Tuesday, February 14, 2017

Mixed markets as Yellen testifies about possible rate hikes

Dow went up 5, decliners over advancers better than 2-1 & NAZ lost 6.  The MLP index dropped 1 to 334 & the REIT index fell 4 to the 342s.  Junk bond funds declined & Treasuries were lower bringing the yield on the 10 year Treasury to 2.5%.  Oil was higher while gold slid back.

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Fed Chair Janet Yellen said more interest-rate increases will be appropriate if the economy meets the central bank's outlook of gradually rising inflation & tightening labor markets.  “At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she told the Senate Banking Committee.  Today's semiannual report on monetary policy is her first since Trump became pres after vowing to boost US growth, which could push the FOMC to pick up the pace of rate hikes if such steps fan higher inflation.  “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she added.  Yellen gave no indication of the timing of the next hike in her prepared remarks.  Investors see about a 30% chance of an increase at the next meeting of the FOMC on Mar 14-15.  The Fed, which has only raised rates twice since 2009, has penciled in 3 qtr-point rate increases in 2017, as the economy closes in on the central bank's goals for maximum employment & 2% inflation.  She said the Fed's outlook for a “moderate pace” of growth is based on continued stimulative monetary policy & a pick-up in global activity.  She did not mention Trump administration proposals as a key element in the central bank's forecast.  Consumer spending has continued to rise at a “healthy pace,” she said, supported by gains in household income & wealth, favorable sentiment & low rates.  The recent rise in mortgage rates “may impart some restraint” on housing markets, she added.

Yellen Sees More Rate Hikes Needed If Economy Stays on Course

US wholesale prices jumped in Jan by the most since Sep 2012, led by higher costs of gasoline and indicating inflation is beginning to stir.  The 0.6% gain in the producer-price index followed a 0.2% advance the prior month, a Labor Dept report showed.  The forecast called for a 0.3% rise.  The measure was up 1.6% from a year earlier, also more than forecast.  The pickup in prices, which also reflected higher retailer & wholesaler margins, is the latest signal that broader inflation continues to move toward the goal of the Fed.  While rising demand & higher commodity costs are reviving price pressures in the production pipeline, renewed strength in the $ may pose a headwind.  Wholesale prices of goods increased 1% in Jan, the most since May 2015.  Half of that pickup was due to a 12.9% surge in gasoline.  Costs of pharmaceuticals, scrap steel, heating oil, natural gas & pork also moved higher.  Higher raw materials costs are pushing up inflation across the globe.  In China, producer prices climbed in Jan by the most since 2011.  Services inflation accelerated, with prices increasing 0.3% following a 0.1% rise the prior month.  More than 80% of the advance was traced to higher margins at retailers & wholesalers.  Transportation & warehousing services prices climbed 1.1%.  Excluding food & energy, wholesale prices rose 0.4% from the previous month after a 0.1% rise.  Those costs were 1.2% higher than in Jan 2016.

Investors haven't been this optimistic on the global economy since 2011, joining small businesses in taking a glass-half-full outlook as a new administration takes over in DC.  A full 23% of investors expect an outright “boom,” according to a survey from Bank of America Merrill Lynch, while the number predicting negligible growth over the next 12 months has fallen by more than ½ to 43%.  The optimism comes amid forecasts global growth will pick up and as Donald Trump promises to cut taxes, boost fiscal spending & loosen regulations in moves that could boost corporate earnings.

Investors' Economic Optimism Surges to Level Not Seen Since 2011

Stocks are taking a breather today.  After all, they can't go up forever.  Market sentiment (shown above) & consumer optimism is strong which bring out buyers.  Negative thoughts are being pushed aside, at least for the time being.  But dark clouds have not gone away.

Dow Jones Industrials


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