Friday, January 12, 2018

Markets rally with best yearly start in 15 years

Dow shot up 228 to another record (closing near the highs), advancers marginally ahead of decliners & NAZ advanced 49.  The MLP index added 2+ to 300.  Junk bond funds remained about even & Treasuries continued weak.  Oil went up to the 64s as the number of rigs drilling for oil & gas jumped last week & gold gained 16 to 1339 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Stocks rose to records as retail sales sparked optimism in the economy & JPMorgan Chase (JPM), a Dow stock, signaled tax cuts will bolster profits.  Treasuries fell, sending the 2-year yield over 2% for the first time since 2008, after core inflation unexpectedly accelerated.  The S&P 500 added to a weekly gain, with JPM lifting the Dow after saying tax cuts will balloon profits this year.  Treasuries slumped amid increased shelter costs, boosting the Federal Reserve's case for higher rates.  The $ headed for its worst weekly loss in almost a year, with the € surging to a 3-year high.  The Stoxx Europe 600 Index rose & Asian shares advanced, with Hong Kong's equity index extending a record winning streak as data showed Chinese exports rose in Dec.  Oil fell after a 4-day rally, even as most commodities climbed, with gold at its highest close since Sep.  The underlying pace of US inflation unexpectedly accelerated in Dec amid increased housing costs, reinforcing the outlook for the Fed to raise interest rates several times in 2018.  That weighed on Treasuries & helped the $ pare losses.  Stocks initially showed weakness on the news, as investors fretted over whether the central bank tightening would slow growth.  JPM's tax commentary underscored how generous the overhaul will be to the nation's largest lenders.  In Europe, reports that German policymakers are set to resolve a months-long political stalemate added to news yesterday that the ECB is open to tweaking its policy guidance soon to align it with a strengthening economy.

Stocks Rise Amid Bank Earnings as Dollar Weakens: Markets Wrap

The underlying pace of US inflation unexpectedly accelerated in Dec amid increased housing costs, reinforcing the outlook for the Federal Reserve to raise interest rates several times in 2018.  Excluding food & energy, the core consumer price index, increased 1.8% from a year earlier after a 1.7% advance, including a 0.3% monthly gain that topped projections & was the most in almost a year.  Including all items, the broader CPI showed a smaller gain in Dec in line with estimates, as energy prices declined, a Labor Dept report showed.  Investors' already-firm expectations rose for a Fed interest-rate increase in Mar, as the data could help calm an increasingly heated debate among central bank officials over why inflation has stayed relatively placid despite solid economic growth & the lowest unemployment rate since 2000.  Fed policy makers have penciled in 3 rate hikes in 2018 following 3 last year.  The 0.3% monthly increase in the core CPI topped the 0.2% estimate.  Shelter costs rose 0.4%, the most since Aug, including a 0.4% increase in rents & 0.3% in owners' equivalent rent, a category designed to track rental prices.  Prices of medical care rose 0.3%, as the index for prescription drugs advanced 1%.  The pickup in the core CPI data may help reinforce expectations that the Fed is making progress on stable inflation, one of its twin goals along with maximum employment.  At the same time, the central bank's preferred gauge of inflation, a separate figure based on consumer purchases & issued by the Commerce Dept, has mostly missed its 2% goal in the past 5 years.  The measure excluding food & energy is also below their target.  Energy prices fell 1.2% from previous month after 3.9% gain & food costs advanced 0.2% following no change.

Gold reached fresh 4-month highs although their upside was limited after a stronger-than-expected inflation reading helped drive up Treasury yields.  With gas & food stripped out, the core rate of consumer inflation rose a sharper 0.3% in Dec, a notch above the forecast & the highest reading in almost a year.  Nascent inflation has been a chief factor in keeping the Federal Reserve's interest-rate reversal slow & steady & continues to color the debate over how aggressive the Fed will be this year with rate hikes.  Gold had a weekly gain about 0.4%, while month-to-date the metal is up 1.5%.  Inflation is a 2-pronged influence on gold prices.   Traditionally, the yellow metal has been seen as a hedge against inflation's erosive effects on other assets & some analysts think the metal will regain this function as inflation picks up this year.  That said, the impact from inflation in pushing up yields can make nonyielding bullion less attractive in a rising-rate environment.

Gold hits 4-month high

The number of rigs exploring for oil & natural gas in the US increased by 15 this week to 939.  That exceeds the 659 rigs that were active this time a year ago.  Baker Hughes reported that 752 rigs were drilling for oil & 187 for natural gas this week.  Among oil- & gas-producing states, Louisiana & New Mexico each gained 5 rigs, Oklahoma increased by 3, Colorado gained 2, & Alaska & Utah each increased by one.  The US rig count peaked at 4530 in 1981 & bottomed out in May of 2016 at 404.

US rig count jumps by 15 to 939; Louisiana, New Mexico add 5

Treasury Sec Steve Mnuchin said he believed the tax cuts will ultimately become revenue neutral over 10 years due to higher growth, but the Treasury will likely ask Congress for more money to implement the plan.  "We think there will be over $1 trillion in growth, so I do think this will pay for itself," Mnuchin said, dismissing estimates from the Joint Committee on Taxation that the tax cuts will increase US deficits by $1.1-$1.5T over 10 years.  Mnuchin added that for modeling purposes, the plan assumes 2.9% annual US growth, but "we do think we can get to three percent or higher."  Mnuchin said the Treasury was talking to Congress about additional funding to aid implementation of the tax plan, which cuts rates for businesses & many individuals but significantly pares back deductions such as those for state & local taxes & mortgage interest.  "We will hire a significant number of people to help with the implementation," he said.  Mnuchin reiterated the need for Congress to raise the debt ceiling whenever the gov gets close to its statutory borrowing limit.  He added he did not believe Congress would allow the gov to shut down when its funding authority expires on Jan 19.  "I think it will either be resolved, or there will be another CR to extend this," he said, referring to a short-term 'continuing resolution' funding bill.

Mnuchin sees $1 trillion revenue growth from U.S. tax overhaul

The Dow rose 500 this week & is up over 1K YTD.  That is a very impressive advance.  While there are plenty of problems starting with funding the federal gov & raising the debt ceiling, economic data & confidence by most Americans is very high.  Although market breadth was weak today, the Dow needs just another 200 to reach 26K.  Traders are watching this indicator closely.

Dow Jones Industrials

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