Friday, March 31, 2017

Markets meander today to conclude an excellent Q1

Dow lost 65, advancers over decliners about 2-1 & NAZ was off 2.  The MLP index went up 3+ to the 322s & the REIT index added 1+ to 345.  Junk bond funds advanced & Treasuries rose.  Oil was higher (more below) & gold crawled higher to 1247.

AMJ (Alerian MLP Index tracking fund)

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German unemployment fell by the most since 2011, pushing joblessness to a record low as Europe's largest economy powers ahead.  The number of people out of work slid by a seasonally adjusted 30K to 2.6M in Mar & the rate dropped to 5.8% from 5.9%, data from the Federal Labor Agency showed.  The forecast called for a 10K decline in the number of jobless & no change in the rate.  The number of employed people in Germany, which is reported with a one-month lag, strengthened in Feb & was about 600K higher than a year ago.  The figures echo the Bundesbank's prediction that the labor-market situation is likely to be even better than stated in recent months due to a “massive” upward correction in employment growth for H2-2016.  That meshes with the strongest levels of business confidence since 2011, signaling that the country's economic momentum is set to continue even as inflationary pressures show signs of easing.  “The job market continues to develop favorably,” the labor agency said. “With the onset of spring activity, the number of unemployed people has declined, employment growth is continuing unabatedly, and demand for new employees continues to be high.”  Joblessness fell about 18K in western Germany & 12K in the eastern part of the country.

German Unemployment Slides to Record Low as Economy Booms

Pres Trump will sign 2 executive orders that the White House says will combat global trade abuses & protect US workers.  The directives come less than one week before Trump is scheduled to meet with the president of China–the largest contributor to the US trade deficit.  One of the executive orders calls for a full-scale 90-day investigation into every form of trade abuse that contributes to the US deficit, which totaled more than $502B in 2016.  The probe will examine the nation's economic relationship with every country on a product-by-product basis, according to Commerce Sec Wilbur Ross.  Peter Navarro, director of the White House National Trade Council, said the White House intends to look into all of the ways the US is being taken advantage of in the global economy.  “We are the freest trading nation in the world. On balance, we have the lowest tariffs and the lowest non tariffs. We run these enormous trade deficits…Wilbur Ross and his team are going to…look comprehensively at all of the different ways that we are getting that deficit,” Navarro said.  The 2nd executive order aims to enforce anti-dumping duties on imports from “forty countries that are cheating the American people,” according to Navarro. He added that the US is owed $2.8B that hasn’t been collected from these types of trade abuse cases over the past 15 years alone.  “This executive order…basically [provides] Customs and Border Protection with all the tools it needs to collect this money,” Navarro said.  “It’s also about the fact that if we don’t collect the revenues, our industries [will] continue to remain at a disadvantage.”  One of the countries Trump has been the toughest on regarding unfair trade practices is China.  Last year that deficit totaled more than $347B.  The Chinese pres is scheduled to visit the US next week & Trump said he anticipates it will be a “difficult” conversation.

Trump Talks Tough on Trade Deficits Ahead of China Visit

St. Louis Fed Pres James Bullard believes that 3 more rate hikes would be “overkill” for the economy.  Though the stock market has hit new highs & the unemployment rate is below 5%, Bullard said that the Fed should wait until inflation picks up further before raising rates.  “Growth is 2% in 2015 and 2% in 2016. First quarter tracking is below 1%, so we don’t really have a lot to go on,” he said.  “Inflation has just come up to 2% with the report today and unemployment hasn’t really changed for the last 15 months, so a lot of variables are very stable going into this. There is obviously a lot going on in Washington…The hard data looks very smooth right now, so let’s wait and see what happens.”  Bullard also weighed in on what may happen if the Fed decided to have 3 more rate hikes.  “You might see longer term rates come down, which we’ve seen since the March move. You might see inflation expectations fall. You might see a little bit slower growth. You might see a little bit of dampening on the economy more than you expected.”  Bullard gave his analysis on what the Fed should be doing to strengthen the economy.  “We could allow the reinvestment policy to end and we could allow the balance sheet to start to normalize, that’s what we should be doing… $4.5 trillion started out at $800 billion before the crisis…I think in a relatively benign environment now’s a good time to let it come down.”

St. Louis Fed President Bullard: Three Rate Hikes This Year Would Be Overkill

Oil prices fell after a 3-day rally ran out of steam as a higher US rig count signaled rising production from shale, contributing to the global supply glut.  Prices have been locked within a range during Q1 as traders searched for signals that OPEC's production cuts are effective or that US production is continuing to offset efforts to rebalance the market.  US crude futures were up slightly, rising 35¢ to $50.69 a barrel after slipping back below $50.  They ended Q1 around 7% lower, the worst quarterly loss since late 2015.  Oil prices had gained momentum this week on a growing sense that OPEC & nonmember Russia would extend their production cut, seeking to drive the market higher.  The US energy department released supply & demand figures for Janu, the latest month available, saying that the country's oil demand for that month was up 0.9% at 19.234M barrels per day, while production rose 60K bpd to 8.835M barrels.  Baker Hughes said US oil rigs increased by 10 to 662 in the latest week, making Q1 the strongest for oil rig additions since mid-2011.  The indicator has shown huge gains, with the rig count doubling in a 10-month recovery & undermining efforts led by OPEC to rein in output.  OPEC & non-OPEC producers including Russia agreed late last year to cut output by almost 1.8M barrels per day in H1 to ease a global supply overhang & prop up prices.  Nevertheless, analysts have slightly lowered their oil price expectations for this year.

Oil Retreats, Set to Become First Quarter's Worst-Performing Asset

Markets had a difficult month, but the Dow finished with a loss of about only 150 & NAZ is at essentially a record high.  In Q1 it rose almost 1K because confidence by consumers & business execs is very high.  2 big markets outside the US, China & Germany are doing well, despite Trump's talk about unfair trade practices.  There was only 1 rate hike by the Fed & general agreement that 2 more will be coming this year, supported by stronger economic growth.  While the outlook for stocks is good, an overbought stock market which hasn't had significant selling in some time & the chaos in DC are worrisome.  In DC, the biggest item on the agenda is tax reform with lower taxes which can only be described as iffy today.

Dow Jones Industrials

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Mixed markets on mixed economic data

Dow lost 24, advancers over decliners 4-3 & NAZ went up 3.  The MLP index was pennies lower in the 318s & the REIT index went up a fraction to the 344s.  Junk bond funds were a little higher & Treasuries were up a tad.  Oil was fractionally lower but still above 50 & gold was flat.

AMJ (Alerian MLP Index tracking fund)

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Federal Reserve Bank of NY pres William Dudley says the Fed forecast for 3 rate hikes this year “is in a reasonable place” & that it could begin shrinking its balance sheet late this year or in 2018, possibly pausing rate increases in the process.  “Where the FOMC is, I think is in a reasonable place,” he said.  “A couple more hikes this year seems reasonable.”  He has a permanent vote on the policy-setting FOMC & is widely seen as one of its most influential members.  His comments suggested no great pressure to tighten quickly.  But they also showed that the Fed is still on track to lift rates further this year, after hiking in Mar, & is potentially headed toward beginning to roll off its $4.5T balance sheet.  “It wouldn’t surprise me” if the Fed started to roll off its assets “later this year” or in 2018, he added.  “If we start to normalize the balance sheet, that’s a substitute for short-term rate hikes,” he said, & “we might actually decide at the same time to take a little pause in terms of raising short-term interest rates.”  Dudley is “not that worried that the markets are going to react to changes to our balance sheet in a very violent way because it’s already factored in.”  The Fed has been treading carefully when it comes to the balance sheet because they want to avoid market disruptions.  “I don’t think there is a strong need to differentiate between mortgages and Treasuries,” Dudley said, referring to the assets held by the central bank.  Some Fed officials have argued they should prioritize allowing MBS to roll off.

Dudley Says a Couple More Hikes Seem Reasonable

Consumer sentiment rose in Mar as Americans registered sunnier views about the state of their finances while becoming less upbeat about the long-term economic outlook, Univ of Mich survey data showed.  The final sentiment index rose to 96.9 from 96.3 in Feb, which with the 97.6 estimate.  The preliminary reading was also 97.6.  Current conditions gauge, which measures Americans' perceptions of their personal finances, increased to 113.2 from 111.5 the prior month; while that’s the strongest since 2005, it's below a preliminary reading of 114.5.  Sentiment is holding close to its healthiest levels in more than a decade even as Americans, especially middle & upper income earners, monitor an easing in the stock-market rally that could moderate household wealth.  Optimism since the election has largely cut along party lines, with Reps feeling much better that the new administration's policies will boost growth.  At the same time, Americans of all political stripes have been buoyed by further labor-market strengthening.  “The data indicate both rising optimism as well as rising uncertainty due to the partisan divide,” Richard Curtin, director of the survey, said.  “Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders, which will result in uneven gains over time and across products.”

Consumer Sentiment in U.S. Rises on Views of Current Finances

US consumer spending rose less than forecast in Feb even as wage growth improved, according to gov data that also showed inflation reached the Fed's goal for the first time in almost 5 years.  The 0.1% advance in consumption followed a 0.2% gain the prior month, the Commerce Dept said.  A price gauge based on consumer spending habits, the Fed's preferred inflation measure, climbed 2.1% from a year earlier, the most in 5 years.  The figures are consistent with projections of softer consumer spending in Q1, partly due to smaller outlays for household utilities amid milder weather.  The slowdown may prove temporary because of steady hiring, cheap financing & a surge in household optimism.  Incomes rose 0.4% after a 0.5% gain that was more than initially estimated.  The February increase reflected a 0.5% pickup in wages, the most in 5 months.  Disposable income, or the money left over after taxes, increased 0.2% after adjusting for inflation (after falling 0.1% in the prior month).  The forecast called for a 0.2% gain in nominal consumer spending.  Adjusting consumer spending for inflation, which generates the figures used to calculate GDP, purchases fell 0.1% after a 0.2 % decrease the previous month.  The data follow the revised Q4 GDP report that showed consumer spending climbed at a 3.5% annualized rate.  Consumption is projected to slow in Q1, moving closer to the 2.5% average of the past 5 years.  That would reflect a slowdown in utility use amid unseasonably mild weather.  Household outlays on services fell 0.1% for a 2nd month after adjusting for inflation.  The category includes tourism, legal help, health care, & personal care items such as haircuts & is typically difficult for the gov to estimate accurately.  Purchases of durable goods, which include automobiles, also fell 0.1% after adjusting for inflation.  That followed a 1.1% plunge in Jan.  Spending on non-durable goods, which include gasoline, rose 0.1%.  The core price measure, which excludes food & fuel, rose 0.2% from the prior month & was up 1.8% from Feb 2016.  The saving rate increased to 5.6% from 5.4% the prior month.

Not much doing as Mar draws to a close.  Data today is uneven.  This has been a tough month for the stock market while gold had a good rise, but recent stock buying has cut the Dow's loss to about 100.  Consumer & business confidence remain high, the bulls like to see that.

Dow Jones Industrials

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