Friday, December 1, 2017

Markets crawl higher as tax bill is debated in the Senate

Dow rose 40, advancers slightly ahead of de liners & NAZ gave back 4.  The MLP index added 4 to the 266s & the REIT index was fractionally higher to the 359s.  Junk bond funds hardly budged & Treasuries were little changed.  Oil jumped up 1+ to the 48s on an agreement by OPEC to extend production cuts & gold was flat at 1276.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil58.65

GC=FGold  1,275.00

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Stocks swung between gains & losses, while the $ advanced as the Senate moved toward passing tax cuts.  The S&P 500 is headed for its best week of the year, with financial stocks pacing gains on speculation they'll benefit most from cuts to corp rates.  Technology shares underperformed as the rotation from the year's biggest winners resumed.  The 10-year Treasury yield held at 2.4% after surging 8 basis points in 2 sessions.  Emerging-market shares headed for the biggest weekly rout since Nov 2016.  Oil rallied above $58 a barrel.  The Canadian $ rallied after jobs data topped estimates.  The Senate tax bill headed for a round of marathon votes Fri, with the chance of passage remaining high even after leaders suspended voting yesterday after a key compromise to win a majority had collapsed.  Equities have been rallying on signs the bill will pass, with the Dow closing above 24K for the first time yesterday.  Oil rose after posting its longest streak of monthly gains since early 2016 in the wake of an OPEC-led coalition's long-awaited extension of crude supply cuts & copper led most industrial metals higher.

U.S. Stocks Pare Weekly Advance as Treasuries Rise: Markets Wrap

US manufacturing expanded at a robust pace in Nov amid a burst of production & rising orders that signal durable gains in the industry, figures from the Institute for Supply Management showed.  The factory index eased to 58.2 (est 58.3) from 58.7 in Oct (readings above 50 indicate expansion).  Measure of production grew to 63.9, highest since Mar 2011, from 61; new orders rose to 64 from 63.4. Employment gauge was little changed at 59.7 after 59.8.  The ISM's latest measure was above the 57.3 average for this year thru Oct, showing the underlying pace of activity remains healthy.  Steady consumer spending, stronger investment in business equipment & improving overseas markets are underpinning the industry.  Factories are making further progress after hurricanes disrupted production schedules & delayed shipments in the immediate aftermath.  Now, delivery times are improving as the supply chain gets back to normal, which helps explain the drop in the ISM's main manufacturing index.  The Nov report also showed factory inventories shrank at the fastest pace this year, a positive sign for production in coming months.  Firmer output is also boosting demand for workers.  The ISM Nov gauge of employment remained near a 6-year high.

U.S. Manufacturing Expands at Healthy Pace on Production Surge

Federal Reserve Bank of St. Louis Pres James Bullard cautioned that short-term interest rates may exceed long-term rates by late 2018, creating an inversion of the yield curve that would bode poorly for the US economy.“  There is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course of increases in the policy rate,’’ Bullard said.  “Yield curve inversion is a naturally bearish signal for the economy. This deserves market and policy maker attention.’’  Some investors & analysts have similar concerns, saying that the narrowing gap between yields on 2- & 10-year Treasuries may be a harbinger of a weaker economy.  That differential has declined to about 60 basis points from 129 basis points when the Fed began raising rates in this tightening cycle in Dec 2015.  The case for raising interest rates again in the Fed's Dec 12-13 meeting is “coming together,” Jerome Powell, the Fed governor who Trump nominated as chairman, said this week (the 3rd hike this year).  But Bullard warned about the risks of continued monetary tightening.  “Given below-target U.S. inflation, it is unnecessary to push normalization to such an extent that the yield curve inverts,” Bullard added.  “The empirical evidence is relatively strong’’ that such a reversal reflects the economic outlook.  “Therefore, both policy makers and market professionals need to take the possibility of a yield curve inversion seriously.’’  Bullard's views have sometimes been influential in the FOMC, though in the past 2 years, a period during which the Fed has been raising rates, he has been the most dovish official.  In Sep, he projected no additional Fed hikes thru the end of 2019, putting him at odds with the median projection for gradual increases.

Fed's Bullard Warns Yield Curve May Invert in a ‘Bearish’ Sign

The senate Reps are saying they have to votes to pass legislation.  But words are cheap & they are required to project positive thoughts.  Nov monthly data will not mean very much, although it should indicate the economy is doing well.  The fate of the tax bill will control market movements as the year draws to a close.  The Dow is up 750 this week & almost 6K since the election.  The bulls want to make the case for extending that rally.

Dow Jones Industrials


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