Monday, February 13, 2017

Markets soar to new records on optimism about the economy

Dow surged 142 (closing near the highs), advancers over decliners a relatively modest 3-2 & NAZ gained 29.  The MLP index was fractionally higher in the 334s & the REIT index rose 1+ to the 346s.  Junk bond funds were mostly higher & Treasuries declined in price as the stock market rallied.  Oil & gold moved lower (more on both below).

Dow Jones Industrials

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Greece must immediately reach an agreement with creditors on the release of bailout funds or risk another recession & even more austerity measures, the country's central bank chief said.  “Any further delay in completion beyond this month will feed a new circle of uncertainty,” Bank of Greece Governor Yannis Stournaras told lawmakers today, saying this could make reaching a deal harder.  “Such a vicious cycle could return the economy to recession and a rerun of the negative developments that took place in the first half of 2015.”  Prime Minister Alexis Tsipras is heading toward a reprise of the antagonistic relationship with Greece's creditors that previously almost knocked the nation out of the euro.  Over the weekend, he lashed out again at the IMF, one of the institutions monitoring Greece's rescue, after auditors insisted on legislation that would trigger further budget cuts if fiscal targets are missed.  Greece “significantly” beat its 2016 fiscal target, the European Commission said today, achieving a budget surplus before interest of 2.3% of GDP, compared with a goal of 0.5%.  The surplus will widen to 3.7% in 2018, in line with targets, provided the gov implements the terms of its €86 ($91B) bailout program, the Commission said.  That’s at odds with the IMF’s view that the surplus won't get above 1.5% without more cuts.  The EU projections underpin the gov's frustration with the IMF’s stance.  European Economics Commissioner Pierre Moscovici will visit Athens on Wed for talks with Tsipras & Finance Minister Euclid Tsakalotos to find a way to break the impasse.  Germany & the Netherlands have threatened to end the Greek program if a deal isn't reached that included the IMF.  German Finance Minister Wolfgang Schaeuble's vocal insistence gave the IMF leverage when lobbying for its demands, according to a leaker.

Greek Central Bank Chief Warns Bailout Delay Risks Rerun of 2015

US households' expectations for consumer price inflation rose to the highest level since mid-2015, according to a Federal Reserve Bank of New York survey.  The median survey respondent reported an expected inflation rate last month of 2.9% 3 years ahead, up from 2.8% in Dec.  Expected inflation for one year from now rose to 3%, from 2.8% the month earlier.  The increase will probably come as welcome news to Fed policy makers, who are trying to navigate what a new govt led by Trump will mean for the economy, prices & interest rates.  Low inflation expectations have haunted officials since the beginning of last year, when the New York Fed survey measure fell to the lowest level on record in data dating to Jun 2013.  In Oct, prior to the presidential election, the median survey respondent expected a 2.6% inflation rate 3 years ahead.  Consumers were less optimistic about growth in household income over the next 12 months.  The median expectation was 2.6% in Jan, down from 2.8% in Dec.  Expectations for growth in household spending fell to 3.1% from 3.7%, marking the lowest level in a year.

U.S. Consumer Inflation Expectations at 19-Month High, Fed Says

A pick-up in American oil activity kept oil prices in check today, despite reports that OPEC producers are mostly sticking to their pledged cuts.  OPEC, which formed a pact to slow down its production of crude beginning in Jan, released its own data to show 93% compliance with production cuts.  The International Energy Agency also found high compliance among OPEC nations.  According to the IEA's report, OPEC’' Jan production achieved 90% of the planned cuts of 1.8Mbarrels per day.  The numbers were better than anticipated & US oil futures responded in kind Fri with a strong rally.  However, another bump in the US rig count reminded investors that OPEC's cuts, while designed to reduce global supplies & lift prices, are encouraging American producers to get back to drilling.  It is believed that domestic production is running at 9.2M barrels per day, faster than the EIA's weekly figure of 8.9M.  The cuts by OPEC, led by Saudi Arabia, are a driving force behind the US oil industry’s reawakening.  The number of rigs operating in the US totaled 741 last week, an increase of 12 versus the prior week & 200 year-over-year.  Canada's rig count is also on the rise, climbing by 130 rigs since the same week in 2016.  Construction of the Keystone pipeline, which has been fast-tracked under the Trump administration, would further improve the economics of oil drilling in Canada.  The EIA believes US oil prices will average $54 per barrel in 2017, according to the its latest short-term energy outlook.  Recent trading suggests that the market expects West Texas Intermediate (WTI) prices to trade between $45-65 in Apr.

U.S. Oil Production Overshadows OPEC Cuts

Oil production from seven major US shale plays is forecast to climb by 80K barrels a day to 4.873M barrels a day in Mar from Feb, according to a monthly report from the EIA. Oil output from the Permian Basin, which covers parts of western Texas & southeastern New Mexico, is expected to see the largest climb among the big shale plays.  It's expected to rise by 70K barrels a day.  Output from the Bakken, which covers parts of Montana & North Dakota as well as parts of Canada, however, is expected to fall by 18K barrels a day.  Oil prices continued their declines.  Mar West Texas Intermediate oil traded at $52.88 a barrel, down 98¢ (1.8%) just prior to the close.

U.S. Shale Oil Output Forecast To Rise By 80,000 Barrels a Day In March: EIA

Gold futures fell, with prices marking their largest $ & percentage decline since Jan 25.  Overall strength in the $ & gains in the stock market reduced investor interest in the precious metal.  Apr gold fell $10.10 (0.8%) to settle at $1225.

Gold Futures Mark Biggest One-day Loss In 2 1/2 Weeks

Tomorrow Janet will speak to Congress & the stock market listens.  Based on her record, she is likely to say pretty much what she has said during prior testimonies.  But nuances about the future of interest rates, which are widely expected to go higher in 2017, can move markets.  The Dow is up a massive 2K+ since the elections & the bulls are not looking back.  Crossing 20K was a major achievement after struggling so long to go thru that ceiling (shown in the chart below), making the bulls very happy.  Among several dark clouds out there, the Greek debt mess may return soon.  Also, market breadth continues to be unimpressive.

Dow Jones Industrials


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