Monday, February 26, 2018

Higher markets as Treasury yields retreat

Dow soared 399 (closing near the highs), advancers over decliners about 2-1 & NAZ gained 84.  The MLP index did little in the 265s.  Junk bond funds rose & Treasuries were slightly higher.  Oil rose late in the trading day to about 64 (more below) & gold went up 4 to 1335.

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ECB head Mario Draghi says the eurozone economy still needs abundant stimulus to raise inflation to more normal levels even in the midst of a strengthening recovery.  Draghi said that "patience and persistence" are still needed in monetary policy.  He told members of the European Parliament that "the evolution of inflation remains crucially conditional on an ample degree of monetary stimulus."  The ECB has reduced its bond purchase stimulus from €60B ($74B) a month to €30M a month at the start of this year.  The bank has said the purchases will continue at least thru Sep & longer if necessary.  The purchases pump newly printed money into the economy in hopes of raising inflation from the current annual 1.3%.

European Central Bank chief: Economy still needs stimulus

Chinese Pres Xi Jinping's top economic adviser will hold talks with American officials in DC this week amid tensions over trade, technology & other issues.  Liu He will discuss bilateral relations & cooperation on trade & economic matters, the ministry spokesman said.  He gave no details of whom Liu will meet or what message he will deliver on the 6-day visit beginning tomorrow.  Liu, who has a master's degree from the Kennedy School of Gov at Harvard, has advised Xi since 2013 & runs the ruling Communist Party's top economic policy group, headed by Xi.  The US & China have one of the world's biggest trading relationships but a steady series of multibillion-dollar Chinese trade surpluses has fueled complaints about Beijing's market barriers & demands for restrictions on US imports from China.  The US, the EU & other trading partners complain that a flood of Chinese steel & aluminum exports at what they call improperly low prices is threatening jobs abroad.  The administration of Pres Trump has raised duties on some Chinese steel & aluminum products & on solar modules & washing machines to counter what it says are improper subsidies.  DC is investigating other products & whether Beijing is improperly pressuring foreign companies to hand over technology.  The Trump administration is believed to be on the verge of releasing findings of its technology probe, which could lead to punitive tariffs or other measures.  China's gov has threatened possible retaliation, saying it is ready to defend its interests.

Chinese president's top economic adviser going to Washington

A majority of business economists now view the new gov tax & spending policy as moving too aggressively to stimulate economic growth, setting up a potential increase in the deficit in the coming years, a new survey shows.  That view emerged from the latest economic policy survey by the National Association for Business Economics (NABE), polling 211 members at companies & industry groups.  The survey is a professional association for business economists, academics & others who use economics in the workplace.  52% of economists who consider the gov fiscal policy "too stimulative" compares with only 20% in Aug, in the previous economic policy survey.  This time, 37% of respondents judged tax & spending policy as "about right," down from 46%.  By contrast, the economists are more supportive of the Fed's interest rate policy: more than 6 in 10 have pegged it as "about right."  That's the highest percentage in 8 years.  "Overall, the (survey) panel expects the deficit to grow as a percentage of the economy in the longer term," NABE VP Kevin Swift, chief economist of the American Chemistry Council, said.  The NABE economists, reflecting the prevailing view of corp America, continue to have a strong preference for more conservative fiscal policy in the long run.  The $1.5T tax-cutting legislation signed into law late last year provides steep cuts for corps & wealthy Americans while offering more modest reductions for most low- & middle-income families & individuals.  Coupled with a $400B bipartisan budget agreement enacted this month, it has raised the possibility of greater inflation.  That could make the Fed more likely to tighten credit.  Experts have said, and the new Trump budget proposal acknowledges for the first time, that the massive tax overhaul likely will add B$ to the deficit & not "pay for itself" with economic growth & higher revenues.  The Trump federal spending plan unveiled in mid-Feb contains T$ deficits.

Most in survey see US fiscal policy as too aggressive

Crude reversed losses & touched a 2-week high as a sudden weakening of the $ boosted the commodity's appeal as a store of value.  West Texas Intermediate futures advanced 1%, briefly surpassing $64 a barrel, after earlier falling 0.8%.  The $ pared its gains & US equities strengthened.  Traders were also assessing Saudi Arabian Energy Minister Khalid Al-Falih’s weekend remarks about phasing out production caps that have been in effect since late 2016.  Oil advanced more than 7% in the past 2 weeks as production curbs by OPEC & allies such as Russia drained a global glut.  WTI for Apr delivery rose 49¢ to $64.04 a barrel after earlier falling to $63.  Brent for Apr settlement added 39¢ to $67.70 a barrel.  With bloated inventories shrinking, the next step for major producers will be phasing out the caps, Al-Falih said on Sat.  The production curbs may be eased “sometime in 2019, but we don’t know when & we don't know how,” he said.

Further interest rate increases are likely forthcoming as the US economy revs up, Federal Reserve Governor Randal Quarles said.  Investors anticipate the Fed will approve 3 rate hikes this year & Quarles did little to dispel that notion during a speech at the National Association for Business Economics in NY.  "I am fairly optimistic about the current state of the economy," the newest Fed member said.  "Along many dimensions, it has been quite some time since the economic environment has looked as favorable as it does now."  Quarles noted that GDP has been growing around 3% since Q2-2017, "a considerable step-up" from the previous 8 years.  In that environment, he said more rate hikes are reasonable.  "With my current economic outlook, I anticipate that further gradual increases in the policy rate will be appropriate to both sustain a healthy labor market and stabilize inflation around our 2 percent objective," he added.  He did note several obstacles to growth, particularly continued low productivity increases.  On the other hand, aggressive fiscal policy in the form of the big tax cut passed in Dec, higher spending in general & a boost to infrastructure have provided a tailwind for growth.  "After subtracting from growth over much of the period from 2011 onward, the impetus from fiscal policy has turned distinctly positive with the passage of recent tax and budget legislation," Quarles said.  "Fiscal policy is likely to impart considerable momentum to growth over the next couple of years not only by increasing demand, but also by boosting, to some degree, the potential capacity of the economy."  Quarles took his seat on the Fed in Oct & also will be the chief overseer of banking regulations.  New Fed Chair Jerome Powell delivers remarks to Congress Tues & Thurs.

Fed's Quarles says it's been 'quite some time' since the economy looked this good

Stocks looked good today & risk investing was rewarded.  The Dow is just 900 short of the record set a month ago after rising almost 2K from the low set on Feb 8.  That is called wild volatility.   Market breadth improved with buying in the PM, however it is short of being impressive.  Stocks are back to short term overbought.  Testimony from Powell this week should move the markets one way or the other.

Dow Jones Industrials

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