Thursday, February 1, 2018

Markets slide lower from prospects for higher interest rates

Dow fell 52, decliners over advancers 3-2 & NAZ went up 7.  The MLP index gained 1 to 290.  Junk bond funds crawled higher & Treasuries suffered more selling.  Oil climbed to the 65s & gold added 2 to 1341.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil65.47

GC=FGold  1,342.80

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Stocks erased early losses to trade little changed, as investors assessed earnings after rising profits powered equities to the best month since Mar.  Treasuries pared losses that took the 10-year yield to a 3-year high.  The S&P 500 was virtually unchanged & NAZ slipped as Microsoft (MSFT), a Dow stock, & Facebook (FB) led major earnings reactions.  Company results set the tone in Europe, where equities failed to hold early gains amid selling in health-care stocks.  Earlier, the MSCI Asia Pacific Index rose, with a surge in Japan offsetting declines in China & India.  The 10-year Treasury yield breached 2.75% after a hawkish Federal Reserve statement, with selling in bonds spreading to Europe amid solid manufacturing data from the region.  The £ increased for a 3rd day alongside the €, though UK numbers disappointed.  Investors are weighing the path of monetary policy at a time of synchronized global growth & rising corp profits that's pushed equity gauges to unprecedented levels & sent benchmark bond yields to the highest in almost 4 years.  The Fed yesterday acknowledged stronger growth, expressed more confidence that inflation will rise to its 2% target, & set the stage for a Mar interest-rate increase.  Oil rose & gold retreated.

U.S. Stocks Mixed Amid Tech Weakness as Oil Gains: Markets Wrap

US factories expanded more than forecast in Jan & near the fastest pace in more than 13 years, indicating manufacturing was still powering ahead at the start of 2018, Institute for Supply Management data showed.  Factory index was little changed at 59.1 (est 58.6) from 59.3 in Dec (readings above 50 indicate expansion).  The gauge remains close to Sep reading of 60.2, which was the highest since 2004.  Measure of new orders cooled to 65.4 from an almost 14-year high of 67.4.  Employment gauge fell to an 8-month low of 54.2 from 58.1  The Jan reading, which exceeded the 57.4 average for 2017, shows manufacturing is benefiting from solid consumer spending & business investment.  A measure of exports advanced to an almost 7-year high, underscoring improving overseas markets.   The pickup in manufacturing is starting to generate inflation pressures as factories demand more raw materials including crude oil.  The ISM measure of prices paid increased to the highest level since 2011.  In a sign factories are challenged by elevated demand, the ISM measure of supplier deliveries climbed to a 3-month high & its backlogs index rose to the highest level since Sep.  Index of factory inventories rose to 52.3, indicating stockpiles were expanding, from 48.5.  Gauge of production fell to 64.5 from 65.2 & export orders measure advanced to 59.8, the strongest since 2011, from 57.6.

U.S. Manufacturing Expands at Close to Quickest Pace Since 2004

Even with solid US economic growth, construction spending rose in 2017 by the least in 6 years, as nonresidential building slowed & outlays by govs declined.  The value of construction put in place increased 3.8% to $1.23T last year, according to Commerce Dept data.  That’s the smallest gain since a 2.6% drop in 2011.  Spending for Dec was up 0.7% from the previous month, exceeding the estimate for a 0.4 percent increase.  Private nonresidential construction rose just 0.6% last year, compared with a 10.6% increase in residential building.  The slow gain in the former category was driven by declines in construction related to power & manufacturing.  Public construction spending fell 2.5% last year to $279.8B, as state & local govs trimmed outlays.  Declines were most pronounced in the categories of highways & streets; power; sewage & waste disposal, & water supply.  Public spending on highways & streets fell 3.7% to $87.7B in 2017.

U.S. Construction Spending Rose in 2017 by Least in Six Years

The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a tightening labor market & strengthening economy at the start of the year.  Initial claims for state unemployment benefits slipped 1K to a seasonally adjusted 230K for the latest week, according to the Labor Dept.  The forecast called for claims rising to 238K last week.  Last week marked the 152nd straight week that claims remained below the 300K threshold, which is associated with a strong labor market.  That is the longest such stretch since 1970, when the labor market was much smaller.  The labor market is near full employment, with the jobless rate at a 17-year low of 4.1%.  Tightening labor market conditions have raised optimism among Federal Reserve officials that inflation will increase towards the US central bank's 2% target this year.  Yesterday it left the benchmark overnight interest rate unchanged & described the labor market as having "continued to strengthen."  The 4-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 5K to 234K, the lowest level since early Nov.

US jobless claims unexpectedly fall as job market strengthens

Stocks are back to meandering in what is turnning out to be a difficult week.  The market is vastly overbought, so selling has to be expected.  Additionally, expectations for earnings were quite high making it easier for disappointment.  The strong economy should be able to handle increases in interest rates which have been historically low for almost a decade.  The stock market has had an excellent run for more than a year & the Dow is only 500 (2%) below the high set last Fri.

Dow Jones Industrials


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