Nov.  That implies GDP estimates for Q4, currently around a 2.6% rate, could be trimmed.  Slower spending last month held back inflation.  The personal consumption expenditures (PCE) price index was unchanged after rising 0.3% in Oct.  In the 12 months through Nov the PCE price index rose 1.4% after increasing by the same margin in Oct.  Excluding food & energy, the core PCE price index was also unchanged after edging up 0.1% in Oct.  That lowered the year-on-year increase in the core PCE price index to 1.6%, the smallest gain since Jul.  The core PCE index increased 1.8% in Oct, which was the biggest increase since Jul 2014.  The core PCE is the Federal Reserve's preferred inflation measure & is running below its 2% target.  Overall consumer spending last month was restrained by a 0.6% drop in purchases of long-lasting manufactured goods such as automobiles.  Spending on services rose 0.3%.  Personal income was flat last month after increasing 0.5% in Oct.  Wages & salaries fell 0.1%.  Savings fell to $780.9B, the lowest level since May 2015, from $809.1B in Oct.

Consumer Spending Slows in November

Crude flipped to small gains at the start of traditional trading hours in the US, where traders are still feeling bullish about recent changes in the oil market.  Prices have been on the way up, gradually, since OPEC & other global exporters agreed last month to cut output.  And even losses yesterday, one of only 3 losing sessions in 2 weeks, couldn't drag the market below recent lows, which momentum-based traders see as a positive sign for prices.  Light, sweet crude for Feb delivery recently gained 63¢ (1.2%) to $53.12 a barrel.  OPEC had agreed last month to cut output by 1.2M barrels a day, equivalent to around 1% of global supply.  A group of big oil producers outside the cartel, including Russia, agreed to join them and scale back their output by another 558K barrels a day.  That has kept oil above $50 a barrel for more days this month than any other since Jul 2015, but many investors also have been skeptical of OPEC.  Its spotty record for adhering to production quotas is casting doubt over whether the cuts will fully materialize after they are supposed to start in Jan.  Many are broadly expecting prices to rise in the new year once OPEC cuts become apparent.  It could take weeks or months for definitive proof that OPEC is following thru, & then for their cutbacks to show up in declining inventories around the world, but many do expect that to happen eventually & for prices to rise when it does.

Oil Flips to Gains on Surge of U.S. Traders

In this semi-holiday period, there was not a lot going on in the stock market.  That should be expected as holiday feelings get more attention along with guesses about what the Trump administration will bring to the economy.  Dow was slightly in the red all day.  Tomorrow should be an even slower day.

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