Monday, April 9, 2018

Markets pare gains after the CBO forecast for US deficit

Dow rose only 46 (about 400 below its highs), decliners slightly ahead of advancers & NAZ gained a modest 35.  The MLP index was fractionally lower in the 239s, & the REIT index fell to the 326s.  Junk bond funds were mixed & Treasuries drifted a little lower.  Oil jumped up to the 63s (more below) & gold added 4 to 1340.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

The US budget deficit will surpass $1T by 2020, 2 years sooner than previously estimated, as tax cuts & spending increases signed by Pres Trump do little to boost long-term economic growth, according to the Congressional Budget Office (CBO).  Spending will exceed revenue by $804B in the fiscal year ending Sep 30, jumping from a projected $563B shortfall forecast in Jun, the non-partisan arm of Congress reported.  In fiscal 2019, the deficit will reach $981B, compared with an earlier projection of $689B.  Deficits were only set to surpass the $1T level in fiscal 2022 under CBO's report last Jun.  CBO projects US budget deficit to hit $1T in 2020, ahead of previous forecast.  The US cumulative deficit, taking into account the new tax & spending legislation, will be $11.7T from 2018 to 2027, about $1.6T larger than the CBO projection in Jun.  The CBO forecast 2% less revenue & 1% more spending over the period.  The tax-cut & spending legislation “provide fiscal stimulus, raising real GDP more than potential GDP in the near term,” the CBO said.  “Over the longer term, all of those effects, as well as the larger federal budget deficits resulting from the new laws, exert upward pressure on interest rates and prices.”  Deficits are growing as the Trump administration enacted a tax overhaul this year that will lower federal revenue by more than a $1T over the next decade & Congress approved a roughly $300B spending increase.  The fresh CBO estimates could heighten investor worries as they weigh the potential impact that tariff threats between the US & China may have on the world economy.  Even before the latest fiscal measures, the US budget gap was predicted to increase as an aging American population puts pressure on health care & retirement programs.  The Trump administration has said tax cuts will lead to faster economic growth that would offset deficit expansion.  CBO estimated that real GDP will expand by 3.3% in the 2018 calendar year, before slowing to 2.4% in 2019 & 1.8% in 2020, based on Q4 year-over-year figures.  In Jun, CBO forecast 2% growth this year.  “During the 2020-2026 period, a number of factors dampen economic growth: higher interest rates and prices, slower growth in federal outlays, and the expiration of reductions in personal income tax rates,” CBO said.  The report sees unemployment declining to 3.3% in 2019 on an annual average, from 3.8% this year.

U.S. Deficit to Surpass $1 Trillion Two Years Ahead of Estimates

Stocks bounced back from a late-week selloff sparked by trade angst, as investors poured into large-cap tech shares that bore the brunt of the decline.  Treasuries fell with the $.  The S&P 500 rose more than 1.5%, rebounding from a 1.4% slump last week amid rising concern the US & China would escalate a tariff dispute.  Those fears took a back seat today after equities in Asia & Europe rose, though shares in sectors that would be hit hardest by a trade spat underperformed.  Strength in semiconductors, software & technology hardware pushed the NAZ 100 Index up more than 2%.  The tech rally shifted focus from the implications of a trade dispute between the world's 2 largest economies, with investors also focused on earnings season, which starts later in the week & is expected to show growth of almost 20%.  That’s not to say the trade issue has vanished.  China was said to be reviewing ways to use its currency as a weapon as Pres Xi Jinping is set to deliver a speech tomorrow that may include a strong warning about the consequences of a prolonged dispute.  Still, currency moves, including a recovery in emerging markets & weaker gold prices, bore out the sense that calm may prevail.

U.S. Stocks Soar, Tech Shares Rebound

The ECB's top officials lined up to express cautious confidence in the euro-area economy after a series of reports pointing to a surprisingly weak start to the year, while reiterating that they'll move only slowly toward the end of stimulus.  Pres Mario Draghi & 3 of his most-senior colleagues signaled that while inflation remains too low & a global trade spat poses a new threat, the region's economic upturn is still solid.  The comments come just over 2 weeks before the Governing Council meets to discuss how & when it might end its bond-buying program.  “We expect the pace of economic expansion to remain strong in 2018,” Draghi said in the institution's annual report, while chief economist Peter Praet later said he sees no reason to change the ECB’s economic outlook.  VP Vitor Constancio, presenting the report to the European Parliament, said price pressures will rise gradually & officials must remain cautious not to “derail” those developments.  A spate of recent data for the euro area has pointed to growth leveling out, with gauges for economic activity & retail sales missing estimates & investor confidence slipping.  The downward dynamic has been particularly pronounced in Germany, the region's largest economy, where figures for exports & industrial production both saw a sharp drop in Feb.  Economists have so far written off much of the slowdown as being caused by temporary factors.  Prior to the release of many of the recent data, the ECB in Mar raised its 2018 forecast for growth to 2.4%.  “In the first few months of this year we have seen a softening of a number of indicators, but they’re still fully in line with the good scenario that we have, so we don’t see reasons to change our assessment of our projections,” Praet said.  “We have to be careful because downside risks have increased, but in a context where risks remain broadly balanced.”  Executive Board member Benoit Coeure said  that “we don’t have worries about euro-zone growth” because the bloc is simply stabilizing after last year's acceleration, though he also acknowledged that there is “not enough” inflation.  He said the ECB will soon begin discussions about what to do with its asset buyback program, which is set to continue until at least Sep & top €2.5T ($3.1T).  Praet & Coeure also warned that the threat of a global trade war is increasing the risk to growth.  That was highlighted today with China evaluating the potential impact of a gradual yuan depreciation in response to a trade spat with Pres Trump.  While the ECB is confident in the outlook, Draghi reiterated that “patience was needed for inflationary pressures to build up, and that persistence was necessary in our monetary policy for inflation dynamics to become durable and self-sustained.”  Still, the impact of lower unemployment on price pressures isn't so straightforward, & the annual report cited recent research that shows models measuring this relationship tend to overestimate inflation.

ECB Says Don't Worry as Euro Area Hits Economic Soft Patch

Oil prices rose, supported by a rebound in the stock market as concerns of a trade war between the US & China eased.  Brent crude futures rose $1.53 to $68.64 a barrel (2.3%) & West Texas Intermediate (WTI) crude futures rose $1.36 to settle at $63.42 a barrel (2.2%).  The US stock market broadly rose more than 1% & crude futures have recently tracked with equities.  Oil prices fell about 2% on Fri after Pres Trump threatened new tariffs on China over Twitter, reigniting fears of a trade war between the world's 2 largest economies.  Market participants also focused on an air strike on a Syrian air base over the weekend. Syria and its main ally Russia blamed Israel for carrying out an attack on a Syrian air base near Homs today which followed reports of a poison gas attack by Pres Bashar al-Assad's forces on a rebel-held town.  The Pentagon formally denied a Syrian state television report that the US military had fired missiles at a Syrian gov air base.  Prices have been supported so far this year by healthy demand & supply restraint led by OPEC, which started in 2017 to rein in oversupply & prop up prices.  In physical oil markets, OPEC's #2 producer Iraq said that it will keep prices steady for its May crude supplies.

Oil rallies more than 2% as stock market rebounds

Pres promised US farmers that they will emerge from a trade dispute with China better off despite threats from Beijing to impose tariffs targeting American agricultural products.  “There’ll be a little work to be done, but the farmers will be better off than they ever were,” Trump said.  China last week announced $50B worth of tariffs on American products including soybeans & pork in retaliation for Trump's plan to impose duties on 1333 Chinese products.  The biggest potential impact will be in rural areas that long have been part of the Rep base.  8 of the 10 biggest soybean-producing states went for Trump in the 2016 election & 3 of those will feature close Senate races in Nov.  The Chinese “hit the farmers specifically because they think that hits me,” Trump said.  “I wouldn’t say that’s nice, but I tell you our farmers are great patriots,” Trump added.  “They understand that they’re doing this for the country. We’ll make it up to them.”  Agriculture has formed part of the bedrock of the the pres's support, but economic pressures are growing.  Farm profits may reach a 12-year low in 2018, according to a forecast the Dept of Agriculture released before the Chinese tariff threat.  Soybeans, the 2nd-most valuable US crop (after corn), would be especially hard-hit.  Exports to China accounted for more than 1/3 of the oilseed’s revenues last year.  Farmer organizations including the American Soybean Association have called the impacts of tariffs on agriculture "devastating," even as farmer supporters of the pres have taken a more wait-&-see approach.  "Farmers and ranchers can be on the tip of the spear when it comes to a retaliation," said Steve Censky, deputy secretary of the USDA.   "We’re working at USDA to take a look to see what kind of actions are needed."

Trump Vows Farmers Will Be ‘Better Off’ Because of Trade Fight

The bulls took their profits & went home with about 2 hours left in trading.  That was followed by substantial selling.  The forecast for higher deficits was very negative & raises questions about the next moves by the Fed.  Optimism about calming tensions between US & China over trade issues faded.  A good 2 months of negotiations remain.  Then there is earnings season which begins this week.  That raises more questions about earnings, &, in particular, comments about how new trade issues will affect future earnings.  Tech continues to be under a dark cloud & Zucherberg testifies before Congress tomorrow.  That may result in some form of regulation for the darling tech companies.  At the close, the Dow finished below 24K, a negative signal for tomorrow's trading.

Dow Jones Industrials


No comments: