Wednesday, August 16, 2017

Markets edge higher after Fed minutes

Dow added 25 (back above 22K), advancers over decliners almost 3-2 & NAZ rose 12.  The MLP index fell 1+ to 271 & the REIT index gained 1+ to the 351s.  Junk bond funds inched higher & Treasuries went up.  Oil fell to the 46s (more below) & gold rebounded 8 to 1288.

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Fed officials engaged in a detailed debate about inflation while keeping the door open for a Sep announcement on the timing of balance-sheet reductions, according to minutes from their policy meeting in Jul.  The minutes showed a majority of FOMC participants sticking with a forecast that inflation would gradually rise to their 2% target over the medium term.  However, “many” saw some “likelihood that inflation might remain below 2 percent for longer than they currently expected,” according to minutes from the Jul meeting.  “Several indicated that the risks to the inflation outlook could be tilted to the downside,” the minutes added.  There was also a group of “some other” participants who cautioned that easy financial conditions & tight labor markets could result in an “overshooting” of the inflation target that could be costly to reverse.  They “cautioned” against “a delay in gradually removing policy accommodation.”  The minutes didn't specify when the Fed would begin shrinking its balance sheet this year.  “Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting,” the minutes said. The Fed next meets Sep 19-20.  The Fed's portfolio stands at $4.5T in total assets, the legacy of 3 rounds of quantitative easing.  The Fed staff pushed up its assessment of financial stability risks to “elevated” from “notable,” the minutes said.  Fed officials discussed stock valuations with “a couple” saying they were supported by “favorable macroeconomic factors.”  US central bankers in Jun forecast they would raise the benchmark lending rate a 3rd time this year to a range of 1.25-1.5%.   That step may depend on officials' evolving forecast for inflation to rise back to their 2% target.

Fed Sees Balance-Sheet Move Soon

US housing starts stumbled in Jul on an abrupt slowdown in apartment construction & a modest decline in single-family homebuilding that shows the industry will do little to spur the economy, Commerce Dept data showed.  Residential starts decreased 4.8% to a 1.16M annualized rate (est. 1.22 M).  Multifamily home starts slumped 15.3% while one-family was down 0.5%.  Permits, a proxy for future construction, fell 4.1% to 1.22M rate.  Despite overall starts being weighed down by less apartment construction, ground-breaking on single-family properties has declined in 4 of the last 5 months.  That indicates little support for the economy.  While staying close to an almost 10-year high, the pace of one-family homebuilding is being held back by labor & lot shortages, according to construction firms.  At the same time, builders remain optimistic that the market will benefit from strength in the job market & cheap borrowing costs.

U.S. Housing Starts Fell in July on Apartment Building Slowdown

President Donald Trump announced the end of 2 of his White House councils, the manufacturing initiative & the Strategic & Policy Forum, following a host of resignations due to his handling of the white nationalist protests in Charlottesville, Virginia over the weekend.

Trump announces end of Manufacturing Council, Strategic & Policy Forum

Oil prices fell even though US crude stockpiles declined by the most in a year, as the gov also reported that domestic crude production was edging higher.  US crude inventories dropped for a 7th consecutive week, falling 8.95M barrels last week to 466M barrels to their lowest since Jan 2016.  Including emergency reserves, crude stocks were at 1.15B barrels, the lowest levels since Oct 2015, the Energy Information Administration said.  The draw was far more than double the 3.1M barrel decline in crude inventories that had been forecast.  However, gasoline inventories did not decline as expected & the data also showed that US crude output rose to 9.5M barrels per day from 9.4M barrels a week earlier.  Rising US output could add to the global crude glut that prompted OPEC & other oil producers to curtail production to boost prices.  Seasonally, US demand usually picks up during the summer.  "If we see these draws past Labor Day, it will drive the market, possibly past $50."  US West Texas Intermediate (WTI) crude futures were at $47.20 a barrel, down 35¢, after rising as high as $47.99.  Ample supplies are limiting price gains.  US gasoline stocks were unchanged, compared with expectations for a 1.1M-barrel drop.  OPEC & other major producers including Russia have pledged to restrict output.  Still, US oil production has soared almost 12% since mid-2016.  OPEC member Angola released a loading plan showing Oct exports were planned at a 13-month high.  On the demand side, analysts see a gradual slowdown in fuel consumption growth.  In China, state-owned China National Petroleum Corp (CNPC) said gasoline demand would likely peak around 2025 & outright oil consumption would top out around 2030.  This means oil demand from the world's 2 biggest consumers may soon stall.  Consumption has already peaked in Europe & Japan.

Oil dips despite steep draw in U.S. crude stocks

Stocks went higher but after Trump closed his advisory councils, selling pared those gains.  North Korea tensions are easing, a major source of comfort to much of the world.  However turmoil in DC is weighing on investors.  Meanwhile fundamental problems of DC remain, an inability to get meaningful legislation passed & there is no end in sight for the deep division.  Then there is the FED & the prospect of it selling its bond holdings.  The bulls are optimistic on balance & able to keep the Dow at essentially record levels.  That's amazing at a time when demand for gold continues strong!!

Dow Jones Industrials

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