Thursday, March 1, 2018

Markets tumble as tariff talk sparks worry of trade wars

Dow plunged 420 (but off the lows), decliners over advancers only about 3-2 & NAZ sank 92.  The MLP index rose a fraction to the 358s.  Junk bond funds were mixed & Treasuries rose, taking the yield on the 10 year Treasury down to 2.8%.  Oil was only marginally lower in the 61s & gold went up 3 to 1321 while stocks were sold.

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Stocks plunged & Treasuries climbed after Pres Trump promised to impose substantial tariffs on foreign metals, drawing a rebuke from a manufacturing industry group.  The S&P 500 sank to session lows & fell below its 100-day moving average, while the Dow dropped more than 500 points after the pres added to earlier confusion on the fate of proposed tariffs by announcing the levies in a meeting with industry executives.  The Institute for Supply Management called the proposal a “big mistake.”  The Federal Reserve earlier praised the benefits of trade, while the EU has said it could respond in kind to any new tariffs.  The market reaction was uneven.  While industrial companies in the benchmark equity index tumbled, automakers led decliners added to losses already sparked by weak sales numbers.  The Russell 2000 Index posted the smallest loss among major indices as the bulk of its members derive most of their sales in the US.  The news sparked a bout of volatility, with the VIX measure climbing past 23 from less than 20 earlier.  The Canadian $ retreated 0.4% versus the greenback, which pared earlier gains to trade little-changed versus the ¥.  Mexico's peso fell.  Investors also digested Senate testimony by Fed Chairman Jerome Powell, who called for gradual interest rate hikes & said he doesn't see evidence of the economy overheating.  Traders were on edge during Powell's 2nd day of Congressional testimony after his comments on Tues about the strength of the US economy opened the door to speculation that the Fed plans to quicken the pace of monetary tightening, a move investors worry could derail growth.  Elsewhere, the Stoxx 600 Index fell as some companies missed their earnings estimates & manufacturing data showed that growth may have peaked.

Markets Tank for Third Straight Day

Pres Trump said the US will slap tariffs on steel & aluminum imports to protect national security, a major escalation of his hawkish trade agenda that could hit producers from Europe to Asia & spur global retaliation.  After on-again, off-again signals of an impending announcement that sent producers' stock prices seesawing, Trump said he will impose tariffs of 25% on imported steel & 10% on aluminum for “a long period of time,” & he expects to sign a formal order next week.  The pres didn't elaborate on the details of the planned action, including whether any products or countries will be exempted.  “We’ll be imposing tariffs on steel imports and tariffs on aluminum imports.” Trump told metals industry executives.  “Some time next week we’ll be signing it in. And you’re going to have protection for the first time in a long time.”  The punitive measures will level the unfair playing field that has persisted for years & make it easier for American companies to expand & hire workers, Trump said.  Trump’s decision drew sharp rebuke from some in his own party.  “Let’s be clear: The President is proposing a massive tax increase on American families,” said Senator Ben Sasse of Nebraska.  “You’d expect a policy this bad from a leftist administration, not a supposedly Republican one.”  Trump’s statement followed hours of confusion.  Staffers in the White House scrambled in the AM to explain what was happening with the expected tariff announcement, ducking in & out of offices in the West Wing as they sought information about the plans.  Last night, Trump was set to announce stiff tariffs on steel & aluminum, & industry CEOs were sent a last-minute invitation to the White House for the unveiling.  Early today, White House aides confirmed the announcement was coming.  But later in the morning, they said it was postponed.  Stocks jumped on anticipation of the tariffs announcement, then retreated following mid-morning reports that no announcement was expected today.  Trump's statement pushed them back up again.  Amid the tumult, the tariff event was re-billed as a “listening session” with CEOs.  At that meeting, he announced the tariffs.  The day's drama mirrored prior behind-the-scenes maneuvering.  Trump has previously made up his mind on steel & aluminum tariffs, only to have staff argue him into delaying.  Despite more warring, Trump dug in.  Trump had been considering a range of options to curb imports of steel and aluminum, after the Commerce Dept concluded that shipments of the 2 commodities hurt US national security.  A move on tariffs may provoke retaliation from China, the world's biggest steel & aluminum producer.  China has already launched a probe into US imports of sorghum & is studying whether to restrict shipments of US soybeans, targets that could hurt Trump's support in some farming states.  While China accounts for just a fraction of US imports of the metals, it's accused of flooding the global market & dragging down prices.  Trump announced the tariffs as Chinese Pres Xi Jinping's top economic adviser, Liu He, is scheduled to meet Trump's senior economic team in DC, including economic adviser Gary Cohn, US Trade Representative Robert Lighthizer & Treasury Sec Steve Mnuchin.

Trump Says U.S. to Impose Harsh Steel and Aluminum Tariffs

Filings for unemployment benefits fell last week to the lowest level in almost 5 decades, indicating the job market remains tight, Labor Dept figures showed.  Jobless claims decreased 10K to 210K, lowest since 1969 (est 225K).  Continuing claims rose by 57K to 1.93M in the latest week.  The 4-week average of initial claims, a less-volatile measure than the weekly figure, fell to 220K, also the lowest since 1969, from the prior week's 225K.  The latest decline in weekly claims shows a tight labor market is increasingly pushing employers to hold on to existing staff amid a persistent shortage of qualified workers.  Applications for jobless benefits are well below the 300K tally that's typically considered consistent with a healthy labor market.  Overall, the employment picture remains solid, with payrolls continuing to increase & the unemployment rate at the lowest since late 2000.  Job growth will help sustain consumer spending, the biggest part of the economy.

Federal Reserve Chair Jerome Powell said he sees no signs the US economy is overheating even as the outlook for growth strengthens & the labor market tightens.  During congressional testimony, he reiterated the central bank will continue to raise rates gradually to keep unemployment & inflation in balance.  “By continuing to gradually raise interest rates over time, we’re trying to balance those two things and achieve inflation moving up to target but also make sure the economy doesn’t overheat,” Powell told the Senate Banking Committee.  He added: “There’s no evidence the economy is currently overheating.”  Powell also said he doesn’t see a tightening labor market causing wages to hit “a point of acceleration.”  “I would expect that some continued strengthening in the labor market can take place without causing inflation,” he said.  “We don’t see any strong evidence yet of a decisive move up in wages.”  Powell gave his first congressional testimony as chairman this week.  On Tues he said that his outlook for the economy had strengthened since Dec, causing investors to increase slightly the odds they see for a 4th interest-rate increase this year.  In their most recent set of projections, Fed officials in Dec penciled in 3 hikes in 2018 (they meet again later this month).  Investors are taking the measure of the Powell Fed as it debates how quickly to raise interest rates with an economy that is growing steadily & receiving new stimulus from tax cuts & spending increases signed by Pres Trump in Dec.  Inflation remains under the central bank's 2% target.  A jobless rate of 4.1% is its lowest since 2000 & below what Fed officials view as it's long-term sustainable level.  Data released earlier today showed real disposable income in the US rose the most since 2015, indicating increased spending power may boost the economy this qtr.  Filings for unemployment also dropped last week to the lowest level in almost 5 decades, providing more evidence of a tightening US labor market.  Powell said the economy was “strong,” with the recent tax cuts adding “meaningfully to growth for at least the next couple of years.”  “The bigger question is how much it will add to longer-run growth,” Powell said.  There, he added, the impact at this point was “highly uncertain.”

Fed's Powell Says He Sees ‘No Evidence’ of Overheating in the U.S. Economy

Auto sales were expected to tail off in Feb as automakers eased up on discounts.  Auto forecasting firm LMC Automotive predicted a 2% drop from last Feb in what is normally one of the weakest sales months of the year.  Others forecast an even steeper decline.  Among major automakers, only Toyota, Subaru & Volkswagen reported sales gains over last Feb.  Ford's (F) US sales chief Mark LaNeve said automakers spent an average of $65 less per vehicle on incentives in Feb compared to the same month last year.  That's a stark contrast from 2017, when incentive spending was often climbing $300-400 per month.  LaNeve said discounts could grow during the spring & summer, when tax returns arrive & more people shop for vehicles.  But based on the first 2 months of this year, he expects automakers to remain fairly disciplined.  In the past, heavy discounting has led to overproduction & steep declines in profits.  General Motors (GM) sales fell just under 7%  to 221K.  Sales were dragged down by the Chevrolet Silverado pickup truck.  Silverado sales were off more than 16% from a year ago, when the company had record Feb sales of SUVs & pickup trucks.  Ford sales also fell 7% to 194K.  Ford said its car & SUV sales were down but sales of the F-Series pickup, its biggest seller, inched up 3.5%.  Toyota (TM) sales rose 4.5% to 182K vehicles.  Sales of its top-seller, the Camry sedan, jumped 12% as an updated version went on sale.  Fiat Chrysler (FCAU) sales fell 1% to 166K.  Jeep brand sales jumped 12% & Alfa Romeo sales were also up, but Ram truck sales fell 14% because of a drop in fleet buyers.  Nissan sales fell 4% to 130K.  Demand for Nissan cars fell 17% but truck & SUV sales were up 9%.  Honda sales fell 5% to 115K.  Sales of its best-seller, the CR-V SUV, dropped 19% despite a recent redesign.  Hyundai sales fell 13% to 46K as higher sales of SUVs failed to make up for declining car sales.  Subaru brand sales rose 4% to 47K.  Volkswagen brand sales rose 6% to 26K.

US auto sales likely fell in February

Americans lifted their spending just 0.2% in Jan, while their incomes jumped because of last year's tax cuts.  The Commerce Dept said that the modest spending increase followed gains of 0.4% in Dec & 0.8% in Nov.  Incomes rose 0.4%, boosted by $30B in tax cut-related bonuses the gov estimates were paid out in Jan.  After-tax income jumped 0.9%, the most in a year, lifted by the tax cuts.  With consumers holding back on spending, the savings rate rose after savings had fallen to a 12-year low in Dec.  The figures suggest Americans took a breather in Jan after shopping enthusiastically over the holidays.  The healthy income gains will likely spur more spending in the coming months.  Still, the slow start to the year indicates the economy may grow more slowly in the first 3 months of the year than it did in last year's Q4, when it expanded at a 2.5% annual rate.  Consumers are feeling much more optimistic about the economy, which should help lift spending.  Consumer confidence jumped in Feb to the highest level since 2000, according to the Conference Board.  There were some signs of inflation pressures.  A key inflation gauge that excludes the volatile food & energy categories rose 0.3%, the most in a year & matching the Jan 2017 gain.  The last time core prices rose faster was in 2007.  Fears of rising inflation stemming from faster economic growth & a solid job market contributed to a sharp fall in the stock market in early Feb.  Yet core prices rose just 1.5% in Jan from a year ago, the same annual gain as in Dec.  A broader inflation measure that includes food & energy increased 1.7% from a year earlier, also the same as the previous month.  Both figures are below the Federal Reserve's target of 2%.  Americans spent much less on cars last month, reflecting a slowdown after consumers replaced thousands of cars in previous months that had been destroyed by hurricanes.  That pulled down spending on long-lasting goods by 1.6%, the steepest fall since last Jan.  Adjusted for inflation, Americans' after-tax incomes rose 0.6% in Jan, the most in 2½ years.  Overall, the economy & job market are mostly healthy.  The number of Americans seeking unemployment benefits fell last week to 210K, the lowest level in 48 years, a sign that employers anticipate solid growth & want to hold onto their staffs.

US consumer spending ticked up in January as incomes soared

This was one more ugly day, although market breadth was not very weak.  Tariff talk is scary for investors & more comments about the interest rate hikes adds to the selling pressure.  However the economy is strong with consumer confidence at elevated levels.  There was bargain hunting in the last hour, reducing losses.  But the Dow is now down YTD as the stock market rally remains in a pause mode.  REITs, under selling pressure for several months, had a mild recovery today.  Increased tariffs should be a bother for them.

Dow Jones Industrials

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