Friday, March 17, 2017

Markets little changed after favorable economic data

Dow went up 3, advancers over decliners 3-2 & NAZ was off 5.  The MLP index lost a fraction to the 319s & the REIT index was up a fraction above 340.  Junk bond funds had a modest rebound & Treasuries rose in price.  Oil clawed its way higher & gold is up 3 to 1230, well off its earlier levels this week (under 1200).

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Gold Apr 17

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Output at US manufacturers rose in Feb for a 6th consecutive month, underscoring a sustained rebound in the industry.  The 0.5% gain at factories, which make up 75% of overall industrial output, matched the prior month's advance, marking the best back-to-back performance in 3 years, a Federal Reserve report showed.  Total industrial production, which includes mines & utilities, was unchanged as warm weather reduced demand for heating.  More appropriate levels of inventories, a recovery in global markets & stronger corporate spending on equipment have put manufacturers on firmer footing.  The data support other figures showing an improving outlook for the nation's factories.  The increase in manufacturing last month matched the forecast.  Factory output accounts for about 12% of the economy.  For total industrial production, the forecast called for a 0.2% advance.  Capacity utilization, which measures the amount of a plant that is in use, eased to 75.4% from 75.5% in the prior month & capacity at factories rose to 75.6%, the highest since Oct 2015.  Utility output dropped 5.7% after a 5.8% decrease the previous month.  Last month was the 2nd-warmest Feb on record.  Mining production, which includes oil drilling, increased 2.7%, reflecting another solid gain in oil & gas well drilling.  Data showed well drilling is up 31% over the past year.  US rig counts climbed to 768 in the latest week, the highest since late 2015.

Manufacturing Production in U.S. Rises for Sixth Straight Month

The University of Mich preliminary index of sentiment increased to 97.6 from 96.3 in Feb.  The projection called for 97.  The index of current conditions jumped 3 points to 114.5, the highest reading since Nov 2000.  Households reported net gains in incomes & wealth at the strongest levels in a decade, while Reps were “much more optimistic” than Dems about expectations for their finances.  Confidence is still near a 13-year high amid a stronger job market & prospects for faster growth under the new administration, but threatens to wane absent more concrete policy action.  “The sentiment data has been characterized by rising optimism as well as by rising uncertainty due to the partisan divide,” Richard Curtin, director of the University of Mich consumer survey, said.  “Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders.”  The gauge of expectations was little changed at 86.7 from a 3-month low of 86.5 in February.  Among Reps, the expectations index was at 122.4, while it was 55.3 for Dems, showcasing the divide in the outlook since Trump's election.  87% percent of Reps expect continued gains in the economy over the next 5 years, compared with 22% of Dems.  Respondents expected the inflation rate in the next year will be 2.4%, compared with 2.7% in the Feb survey.  Over the next 5-10 years, they project a 2.2% rate of price growth, the lowest reading since 1980, after 2.5% in the prior month.

Consumer Sentiment in U.S. Rises as Household Finances Improve

Federal Reserve Bank of Minneapolis Pres Neel Kashkari said little-changed economic data & his belief that job market slack remains inspired him to cast the lone dissent when the FOMC raised interest rates this week.  In an written explanation detailing his vote to hold rates steady, Kashkari said he would prefer the Fed publish a detailed plan that explains how & when it will begin to normalize its balance sheet before hiking again.  Financial conditions could tighten in response to that announcement, possibly standing in for a rate increase, he wrote.  Kashkari votes for the first time this year, & he dissented against the first major monetary policy decision on which he had any formal say.  Nonconformity colored his 13-page justification of that decision: he also suggested that the Fed in fact pays lip service to a symmetric inflation target while treating its 2% goal as a ceiling & challenged the wisdom that gradual, pre-emptive increases are better than more rapid hikes that respond to actual inflation.  He also suggested that slack persists in the labor market at a time when a low unemployment rate has convinced many of his colleagues that it's mostly absorbed.  “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting,” Kashkari said.  “We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.”  He echoed many of his colleagues' sentiment in saying that the Fed's balance sheet, swollen to $4.5T by multiple rounds of mass bond-buying, shouldn't become a regular policy tool.  That said, he supported publishing a plan for unwinding the holdings soon.  “It is imperative that we give the markets time to understand the details of the plan before it is implemented,” he wrote.  “And while it is likely the announcement of that plan will not trigger much of a market response, we don’t know that for certain. The announcement of our balance sheet plan could trigger somewhat tighter monetary conditions.”

Fed's Kashkari Explains Dissent, Urges Plan for Balance Sheet

Stocks are back to meandering.  Economic news continues to be favorable.  But this market is vastly overbought & needs time to digest the gains.  With Dow close to 21K, the bulls are happy because the it has risen 14% since the election.  At other times, that would be an excellent year for stocks.

Dow Jones Industrials

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