Wednesday, March 7, 2018

Markets bounces off low after hints Canada & Mexico could be exempt from tariffs

Dow fell 82 (260 above midday lows), advancers over decliners about 5-4 & NAZ gained 24.  The MLP index gave back 2+ to the 256s.  Junk bond funds were flattish & Treasuries largely fluctuated.  Oil dropped to the 61s & gold sank 10 to 1325.

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Stocks fell in thin trading, while Treasuries pushed higher as the threat of a trade war loomed over markets already rattled by signs of rising inflation.  The $ advanced.  The S&P 500 sank for the first time in 4 days in PM trading that was 12% below average as the Northeast braces for the 2nd major winter storm in a week.  Equities have been under pressure since the resignation of free-trade proponent Gary Cohn & news the pres intends to clamp down on China.  Disparities in the major indices reflected concern that Trump's plans to impose stiff tariffs on some imports could lead to a broader trade war.  Multinationals in the Dow fell more than 1%, while domestically-focused small caps advanced.  The equity losses fed demand for Treasuries, with the 10-year yield edging lower to 2.88%.  The $ pushed higher, while crude fell toward $61 a barrel.  Investors also have their sights fixed on upcoming central bank decisions in Europe & Japan, ahead of the US jobs report on Fri.   While the imposition of severe levies on steel & aluminum may come as soon as this week, speculation remains that the tariffs may not spark a broader trade conflagration.  The EU has said it will retaliate in kind, while China has so far remained largely quiet.  At the same time, Rep leaders in Congress have urged Trump to target only specific items & countries, adding to hope that a broader crackdown on trade will be avoided.

U.S. Stocks Extend Drop, Bonds Rise on Trade Angst

Treasury Sec Steve Mnuchin said he recognizes the risk of retaliation against the US for steel & aluminum tariffs the Trump administration plans to impose but still believes the move will benefit American workers.  “If you want to negotiate things that are good for us, you have to be prepared for the consequences,” the Treasury chief said.  “Our objective is not to create a trade war. Our objective is to make sure U.S. companies and workers are treated fairly.”  Trump's call last week for tariffs of 25% on steel & 10% on aluminum imports has stirred fears of a global trade fight.  A formal announcement could come as soon as tomorrow.  The EU this week threatened retaliatory levies on politically sensitive US goods & China last week sent an economic envoy seeking to clarify US demands.  Rep lawmakers are pressuring Trump to at least curtail the tariffs by targeting a limited number of countries or specific categories of steel & aluminum in order to ease the impact on American manufacturers that depend on the metals.  Mnuchin said no one should be surprised at the tariffs.  Trump has made renegotiating trade deals & getting better access to Chinese markets for American companies a pillar of his economic agenda since his candidacy.  While Mnuchin said that the tariffs will “definitely” be rolled out soon, both he & Commerce Sec Wilbur Ross signaled the administration is open to exempting countries from the tariffs, including Mexico & Canada, depending on the result of ongoing Nafta negotiations.  “We have a mechanism to carve out countries,” Mnuchin said.  Imposing tariffs would open a new chapter in the long-running tension between Trump's growth-boosting policies, such as tax cuts & reduced regulation, & his trade & immigration proposals, which most economists consider a risk to growth.

Mnuchin Says Tariffs Will Benefit U.S. Despite Retaliation Risk

A tight US labor market was helping lift wages across most of the country thru late Feb & contributing to “moderate inflation” in most areas, a Federal Reserve survey showed.  The central bank's Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks thru Feb 26, showed that the nation's “modest to moderate” expansion was spreading the benefits of higher pay more widely.  The survey also contained evidence that a pickup in inflation was more broadly based.  “Across the country, contacts observed persistent labor market tightness and brisk demand for qualified workers, as well as increased activity at staffing placement services.”  “Most districts saw employers raise wages and expand benefit packages in response to tight labor market conditions” the report said.  Prices increased in all districts, the survey stated, “and most reports noted moderate inflation.”  The previous Beige Book report, released Jan 17, noted that “most districts reported modest to moderate price growth.”   The report may add to expectations that the central bank could end up raising interest rates in 2018 by more than the 3 qtr percentage-point moves that officials projected in Dec.  The FOMC will meet Mar 20-21 & investors widely expect the 6th increase since Dec 2015.  One of the Fed's more dovish policy makers, Atlanta Fed Pres Raphael Bostic, said today he had upgraded his own projection to 3 hikes this year, from 2.  Fed Governor Lael Brainard, another official who has argued a cautious approach to raising rates, said late yesterday the economic outlook is improving & signaled support for continued gradual rate increases.  Material for the report was gathered before Pres Trump announced plans for steel & aluminum import tariffs that have triggered fears of a trade war.  Still, the report's national summary mentions that “four districts saw a marked increase in steel prices, due in part to a decline in foreign competition.”  Trump signed a $1.5T tax-cut bill into law in Dec, a shot of fiscal stimulus that was noted in the Beige Book.  “Contacts in a few districts conveyed reports of modest increases in compensation” following the tax cuts, according to the report, prepared by the San Francisco Fed.

Fed Sees Moderate Inflation as Tight Job Market Boosts Wages

US consumer debt rose in Jan by the least in 4 months on a sharp slowdown in use of revolving products such as credit cards, Federal Reserve data showed.  Total credit rose $13.9B M/M (est $17.7B gain) & follows a revised $19.2B Dec gain (prev. $18.4B).  Revolving credit outstanding rose $701M, least since Feb 2015, after a $6.1B Dec. increase.  Non-revolving debt outstanding climbed $13.2B after a $13.1B rise.  The slow growth in revolving debt, in line with sluggish household spending figures reported for Jan, indicates consumers may have been reluctant to increase credit-card balances following robust outlays in Q4.  Gains in overall consumer credit cooled for a 2nd month.  Even so, a strong jobs market & the tax cuts enacted in Dec are likely to support household spending in H1.  The Fed's consumer credit report doesn't track debt secured by real estate, such as home equity lines of credit & home mortgages.  Lending by the federal gov, which is mainly for student loans, increased by $26.3B in Jan, before seasonal adjustment.

U.S. Consumer Credit Grew in January by Least in Four Months

Pres Trump said that China has been asked to address its large trade deficit with the US.  “China has been asked to develop a plan for the year of a One Billion Dollar reduction in their massive Trade Deficit with the United States. Our relationship with China has been a very good one, and we look forward to seeing what ideas they come back with. We must act soon!”   This comes as the Trump administration has been taking measures to combat what it says are unfair trade practices.  The trade deficit with China in Jan surged 16.7% to $36B, the widest since Sep 2015 & the deficit with Canada soared 65% to a 3-year high of $3.6B.

China trade deficit draws critical Trump tweet

US companies added a healthy 235K jobs last month, led by solid gains in construction, hotels & restaurants, & education & health care.  The report on Feb hiring from payroll provider ADP comes after businesses added 244K people in Jan & 249K in Dec.  Those gains should be enough to reduce the unemployment rate, currently a low 4.1%, over time.  With unemployment already so low, strong hiring should force employers to offer much higher pay to find the workers they need.  If pay hikes continue to broaden, companies may have to raise prices to cover at least some of the cost of higher wages, which would lift inflation.  That, in turn, could push the Federal Reserve to increase interest rates more quickly, which over time could slow growth.  "The risks of an overheating economy are rising," Mark Zandi, chief economist at Moody's Analytics, said (Moody's helps compile the ADP data).  ADP compiles hiring data from Ms of companies that are clients of its payroll services.  Its report & gov figures frequently diverge from month to month.  Last month, the gov said 200K jobs were added, below ADP's initial estimate of 234K.  That figure has since been revised higher.  Economists believe the US jobs report for Feb, to be released Fri, will likely show a gain of 200K jobs & will also project the unemployment rate will tick down to 4%.  Growth should accelerate in the coming months, Zandi said, boosted by the tax cuts & recent increases in gov spending enacted by Congress.  The unemployment rate could fall to below 3.5% by the middle of next year.  The Trump administration's tariffs on steel & aluminum imports will likely cost the US 50-60K jobs, Zandi said, as companies that use the metals as input to other products will have to cut back.  Yet those losses aren't enough to knock the economy off course, he said.

Survey: US businesses hire 235,000 new workers in February

The White House says Mexico, Canada & other countries may be exempted from the steel & aluminum tariffs under national security "carve-outs."  Press secretary Sarah Huckabee Sanders told reporters that the exemptions would be on a "case by case" & a "country by country" basis.  The openness to country exemptions is a reversal from the policy articulated by the White House just days ago that there would be no exceptions to Trump's plan to put in place 25% tariffs on imported steel & 10% on aluminum.  Sanders says Trump will finalize the tariffs later this week.  The plan has roiled markets and drawn consternation from American allies, Rep free-trade advocates & the business community.

The Latest: WH says some countries may get tariff exemptions

Exxon Mobil, a Dow stock & Dividend Aristocrat,, said oit expects its earnings to more than double by 2025 to $31B with crude prices at or above current levels.  The company said exploration projects in Guyana & the Permian Basin as well as refining & chemical plant expansions, should help boost earnings.  The company reported an adjusted profit of $15B in 2017.  XOM has come under increasing pressure in recent years to boost returns, which have lagged its 4 largest publicly traded peers.  The stock fell 1.90.
If you would like to learn more about XOM, click on this link:

Exxon sees earnings doubling by 2025 at current oil prices

No shortage of excitement from DC.  Every whim, one way or the other, moves the stock market.  And these swings can be substantial.  It's difficult to keep up with the constantly changing story, let alone understand what;s going on.  With the bounce back earlier today, the Dow is barely in the black YTD.  Get ready for another wild day  of trading tomorrow.

Dow Jones Industrials

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