Wednesday, February 21, 2018

Markets tumble in last hour of trading after 10 year yield hits 4-year high

Dow lost 166 (with selling into the close & well below earlier highs), decliners ahead of advancers about 5-4 & NAZ lost 16.  The MLP index fell 3+ to the 265s.  Junk bond funds fluctuated & Treasuries retreated, taking the yield on the 10 year Treasury up to 2.94%.   Oil drifted lower in the 61s (more below) & gold gave back 5 to 1325.

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In Jan, the Federal Reserve emphasized that monetary policy continuity would endure even as Chair Janet Yellen's term came to a close.  The Fed unanimously voted to keep the rate target unchanged at a range of 125 to 150 basis points & signaled that “further gradual increases” would likely be warranted.  This statement givet more clues on why Fed officials added that much-discussed word—“further”—to the statement.  NY Fed Pres Willilam Dudley indicated  that “further” reflects “more confidence in the strength of the economy,” while others see the diction as merely reinforcing that new Fed Chair Jerome Powell intends to follow in his predecessor's footsteps.  “I think ‘further’ is intended to say continuing the current path that we’re on,” Minneapolis Fed Pres Neel Kashkari said.  The Fed has been hiking rates for more than 2 years despite below-target inflation in the hope that it would pick up.  Policymakers had been predicting inflation would rise but still remain below their target in the near term, a phrase that was dropped in the most recent statement.  In Jan, the FOMC upgraded its assessment, saying it expects the annual clip of price increases to move up this year while noting that market-based measures of inflation compensation had risen.  Inflation & wage growth data released since that decision have been higher than expected, so today's communique will also offer a glimpse at whether imminent improvements had been anticipated by the Fed.  Hotter-than-expected price data, along with the successful passage of tax cuts, has prompted a growing number of economists to predict 4 interest rate invcreases in 2018, one more than the forecast on the central bank's “dot plot” implies.  The minutes may also feature a discussion of how much this fiscal stimulus courtesy of congressional Reps might change the calculus for the Federal Reserve's rate path.

Inside the Fed’s January Meeting: The Annotated Minutes

Sales of previously owned US homes unexpectedly fell in Jan to a 4-month low, indicating a shortage of available properties is increasingly hindering the real-estate industry, a National Association of Realtors (NAR) report showed.  Contract closings fell 3.2% M/M to 5.38M annual rate (est 5.6M) from 5.56M (below all estimates).  The median sales price increased 5.8% Y/Y to $240K. & the inventory of available properties fell 9.5% Y/Y to 1.52M, lowest for Jan since records began in 1999.  Sales growth is limited by an acute shortage of inventory, which is pushing up home prices faster than wage growth.  The group noted that property prices have jumped 41% over the past 5 years, while wages have gained 12%.  If the current pace of sales continues, which NAR doesn't anticipate, purchases would be lower than in 2017.  At the same time, steady hiring & elevated confidence to make large purchases, as well as tax cuts that are boosting take-home pay, are expected to sustain demand for housing in much of the nation.  Borrowing costs have risen since the start of the year, also crimping affordability, with the rate on a fixed 30-year mortgage advancing last week to the highest in almost 4 years.  While the tax legislation also limits the deduction for mortgage interest on more expensive homes, signaling demand may cool in areas of the country where the cost of a house is well above the national median, the Realtors group said there's little evidence yet that it’s having an impact.  “It’s the inventory situation that pops out” as the main culprit for the slowdown, Lawrence Yun, NAR's chief economist, said.  “The interest is there, but they just cannot close the deal because of the lack of inventory.”  First-time buyers are “struggling to get in,” Yun said.  “There’s no letup in home prices.”  First-time buyers made up 29% of all sales, compared with 33% a year earlier.  Homes typically sold in 42 days, down from 50 days a year earlier & 43% of homes sold in Jan were on market for less than a month

Sales of Existing U.S. Homes Unexpectedly Fell in January

The Federal Reserve should continue to raise interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank Pres Robert Kaplan said.  "I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018," Kaplan said in an essay updating his views on the economic & policy outlook.  "History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up."  The Fed is widely expected to raise rates 3 times this year, starting next month.  Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year.  But he warned that falling behind the curve on rate hikes could make a recession more likely.  He also had some cautionary words about the Trump administration's recent tax overhaul, which he said would help lift US economic growth to 2.5-2.75% this year, pushing the unemployment rate, now at 4.1%, down to 3.6% by the end of 2018.  Inflation, he projected, will firm this year, making progress toward the Fed's 2% goal.  While the corp tax cuts & other reforms may boost productivity & lift economic potential, most of the stimulative effects will fade in 2019 & 2020, leaving behind an economy with a higher debt burden than before.  "This projected increase in government debt to GDP comes at a point in the economic cycle when it would be preferable to be moderating the rate of debt growth at the government level," Kaplan added.  A higher debt burden will make it less likely the federal gov will be able to deliver fiscal stimulus to offset any future economic downturn & unwinding it could slow economic growth.  "While addressing this issue involves difficult political considerations and policy choices, the U.S. may need to more actively consider policy actions that would moderate the path of projected U.S. government debt growth," he said.

Fed should raise rates gradually this year, Kaplan says

Oil dropped on fears that expanding US stockpiles knocked the steam out of OPEC's cuts for another week.  Crude fell more than 1%.  Inventories in American tanks & terminals probably increased 2.9M barrels last week, according to a survey.  If a gov report tomorrow confirms that estimate, it would be the 4th straight weekly gain, the longest expansion since Q1-2017.  Spare supplies are increasing against the backdrop of record output by US drillers.  Oil has struggled to regain Jan's highs as faltering confidence in the outlook for economic growth & a strengthening $ reduce the appeal of commodities.  OPEC has reiterated not just its commitment to curbing an oversupply, but possibly even extending its alliance with Russia beyond this year.  West Texas Intermediate for Apr delivery fell 27¢ to $61.52 & Brent for Apr settlement slipped 5¢ to $65.20 in London.  The global benchmark traded at a $3.68 premium to WTI.  The outlook for US oil production in both 2018 & 2019 is “phenomenal,” Deputy Energy Secretary Dan Brouillette said yesterday.  The nation's crude inventories have rebounded since late Jan & kept above 420M barrels this month, according to Energy Information Administration data.

Yields keep climbing, as predicted.  The 10 year Treasury yield is approaching 3%.  Market selling came in the last hour (a bad sign for tomorrow).  Dow finished at its lows under 25K (470 below session highs).  These are choppy time for stocks with investors unsure about the future.  Walmart (WMT), a prominent Dow stock & Dividend Aristocrat, dropped another 2+ (near the lows) today after yesterday's 10+ drop from disappointing earnings.

Dow Jones Industrials

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