Wednesday, July 26, 2017

Higher markets after the Fed leaves interest rates unchanged

Dow advanced 97, advcancers barely ahead of decliners & NAZ went up only 10.  The MLP index lost a fraction to 300 & the REIT index added 2+ to the 354s.  Junk bond funds crawled higher & Treasuries also were purchased.  Oil shot up again (more below) & gold climbed 8 to 1260.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil48.80

GC=FGold   1,255.60

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Federal Reserve officials said they would begin running off the $4.5T balance sheet “relatively soon” & left their benchmark policy rate unchanged as they assess progress toward their inflation goal. The start of balance-sheet normalization, possibly as soon as Sep, is another policy milestone in an economic recovery now in its 9th year.  The Fed bought $T's of securities to lower long-term borrowing costs after cutting the main interest rate to zero in 2008.  “Household spending and business fixed investment have continued to expand.”  Fed watchers had anticipated that the inclusion of the term “relatively soon” would signal the central bank could announce the timing of the balance-sheet reduction program at its next meeting, scheduled for Sep 19-20.  US central bankers have raised the benchmark policy rate 4 times since they began removing emergency policy in Dec 2015 & project another increase before the end of this year. In Jun, the FOMC outlined gradually rising runoff caps for maturing Treasuries & mortgage-related securities, & said the program would start “this year.”

Fed Says Balance-Sheet Unwind to Start ‘Relatively Soon’

Treasury Sec Steve Mnuchin warned lawmakers that there's a cost to delaying an increase to the gov debt limit & said prolonging the decision burdens taxpayers & creates unease among investors.  While he reiterated that the gov can finance itself thru Sep, he urged lawmakers to raise the debt limit as soon as possible.  The gov has been relying on special accounting maneuvers since Mar to stay under the nearly $20T current debt cap.  Aside from the “implied cost” of market uncertainty, special measures to stave off a default have pushed up interest rates for some gov borrowing, Mnuchin told a Senate Appropriations subcommittee today.  The Treasury is using cash-management tactics such as suspending investments in pension funds for federal workers.  “There is a real cost to doing that,” he said.  “There is also an implied cost of uncertainty into the market. And the longer we wait, the more that uncertainty will be.”  Mnuchin's comments increase pressure on lawmakers to act on gov's borrowing authority, amid lawmaker wrangling over health-care reform & a tax overhaul.  Mnuchin repeated that the US must honor its debt obligations as the world's reserve currency.  He has called on Congress to pass a “clean” debt-ceiling increase, without any policy riders.  White House budget director Mick Mulvaney, backed by conservatives in the House, has suggested using the bill to try to force Dems to accept spending cuts.  The Congressional Budget Office estimates the Treasury can fund the gov thru early- to mid-Oct under the current borrowing limit.

Mnuchin Cautions Congress About Cost of U.S. Debt-Limit Impasse

Oil surged to an 8-week high after the gov said US stockpiles shrank to levels last seen at the start of the year & futures rose.  Crude inventories declined 7.2M barrels last week to the lowest since Jan 6, according to the Energy Information Administration.  Gasoline stockpiles fell for a 6th week to the lowest level since Dec.  Oil has been on a rebound since hitting its low point for the year in Jun as rising demand for gasoline during the summer driving season is helping push stockpiles lower.  But prices have been stuck below $50 a barrel since May amid lingering concerns that rising global output from producers such as Libya, Nigeria & the US will offset reduced flows from members of OPEC & allies.  The United Arab Emirates reiterated its commitment to OPEC production cuts & said it would deepen its own curbs, & Kuwait also has promsed to pump less.  The move follows criticism from Saudi Energy Minister Khalid Al-Falih of OPEC members who haven't fulfilled their pledged supply reductions.  West Texas Intermediate for Sep delivery rose 86¢ to settle at $48.75 a barrel, the highest since May 30.  Total volume traded was about 31% above the 100-day average.  US crude supplies slipped to 483M barrels last week, while gasoline stockpiles fell 1M barrels to 230M barrels.  Stockpiles at Cushing, Oklahoma, the delivery point for WTI & the biggest US oil-storage hub, fell 1.7M barrels to 55.8M, the lowest level since Nov 2015.  Crude production declined for the first time since Jun, slipping by 19K barrels a day.  While production from Alaska fell, output from the lower-48 states jumped for a 4th week.

The US housing market is stabilizing near 10-year highs, according to gov data that showed sales of new homes were slightly less than forecast.  Single-family home sales increased 0.8% M/M to 610K annualized pace (est. 615K).  The median sales price fell 3.4% Y/Y to $310K.  The supply of homes crept up to 5.4 months from 5.3 months; 272K new houses were on market at end of Jun.  Americans, taking advantage of low mortgage rates & confident in a strong job market that's providing steady wage gains, are still on the hunt for new homes.  Prices fell from a year earlier as more moderately priced homes sold in Jun.  There were signs of progress on housing inventories, which were the highest since 2009.  The industry says it is still grappling with a lack of skilled workers & a limited number of plots to begin construction.

Pace of U.S. New-Home Sales Suggests Steady Housing Strength

Boeing (BA) reported higher-than-expected earnings for Q2 despite lower revenue, & it raised its forecast for full-year profit, sending both the Dow stock higher.  The company is benefiting as profitable airlines continue to order new planes.  With a backlog of orders approaching ½T$, BA will buy back $10B of its own stock this year & reduce its taxes by paying down its pension liability.  Its backlog grew to $482B at the end of Jun, including $27B in new net orders during Q2.  Nearly 90% of that value is from the backlog of more than 5700 commercial airliners, with the defense business accounting for the balance.  The company is gearing up to increase production of its most popular airliner, the single-aisle 737 that is a mainstay on short & medium-haul routes.  Demand for widebody, 2-aisle planes that are used on many intl routes is not as strong.  Adjusted EPS was $2.55, easily topping the forecast of $2.32.  Revenue fell 8% to $22.74, below projections, as the company delivered 183 airliners in the qtr, down from 199 a year earlier.  BA expects full-year adjusted EPS of $9.80-$10, up 60¢ from the last forecast & well above analysts' prediction of $9.39.  That largely reflects its expectation of lowering its taxes by about $700M by speeding up funding of pension obligations.  BA said it will use stock to make a $3.5B pension contribution in Q3, meeting funding requirements thru 2021.  The company also said it plans to use cash to buy back $10B in stock this year, up from a previous goal of $6.5B.  The stock soared 20.99 (10%).  If you would like to learn more about BA, click on this link:

Boeing beats 2Q profit forecasts, raises full-year outlook

Dow powered ahead, largely on strength of BA stock.  But market breadth was sluggish & tech stocks on NAZ did not really participate in the rally.  Hard to make much of today's rise.  Meanwhile a lot of work in DC is not getting done.  Instead it is wasted worrying about Russia.  The new healthcare bill is stuck in neutral, going nowhere fast.  There are only 2 months left before the gov fiscal year ends with no ability to borrow additional funds.  Then there is tax reform aimed at boosting the economy, also going nowhere fast.  However the bulls remain happy.  The question becomes, "How long?"  Gold & Treasuries have been attracting investors once again.

Dow Jones Industrials


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