Wednesday, February 14, 2018

Markets extend rally as inflation fears recede

Dow shot up 253 (closing near the highs), advancers over decliners better than 2-1 & NAZ surged 130.  The MLP index was about even in the 276s.  Junk bond funds were mixed & Treasuries continued to be sold (more below).  Oil found buying late in the session which took the price back over 60 (more below) & gold soared 26 to 1356 (near recent  highs).

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US stocks turned higher as investors shrugged off a surprisingly strong report of inflation last month, lifting the Dow & the S&P 500 into positive territory for the year.  The Dow opened with triple-digit losses after the Consumer Price Index (CPI) report for Jan was released, but as trading continued, stocks clawed back into positive territory.  The CPI jumped 0.5% in Jan, compared with an increase of 0.3% forecast & 0.2% inflation reported in Dec.  Rising inflation spooks investors because it increases the likelihood that the Federal Reserve will more aggressively raise interest rates.  The yield on the 10-year Treasury bond climbed to 2.9% from 2.837%, a 4-year high, yesterday.  The yield on bonds moves in the opposite direction from the price.  Inflation has recently roiled the markets & was attributed to the market sell-off that started on Feb 2.  Meanwhile, gold, which is often seen as a hedge against inflation, rose to $1348 per ounce, for a 1.4% gain.  Many analysts cautioned against seeing a trend in the Jan CPI numbers.

Stock market climbs despite strong inflation data

Oil dipped, squeezed by lingering oversupply including rising US inventories & ample physical flows, though the prospect of Saudi output dropping in March, economic growth hopes & a weaker $ all combined to cap losses.  West Texas Intermediate crude futures were at $59.06 a barrel, down 13¢ from their last settlement, after trading above $65 in early Feb.  Brent crude futures were at $62.68 per barrel, down 4¢, after trading above $70 a barrel earlier this month.  The Saudi energy ministry said that Saudi Aramco's crude output in Mar will be 100K barrels per day (bpd) below its Feb level while exports would be kept below 7M bpd.  Ongoing weakness in the $ as well as economic growth were also somewhat supporting oil markets.  Despite this, analysts warned that not all indicators were bullish.  The American Petroleum Institute said yesterday that US crude inventories rose by 3.9M barrels in the latest week, to 422.4M.  That was largely due to soaring US crude production, which has jumped by over 20% since mid-2016 to more than 10M bpd, surpassing that of top exporter Saudi Arabia & coming within reach of Russia, the world's biggest producer.  US crude is also increasingly appearing on global markets & more is set to come as the Louisiana Offshore Oil Port starts testing supertankers for exports.  The surge in US supplies means oil may be in oversupply again soon, flipping the 2017 deficit induced by supply restraint led by OPEC & Russia.  "I am confident that our high degree of cooperation and coordination will continue and bring the desired results," Saudi Arabia's Energy Minister Khalid al-Falih said.  Not all agree.  The Intl Energy Agency said expects oil demand to grow by 1.4M bpd in 2018, but adding that output growth could outpace demand.

Oil dips on looming oversupply

The yield on the 10-year Treasury note jumped to 2.92%, its highest level in 4 years, & slightly above the levels that sparked a stock-market sell-off earlier in the month.  The move higher came after the gov reported inflation in Jan rose by more than expected.  The yield has clawed its way from a low of 2.65% touched last week in the wake of a stock market plunge that sent investors back into Treasuries temporarily.  It first hit a 4-year high of 2.902% yesterday.  The 7-year note yield hit a high of 2.826%, its highest level since Apr 2011, when it yielded as high as 2.830%.  Meanwhile, the US 5-year yield added about 10 basis points to a high of 2.639%, its highest level since Apr 2010 when it yielded as high as 2.681%.  As of the the latest reading, the 10-year yield remained roughly 8 basis points higher at 2.92%, while the yield on the 30-year bond rose to 3.182%.  The new rate highs came after the Labor Dept reported consumer prices climbed much more than expected in Jan, spurring inflation fears & worries that rates could climb higher.  The CPI rose 0.5% last month against projections of a 0.3% increase.  Excluding volatile food & energy prices, the index was up 0.349% against estimates of 0.2%, the largest gain for the measure since Mar, 2005.  CPI rose 2.1% on an annualized basis against expectations of 1.9% & Core CPI increased 1.8% vs estimates of 1.7%.  The gov added that pricing pressures were widespread, citing upticks in gasoline, shelter, apparel, medical care & food.

US 10-year yield jumps to new 4-year high of 2.92% after hot inflation report

Economists are underestimating how rapidly the US economy will grow from tax cuts that are encouraging companies to invest & create jobs, a senior Treasury official said.  “Despite the stock-market volatility, the economy is enjoying a period of relative strength and prosperity in both the United States and in many other countries,” said David Malpass, the Treasury Dept's undersecretary for intl affairs.  “Many forecasting models low-ball the longer-term growth effect of the new tax law by focusing on its fiscal mechanisms rather than the structural change.”  The “real growth effect” will come from “businesses, large and small, responding to improvements in growth policies,” he added.  The White House's economic outlook in the 2019 budget proposals released yesterday counts on a unlikely mix of faster growth, lower unemployment & tame inflation.  The Trump administration sees inflation, based on the consumer price index, averaging 2.1% in 2018 & 2.3% over the long run.   The economy is seen expanding 3.1% this year & 3.2% in 2019, following 2.5% in 2017.  Analysts surveyed expect GDP to climb 2.7% this year & 2.3 percent next, with inflation at 2.3% in 2018 & 2.2% in 2019.  US financial markets were roiled recently by concerns that inflation is picking up, driven by a tightening labor market, which could lead the Fed to quicken the pace of interest rate increases.  Investor worries deepened on today when the Jan inflation data came in faster than expected.  A combination of tax cuts & deficit spending backed by Congress is expected to stimulate the economy, adding more pressure on the inflation outlook.

U.S. Treasury Official Says Economists Lowballing Tax-Cut Impact

Risk investing is being embraced once again, even after an inflation report earlier today worried investors.  Today's rally was led by tech stocks on NAZ which are less concerned with inflation thoughts.  The Dow is back in the black YTD.   Meanwhile gold also had a spectacular gain fueled by investors who are risk averse.  Additionally, REITs were sold on worries about how higher rates will affect them.  These are not times for the timid!!

Dow Jones Industrials

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