Dow bounced back 48, advancers over decliners about 2-1 & NAZ gained 27. The MLP index inched higher in the 294s & the REIT index was even in the 352s. Junk bond funds slid lower & Treasuries were little changed. Oil drifted lower & gold also declined.
AMJ (Alerian MLP Index tracking fund)
While the gov hit its borrowing limit in Mar, it's been relying on special accounting maneuvers to stay under the current debt ceiling of nearly $20T. Only Congress can increase the legal limit on how much the gov can borrow. Failure to lift that cap could put the US at risk of defaulting on its financial obligations, including to investors. The debate on raising it has grown fraught in recent years as lawmakers sought to use it for leverage on spending controls. Mnuchin yesterday repeated his call for a ”clean” vote on legislation raising the debt cap that has no strings attached. Congress may look to pair the debt-increase bill with conditions. While it’s unimaginable that Congress wouldn't authorize a borrowing increase, markets don’t want a delay on that decision, said Mnuchin. Mnuchin's estimated time frame for exhausting the US borrowing capacity is in line with the latest projections of independent economics & analysts. “We estimate the Treasury will hit the debt ceiling sometime in early September,” he said. “We expect that Congress will act on the debt ceiling before the August recess to alleviate the need to rapidly address the issue upon their return.” The US budget gap increased to $88.4B in May from $53B a year earlier, according to Treasury. Revenue rose 7% while spending climbed 19%. Tax revenue this fiscal year has grown by 3% less than the Congressional Budget Office had projected. Mnuchin has said anticipated tax cuts the Trump administration has promised this year may help explain the revenue slowdown, but that he’s not concerned. The Bipartisan Policy Center projected yesterday that the US will need to increase the debt ceiling by Oct or Nov to avoid a payment default, in an updated forecast reflecting the May cash flow data from Treasury.
Fed set to raise rates, focus turns to balance sheet and inflation outlook
Trading today is meaningless. Attorney General Sessions testimony will dominate the news even though he will not bring new information to the already muddled story. Then tomorrow is the big day for Janet Yellen, when her words will be more important when the expected rate increase is made official. Meanwhile Trump is keeping his head above the waterline, pushing forward on ways to improve & grow the economy. Dow is flirting with records highs. Not bad considering how DC remains dysfunctional.
AMJ (Alerian MLP Index tracking fund)
German investor confidence unexpectedly dropped in Jun in a sign that exaggerated optimism in Europe's largest economy is beginning to moderate. The ZEW Center for European Economic Research said index of investor & analyst expectations, which aims to predict economic developments 6 months ahead, fell to 18.6 from 20.6 in Jun. Economists predicted an increase to 21.7. With business confidence climbing to the highest level since 1991 & manufacturers & service providers reporting the fastest expansion in six years, sentiment indicators have recently exceeded already strong economic fundamentals. The Bundesbank described German'’s upswing as “broad-based and fairly brisk” when it lifted its projections for growth thru 2019 last week. ZEW's gauge for German current conditions rose to 88 in Jun from 83.9, the highest level since Jul 2011. Germany’s favorable economic conditions are bolstering prospects for the 19-nation euro area. ECB President Mario Draghi said last week, the first time in almost 6 years, that risks to the region’s growth outlook are “broadly balanced.” ZEW’s measure for expectations in the euro area advanced to 37.7 from 35.1.
German Investor Confidence in Economy Unexpectedly DeclinesWhile the gov hit its borrowing limit in Mar, it's been relying on special accounting maneuvers to stay under the current debt ceiling of nearly $20T. Only Congress can increase the legal limit on how much the gov can borrow. Failure to lift that cap could put the US at risk of defaulting on its financial obligations, including to investors. The debate on raising it has grown fraught in recent years as lawmakers sought to use it for leverage on spending controls. Mnuchin yesterday repeated his call for a ”clean” vote on legislation raising the debt cap that has no strings attached. Congress may look to pair the debt-increase bill with conditions. While it’s unimaginable that Congress wouldn't authorize a borrowing increase, markets don’t want a delay on that decision, said Mnuchin. Mnuchin's estimated time frame for exhausting the US borrowing capacity is in line with the latest projections of independent economics & analysts. “We estimate the Treasury will hit the debt ceiling sometime in early September,” he said. “We expect that Congress will act on the debt ceiling before the August recess to alleviate the need to rapidly address the issue upon their return.” The US budget gap increased to $88.4B in May from $53B a year earlier, according to Treasury. Revenue rose 7% while spending climbed 19%. Tax revenue this fiscal year has grown by 3% less than the Congressional Budget Office had projected. Mnuchin has said anticipated tax cuts the Trump administration has promised this year may help explain the revenue slowdown, but that he’s not concerned. The Bipartisan Policy Center projected yesterday that the US will need to increase the debt ceiling by Oct or Nov to avoid a payment default, in an updated forecast reflecting the May cash flow data from Treasury.
With a rate rise at the conclusion of the Federal Reserve’s 2-day policy meeting tomorrow a near certainty, the focus now for investors is when the central bank will begin trimming its balance sheet amid a mixed backdrop of low inflation & continued labor-market strength. Economic data since the Mar meeting, when it opted to lift rates by a qtr percentage point, has shown the nation’s unemployment rate falling 4 percentage points as the slack in the labor market diminishes. However, inflation as measured by the central bank's preferred gauge, the core personal consumption expenditures index (which strips out volatile food & energy components) had dipped 2 percentage points on a year-over-year basis to 1.5%, well below the 2% target. Another complicating factor for the Fed is the divergence between equity prices that, despite a pullback in the technology sector the last 2 sessions, continue to trade near record levels, & a bond market that could be signaling caution ahead. Bond yields, which move inversely to prices, have come down from post-election highs. What's more, the yield curve has flattened as the federal funds rate & other shorter-term duration bond yields move higher while longer-term yields have been relatively unmoved. Fed officials have signaled at least 2 more rate hikes before the end of the year, but some analysts have pondered the possibility of balance-sheet normalization, the process of reducing the central bank's $4.5T in Treasuries & mortgage-backed securities, as the next phase in the tightening cycle.
Fed set to raise rates, focus turns to balance sheet and inflation outlook
Trading today is meaningless. Attorney General Sessions testimony will dominate the news even though he will not bring new information to the already muddled story. Then tomorrow is the big day for Janet Yellen, when her words will be more important when the expected rate increase is made official. Meanwhile Trump is keeping his head above the waterline, pushing forward on ways to improve & grow the economy. Dow is flirting with records highs. Not bad considering how DC remains dysfunctional.
Dow Jones Industrials
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