Wednesday, July 12, 2017

Markets rise after Janet Yellen's testimony

Dow advanced 123, advancers over decliners better than 3-1 & NAZ was up 67.  The MLP index added 2+ to the 298s & the REIT index went up 4+ to the 345s.  Junk bond funds were higher & Treasuries continued strong, along with stocks.  Oil gains were pared in the PM & gold rose (more on both below).

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Janet Yellen had plenty to say about a strong US job market but added little clarity about her own employment status come Feb.  During semiannual testimony to Congress, she fielded questions on topics ranging from the subdued labor participation rate, the Fed's $4.5T balance sheet & the effect of the financial regulations on community banks.  Given her term as chair expires Feb 3, several lawmakers were also curious about whether she'd be interested in another 4 years.  “I absolutely intend to serve out my term,” she said.  “I really haven’t had to give further thought at this point to this question.”  The pres nominates the leader of the Fed, a post that is then subject to approval by the Senate.  Pres Trump has a chance to reshape the leadership of the monetary authority with both Yellen & Vice Chair Stanley Fischer's terms expiring next year.  Several Dems, perhaps as a way of saying farewell in case she's not reappointed, heaped praise on Yellen's stewardship of the economy.  One Rep cautioned that she didn't deserve all the credit, noting the economy's improvement & the stock market's gain since the election.

Yellen Sidesteps Questions on Her Future

Economic growth in recent weeks ranged from “slight to moderate” across the central bank's regional districts, as wages & inflation remained generally subdued, a Federal Reserve survey showed.  The Beige Book economic report, based on anecdotal information collected by the 12 reserve banks thru Jun 30, continued to raise questions over why a tight labor market is failing to stimulate broader wage and price increases.  “The majority of districts expected modest to moderate gains” in the economy in coming months, according to the report.  Employment increases maintained a “modest to moderate” pace while prices “continued to rise modestly in the majority of districts.”  The Fed has raised interest rates 3 times in the past year, though officials have begun to diverge over whether flagging inflation should prompt a pause in hiking.  Projections from Fed officials published in Jun showed the FOMC anticipates raising interest rates one more time in 2017.  The FOMC has also indicated it plans to begin reducing the central bank’s balance sheet this year, which could cause monetary conditions to tighten further.  Districts including St. Louis, Minneapolis & Dallas reported companies finding it difficult to fill open positions due to a shortage of qualified candidates.  “Wage pressures generally trended with employment conditions, and rising wage pressures were noted among both low-and high-skilled positions,” the report said.  Atlanta reported that a tightening labor market caused firms to “explore or deploy technology as viable future replacements for labor, especially in hard-to-fill jobs.”  Philadelphia said “workers appear to have less loyalty to the job, and more job hopping is showing up on resumes.”  Still, overall wages “continued to grow at a modest to moderate pace in most districts,” the report added.  Unemployment inched up to 4.4% in Jun after hitting a 16-year low of 4.3% in May.  Despite that, the Fed's preferred gauge of inflation, after stripping out food & energy, rose just 1.4% in the 12 months thru May.

Beige Book Adds to Fed's Conundrum Over Jobs and Wages

Gold ended higher, buoyed by US political uncertainty fueled by Donald Trump Jr.'s release of email exchanges linked to a meeting with a Russian lawyer last year.  Investors also digested Congressional testimony from Janet Yellen, who reiterated the central bank's "gradual" approach to raising interest rates.  Aug gold rose $4.40 (0.4%) to settle at $1219 an ounce.

Gold Tallies a Third-consecutive Session Gain

Oil futures rose more than 1%, but backed off session highs despite hefty drawdowns in US crude & gasoline inventories as gov data also showed stocks were still above average & demand lackluster.  US crude inventories fell 7.6M barrels last week, its biggest weekly plunge in 10 months, the Energy Information Administration (EIA) said.  That was much more than the 2.9M-barrel crude draw forecast but was slightly less than the 8.1M -barrel decline reported by the American Petroleum Institute (API) on Tues.  At 495.4M barrels, US crude oil inventories were in the upper ½ of the average range for this time of year.  US gasoline stocks fell 1.6M barrels, compared with expectations for a 1.1M-barrel gain, but were in the upper ½ of the average range, the EIA said.  West Texas Intermediate (WTI) crude was up 63¢ (1.4%) at $45.67 per barrel.  Suggestions from OPEC that the oil market will see a surplus next year also weighed on today's price gains.  OPEC said its oil production jumped in Jun & forecast world demand for its crude will decline next year as rivals pump more, pointing to a market surplus in 2018 despite an OPEC-led output cut.  The cartel said the world will need 32.2M barrels per day (bpd) of crude from its members next year, down 60K bpd from this year.  The OPEC-led production cuts, in place since the start of the year, have lent prices some support, but in recent weeks rising output from Libya & Nigeria, OPEC members exempt from the output reduction deal, has pushed supply higher.  "We remain very optimistic ... (about) helping the market to rebalance itself," OPEC Secretary-General Mohammad Barkindo said at an industry conference in Istanbul.  A Saudi industry source said that Riyadh planned to reduce shipments in Aug by more than 600K bpd, taking exports for that month to their lowest this year.

Oil pares gains despite U.S. drawdowns as stocks still high

Janet spoke & the markets listened.  Nothing like calming words to make traders feel good.  But she said nothing new.  The Dow set a new record when it was barely able to hold above the previous record close on Jun 19.  At the same time, gold & Treasuries rose.  Generally those are sold in a rising stock market.  That disconnect may be settled when earnings are reported shortly.

Dow Jones Industrials


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