Thursday, February 22, 2018

Markets rebound, but gains pared in late trading

Dow rose 164 (but 200 below session highs), advancers over decliners 4-3 & NAZ lost 8.  The MLP index gave back 2+ to the 263s.  Junk bond funds traded higher & Treasuries rose, but the yield on the 10 year Treasury remains above 2.9%.  Oil climbed to the 62s on lower supply data (more below) & gold added 1 to 1333.

AMJ (Alerian MLP index tracking)

Live 24 hours gold chart [Kitco Inc.]

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The US central bank is carefully raising interest rates against a brightening economic background that has perked up conditions for the nation’s lenders, said Federal Reserve Bank of Atlanta Pres Raphael Bostic.  After years of emergency-era monetary policy, Fed officials are now “in an increasing-rate environment, and are in the midst of a carefully-calibrated return to a more normal Fed footing, which includes the gradual reduction in our balance sheet,” Bostic, a voter this year on the Fed's rate-setting panel, told a banking conference today.  “Banks have anticipated the increase in rates and were really excited about the prospects of higher returns, keeping in mind the need to manage interest-rate risk.”  Fed officials saw stronger US growth sustaining additional interest-rate increases, minutes of the Jan policy meeting showed.  Investors fully expect the Fed to raise rates at its Mar meeting according to pricing in interest-rate futures contracts & are lining up with the Fed's projection for a total of 3 hikes this year.  “Our most recent GDPNow estimate projects growth of 3.2 percent in the first quarter -- which is a lot more than it was last first quarter -- and so things continue to look up,” Bostic said, referring to the Atlanta Fed's tracking model of GDP.  For banks, Q4 results signal that “discounting the transitory effect of changes in the tax code, core earnings are solid and credit quality remains stable.”

Atlanta Fed President Says ‘Things Continue to Look Up’ for U.S. Economy

The world's largest oil & gas company, ExxonMobil (XOM), a Dow stock & Dividend Aristocrat, may soon operate the largest crude refinery in the US.  The company is close to receiving approval to expand its Beaumont, Texas plant.  The plant currently occupies about 2400 acres of land, processes about 365K barrels of crude oil per day & produces 2.8B gallons of gasoline each year, according to XOM.  An expansion at the refinery is expected to increase total capacity to 700-850K barrels per day.  The Motiva Enterprises' Port Arthur, Texas, plant, presently the largest in the US produces about 650K barrels per day.  A potential expansion comes at a time when US crude production is on the rise.  US crude production averaged 10.2M barrels per day in Jan, according to the US Energy Information Administration (EIA).  For 2018, production is expected to average 10.6M barrels per day, which would be the highest annual production level to date.  The EIA forecasts that annual production in 2019 will average 11.2M barrels per day.  The project would create up to 1850 construction jobs & as many as 60 permanent positions when complete.  XOM said only that it is considering increasing its domestic operations.  The company said last month it would invest $50B in the US over the next 5 years.  The stock rose 98¢.
If you would like to learn more about XOM, click on this link:

Exxon may soon operate largest US crude refinery: report

Long-term US mortgage rates crept higher this week, upping the costs of borrowing to purchase a home just as more of the millennial generation is entering the real estate market.  Mortgage buyer Freddie Mac said that the average rate on 30-year fixed-rate mortgages rose to 4.40% this week, a slight gain from 4.38% last week.  That average is the highest since Apr 2014 & the 7th straight weekly increase.  The rate on 15-year, fixed-rate loans rose to 3.85% from 3.84% last week.  Mortgage rates closely track the yield on 10-year Treasury notes, which have climbed to 2.92% from 2.46% at the start of the year.  Interest costs are rising in response to greater gov debt levels & expectations of higher inflation.

Long-term mortgage rates climb to 4.40 percent

Central bankers need to be careful not to increase interest rates too quickly this year because that could slow the economy too much, St Louis Federal Reserve Pres James Bullard said.  Analysts expects the Fed to raise rates at next month's meeting, in the first of what's seen as at least 3 total hikes in 2018.  The Fed increased the cost of borrowing money 3 times last year to 1.25-1.50%.  Hiking rates by a total of 1% this year, which would signal 4 increases of the typical 0.25%, would be "priced for perfection," Bullard said.  "The idea that we need to go 100 basis points in 2018, that seems like a lot to me," he added.  "Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I'm not sure that's a good way to think about 2018."  The Fed needs to follow the economy, which is showing strength but still little inflation, Bullard said, adding he doesn't expect the years of below-target inflation to change rapidly.  "We've got a ways to go on this inflation story."  "One thing I'm concerned about is if [there's] a bunch of hikes this year Fed policy will turn restrictive," he said.  "The neutral fed funds rates is pretty low." The fed funds rate is a key short-term interest rate that banks use to lend each other money overnight.  Central bankers held interest rates steady last month but indicated optimism about the economy & inflation moving higher toward the Fed's 2% target.  "It was natural for us to be meeting in January and saying good things about 2017," he said, considering the US & the global economy surprised to the upside.  Investors & traders have been nervous lately about economic growth running too hot & inflation overshooting & whether those conditions might lead the Fed to increase rates more aggressively than planned.  While stocks were volatile in the last month, the 10-yesr Treasury yield was spiking to around 4-year highs just below 3%.  Bullard said the Fed does not have to hurry on rates because the bond market has been doing some of the heavy lifting.  "I don't think we need to chase the 10-year up," he said. "If the long end is moving up in tandem with better growth prospects worldwide, then the bond market is doing our work for us."  As for fiscal policy, he said he's encouraged by some of the policies of Pres Triump & Rep leaders.  "I like the deregulatory agenda. I think the tax plan has some chance of working and firing up investment."

Fed's Bullard warns that too many rate hikes this year could slow the economy too much

Oil surged to the highest in 2 weeks as American supplies unexpectedly shrank & exports surged, dispelling fears that a new shale boom will leave the country awash in crude.  Futures advanced almost 2% after a gov report showed US crude stockpiles slid 1.62M barrels last week, the largest draw in 5 weeks.  That contrasted with a 2.9M increase estimated ahead of the release.  At the same time, crude moving from storage facilities in Cushing, Oklahoma, to tankers on the Gulf Coast helped exports jump 55% to 2M barrels a day, the most since Oct.

The bulls made an attempt to take the Dow over 25K, but late day selling was too much for them.  The Dow finished under 25K, in what is becoming an important technical level.  After plunging in early Feb, the Dow has been loosely trading in a sideways band around 25K.  Economic data continues strong, but the thoughts of 3 & maybe 4 rate hikes haunt traders who have become addicted to low rates for almost a decade.

Dow Jones Industrials

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