Wednesday, March 21, 2018

Markets waver in chopy trading after the Fed raises interest rates

Dow fell 44 with selling into the cloase, advancers over decliners 4-3 & NAZ lost 19.  The MLP index recovered 3+ to the 246s & the REIT index was off fractionally to the 327s.  Junk bond funds slid lower & Treasuries remained weak with the yield on the 10 year Treasury at 2.91%.  Oil jumped up about 2 to the 65s (more below) & gold surged 23 to 1334 after the Fed announcement & talk of a massive gov spending bill.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a qtr-point & forecast a steeper path of hikes in 2019 & 2020, citing an improving economic outlook.  Policy makers continued to project a total of three increases this year.  “The economic outlook has strengthened in recent months,” the FOMC said.  Officials repeated previous language that they anticipate “further gradual adjustments in the stance of monetary policy.”  The upward revision in their rate path suggests Fed officials are looking thru soft Q1 economic reports & expect a lift this year & next from tax cuts.  Financial conditions have tightened since late Jan as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger US growth & tight labor markets.  The vote to lift the federal funds rate target range to 1.5-1.75% was a unanimous 8-0.  The latest set of quarterly forecasts forecasts showed that policy makers were divided over the outlook for the benchmark interest rate in 2018.   7 projected at least 4 qtr-point hikes would be appropriate this year, while 8 expected 3 or fewer increases.  The central bankers projected a federal funds rate of 2.9% by the end of 2019, implying 3 rate increases next year, compared with 2 2019 moves seen in the last round of forecasts in Dec.  They saw rates at 3.4% in 2020, up from 3.1% in Dec.  The S&P 500 stayed higher after the release, while the yield on 10-year Treasury notes rose slightly, to 2.91%.  In another change to the statement, the Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the Jan statement.  Price gains are still expected to stabilize around the Fed's 2% target over the medium term, the FOMC said.  The central bank's preferred price gauge rose 1.7% in the 12 months thru Jan & officials projected it to rise to 2% in 2019 & hit 2.1% the following year.  The estimates for inflation excluding food & energy, which officials see as a better way to gauge underlying price trends, rose to 2.1% in 2019 & 2020 from 2% seen in Dec.  “Job gains have been strong in recent months, and the unemployment rate has stayed low,” the FOMC said.  The statement said that household spending & business investment “have moderated” from strong Q4 readings.  The statement added previous language that “near-term risks to the economic outlook appear roughly balanced.”

Fed Lifts Rates, Steepens Path Through 2020 For More Hikes

German Chancellor Angela Merkel is backing talks aimed at averting US steel & aluminum tariffs that she believes are illegal, but says Europe will retaliate in an "unambiguous" way if it has to.  The EU is seeking an exemption from the tariffs for the 28-nation bloc.  Pres Trump's tariffs  take effect Fri, but he has temporarily exempted Canada & Mexico.  Merkel told the German parliament: "We will ... of course continue to back talks but if necessary take unambiguous counter-measures."  EU leaders are to discuss the issue at a summit tomorrow.  Merkel said: "We believe these tariffs are illegal, we think they are harmful ... but we must of course await developments."

Germany's Merkel hopes to avert 'illegal' US tariffs

Negotiators on a $1.T gov spending bill dropped protections for Dreamer immigrants & gave Pres Trump only a partial victory on funding for his US-Mexico border wall as talks entered the final stage today.  A meeting of top congressional leaders produced tentative accords on 2 tax provisions & a decision to strengthen the criminal background check system for gun purchases.  House Speaker Paul Ryan said an official agreement on the sweeping measure would likely come "very soon."  GOP aides said that Trump would win $1.6B for a border wall & physical barriers along the border, which would construct older wall designs & repair existing segments.  But Trump would be denied a more recent, far larger $25B request for multi-year funding for the wall project.  Dems said just $641M would go to new segments of fencing & walls that double as levees.  Negotiators planned to unveil the massive gov-wide spending bill later in the day in hopes of passing it before a Fri midnight deadline to avoid a gov shutdown.  A senior administration official said the White House is generally happy with the emerging deal.  The person said the plan addresses the top priorities of the pres, including a large funding increase for the military, border security measures & money to fight the opioid epidemic.  The top 4 leaders of both House & Senate met today & emerged saying they basically had a deal.  "We're finalizing," said House Speaker Paul Ryan told reporters, saying the bill would shortly be made public. "We're in a good place."  The bill would give Trump a huge budget increase for the military, while Dems would cement wins on infrastructure & other domestic programs that they failed to get under Pres Obama.  It funds a 2.4% pay raise for military personnel touted by Reps.  Battles over budget priorities in the huge bill were settled, while a handful of non-budget issues still remain.

Final spending bill leaves out 'dreamers,' major wall money

The threat of a global trade war, which has caught the attention of investors in a big way, is also a concern for the Federal Reserve.  In his first news conference, Jerome Powell said the battle over tariffs has not caused Fed officials to change their economic outlook yet, but future expectations will depend on how the situation unfolds.  "A number of participants in the FOMC did bring up the issue of tariffs," Powell said.  "If I could summarize what came out of it was, first, there's no thought that changes in trade policy should have any effect on the current outlook."  However, "a number of participants reported that about their conversations with business leaders around the country and reported that trade policy has come a concern going forward for that growth."  Those concerns come as Pres Trump has slapped tariffs on imported steel & aluminum.  A number of recent investor surveys indicate that an acceleration in trade tensions presents the biggest threat to future growth.  "Our FOMC participants reported that they heard concerns, which were relatively new, about future trade actions," Powell said.  "They're seeing it as a risk to the outlook. The kind of things people are talking about are more widespread retaliations, more widespread action back and forth."

Powell says Trump's trade policy has become a growing concern among Federal Reserve members

The White House plans to announce a package of tariffs tomorrow penalizing China for intellectual property theft, a senior White House official said.  The measures to be unveiled will not include restrictions on Chinese investment in the US or student visas.  Pres Trump will be briefed again in 2 weeks to consider more actions based on the effects of the first phase.  Trump worries the measures could hit American universities too hard.  Both the timing of the announcement & scope of the tariffs are in flux.  The pres has pushed for tariffs on $60B in goods.  But by law, the penalties must be limited to the amount of harm the US trade representative finds the unfair trade practices have done to the US economy.  The top US trade official, Trade Representative Robert Lighthizer, said Trump will make the final decision.  However, he noted the administration would structure the tariffs to inflict maximum harm upon China & try to limit the effect on US consumers.  It marks the latest Trump administration move to crack down on trade practices the pres deems unfair.

White House will announce tariffs cracking down on Chinese theft of intellectual property

Oil prices rose for a 2nd day, trading at 6-week highs, on a surprise decline in US crude inventories & as concern persisted over possible disruption to Middle East supply. West Texas Intermediate crude ended up $1.63 (2.6%) at $65.17 a barrel.  Brent was up $1.97 (2.9%) at $69.39 a barrel.  The price has risen by about 12% since hitting a 2-month low of $61.77 in early Feb.  Oil prices barely budged after the Federal Reserve hiked & upgraded its outlook for economic growth.  Data released by the Energy Information Administration (EIA) showed a surprise 2.6M barrel draw in crude inventories.  Analysts had expected a 2.5M barrel build.  Gasoline stocks fell by 1.7M barrels, compared with expectations for a 2.0M barrels drop.  Distillate stockpiles, which include diesel & heating oil, fell by 2.0M barrels, versus expectations for a 1.7M barrels drop, EIA data showed.

Oil rises more than 2% after surprise drop in US crude stockpiles

The Fed is looking for a strong economy.  That's good for stocks.  But that strength will bring a more aggressive attitude for raising interest rates.  Not so good.  The Dow dropped on the gut reaction after the announcement, then wavered followed by selling going into the close trying to figure out what all this means.  Traders will think about it tonight without coming to a firm conclusion.  More important, at least for the time being, is intl trade & the future of increased tariffs.  The Dow chart below indicates that  it continues to be stuck in the mud, pretty much hugging the 25K level.

Dow Jones Industrials

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