Wednesday, April 5, 2017

Markets give up early gains after Fed minutes

Dow fell 41 finishing close to session lows, decliners over advancers almost 2-1 & NAZ was down 34.  The MLP index fell 1+ to the 322s & the REIT index crawled up a fraction in the 345s.  Junk bond funds were mixed & Treasuries drifted lower.  Oil was a little lower & gold declined (more below).

AMJ (Alerian MLP Index tracking fund)

 Live 24 hours gold chart [Kitco Inc.]

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Alongside continued rate rises, the Federal Reserve is likely to begin trimming the $4.5T in bonds on its balance sheet later this year, minutes from the central bank's Mar meeting show.  Participants in the Fed's FOMC emphasized that the process of reducing the balance sheet should be done in a predictable way so as not to surprise investors.  “Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the committee’s reinvestment policy would likely be appropriate later this year,” the minutes read.  To begin that process, some FOMC members prefer to phase out reinvestments of principle from assets – including Treasury securities & mortgage-backed securities – at maturity, which would reduce financial-market volatility, while others preferred ending reinvestments all at once, which would normalize the balance sheet much more quickly.  Up to this point, the Fed has maintained the size of its balance sheet by purchasing new bonds when old ones mature.  By stopping the reinvestment, it would begin to slowly reduce the balance sheet, or let it “runoff.”  A clear sign the Fed is not ready to make any final decisions on the matter, the minutes showed committee members agreed more deliberation on the balance sheet would come at meetings later this year & a final decision would be “communicated to the public well in advance of an actual change.”  Much of the assets sitting on the Fed's balance sheet were a product of a monthly bond-buying program called quantitative easing, enacted in the wake of the 2008 financial crisis & was intended to help jump start the economy.  Since then, the economy has made marked improvements as the unemployment rate holds below 5%, inflation has moved well within striking distance of the Fed's 2% target, & consumers remain optimistic & spending at a robust rate.

Fed Eyes More Rate Hikes, Balance Sheet Trimming Later This Year

American service companies expanded in Mar at the slowest pace in 5 months, adding to signs of tepid economic growth in Q1, a survey by the Institute for Supply Management showed.  ISM'S non-manufacturing index eased to 55.2 (forecast was 57) from 57.6 in Feb, which was the highest since 2015 (readings above 50 indicate growth). The measure of business activity fell to 58.9 from 63.6. Index of services employment dropped to 51.6 last month, the weakest since Aug, from 55.2 a month earlier.  A disappointing start to the year for spending could be to blame for the drop in the ISM index, as softer consumption in Q1 has been a common theme in the last 3 years.  While the figure remains above its 2016 average, the decline represents some easing following the big gains in soft data, such as surveys & confidence indicators, since Trump's election.  Services account for about 90% of the economy & span industries such as utilities, retailing, health care & construction.  The decline in the services employment gauge is also a potentially negative indicator for Fri payrolls report, which is forecast to show the US added 175K jobs added in Mar following Feb's gain of 235K.  “We had this euphoria after the election that was reflected by our respondents in their comments and the numbers as well, and then there’s this uncertainty that we’re experiencing right now which pairs with this cautiousness because the comments throughout talk about trade, immigration, health care,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said.  “We’re seeing a little bit of waning only due to that uncertainty.”

Gold retreated following 3 sessions of gains as better-than-expected employment data revived appetite for riskier assets such as stocks.  The US private sector added 253K jobs in Mar, significantly ahead of the 170K projected. Jun gold shed $9.90 (0.8%) to settle at $1248.

Gold Settles Lower As Robust Economic Data Boost Risky Assets

The Fed minutes were a reminder that higher interest rates, & they are coming, has consequences.  That makes investors who have become addicted to low interest rates nervous.  So they sold stocks.  Weaker data for the service sector last month also hurt the stock market.  However stocks have been holding up last month even with all the turmoil coming from DC.  The Dow is still only 500 below its recent record highs.

Dow Jones Industrials

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