Thursday, April 19, 2018

Markets retreat as techs are sold & rates rise

Dow dropped 83, decliners over advancers better than 2-1 & NAZ lost 57.  The MLP index fell 2+ to the 257s following recent strength & the REIT index was little changed in the 329s.  Junk bond funds fluctuated & Treasuries were sold all day.  Oil settled flattish in the 68s after going over 69 (more below) & gold fell 5 to 1348.

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Federal Reserve Bank of Dallas Pres Robert Kaplan said that the US is on an unsustainable path of debt growth & predicted a big slowdown in the economy within the next 2 years.  “In the Dallas Fed we are estimating U.S. growth about 2.5 [percent], 2.75% in 2018,” he said.  “Unfortunately we think growth will moderate next year and we think by 2020 we’ll be down to 1.75 [percent] to 2%.”  He added that an aging workforce & sluggish productivity growth were factors, but also raised concerns about the nation's $T budget deficit.  “The stimulus from increasing debt to GDP, which this recent legislation did, can turn into a headwind because we think we are on an unsustainable rate of debt growth in the United States,” he said.  During its Mar meeting, the Federal Reserve responded to higher inflation & a strengthening labor market by raising its target range for the federal funds rate by a qtr-percentage point to 1.5% to 1.75%.  Kaplan maintained the Fed's forecast for 2 additional rate hikes in 2018.  “I think the path of rate increases is probably going to be flatter than people are accustomed to and one of the reasons is this moderating out year growth,” he said.  “I think we should be increasing the fed funds rate [and] removing accommodation, but we have to do it very patiently and gradually because we’ve got a number of these structural headwinds that are not going away.”

Unsustainable debt will ripen sluggish economic growth: Dallas Fed president

The head of the IMF warned that the healthiest global economy in years is threatened by rising debt levels, volatile financial markets & a simmering trade dispute between the world's 2 biggest economies.  Managing Director Christine Lagarde said a US-China trade war "will not be something that will affect only the two countries because the world is so interconnected. It will affect the global economy."  For now, the IMF expects the global economy to grow 3.9% this year, the fastest since 2011.  But Lagarde says "we are seeing more clouds accumulating on the horizon."  She cited trade tensions & rising global debts, which have hit a record $164T & noted that gov debt in advanced economies is at the highest level since World War II.  Lagarde's comments came at the start of spring meetings of the 189-nation IMF & its sister lending organization, the World Bank.  The 3 days of talks will also include discussions among the Group of 20 major economies, which account for more than 80% of global economic output.  The US is being represented by Treasury Sec Steve Mnuchin & Federal Reserve Chairman Jerome Powell.  The spring meetings are occurring as the global economy enjoys a broad-based rebound, with most regions recording growth, for the first time since the 2008 financial crisis sent the world into a deep recession.  But Lagarde said the expansion was vulnerable.  Stock prices are unusually high but have been battered recently over growing concerns about Pres Trump's aggressive America First trade policies.  The turbulence comes as the Federal Reserve ratchets up US interest rates from the record low levels where they had been in the decade after the financial crisis.  While the Fed has been raising rates at a gradual pace, Lagarde expressed concern about the consequences if the Fed had to accelerate the pace of its rate hikes.  A rapid succession of rate hikes could push down stock prices & potentially hurt developing countries that have come to rely on foreign investment, she said.  To guard against these risks, Lagarde called for countries to take advantage of the current good times to reduce their debt, giving them room to ramp to combat a downturn.  She called on all countries "to steer clear of all protectionism measures."  While Lagarde did not directly criticize Trump's hardball trade policies, she urged countries not to abandon & decades of intl cooperation that she credited with "helping to reduce poverty & deliver more progress for more people than at any time in history."

IMF's Lagarde: Trade tensions threaten global economy

Oil prices have skyrocketed since the end of 2016, reaching a 3½-year high this week & natural gas prices are at a 3-year high.  One of the more painful downturns for the domestic petroleum business is now turning into a distant memory.  After losses for a number of years, US oil producers may finally be able to reward their shareholders with positive returns as the country emerges victorious from a market share battle that the Middle East thought it would win.  The shale oil sector's resilience is thanks to technological advances & lower production costs that not only has set OPEC on its heels but could soon dethrone Russia as the world's largest oil producer.  According to the Intl Energy Agency (IEA), the US will overtake Russia to become the world's largest oil producer by 2023.  In the meantime, US companies should start to benefit from the recent surge in revenue.  Nearly 1/3 of the 25 top US shale oil producers have paid or promised to pay divs in 2018, the largest number since the shale boom kicked off about a decade ago.  While US oil companies' Q1 results, which will be released in the coming weeks, will provide the latest evidence on how the sector is performing with much higher oil prices, Q4-2017 augured well for the current turnaround.  And this was well before oil was knocking on $70 a barrel.  The oil price recovery has been driven by OPEC restraining output.  But, it took them a long time for the member countries to curb their oil output.  At first OPEC fought America's emerging dominance by overproducing & thus driving down the price of oil.  But with US producers more efficient than ever, & thus able to turn a profit even with low prices, the cartel's strategy failed.  The current oil boom appears to have staying power as oil price forecasts have been recently raised.  The North American crude oil benchmark, West Texas Intermediate, crossed above $69 per barrel yesterday, its highest price point since Dec, 2014.

'Boom time' for US oil, natural gas producers

Oil prices rose to their highest since the end of 2014 as US crude inventories declined & as top exporter Saudi Arabia pushes for higher prices by continuing to withhold supplies.  Brent crude oil futures rose over $74 a barrel, the highest since  late Nov 2014.  West Texas Intermediate (WTI) crude futures were up 38¢ (0.6%) at $68.85 a barrel.  OPEC & its partners in a supply reduction pact will meet tomorrow & then meet on Jun 22 to review its oil production policy.  OPEC & other major producers including Russia started to withhold output in 2017 to rein in oversupply that had depressed prices since 2014.  Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel,  a sign that Riyadh will seek no changes to the supply-cutting deal.  Since the start of the supply cuts, crude inventories have gradually declined from record levels towards long-term average levels.  In the US, the Energy Information Administration (EIA) said that commercial crude stocks fell by 1.1M barrels in the latest week to 427M barrels, close to the 5-year average level around 420M barrels.  Further supporting oil prices is an expectation that the US will re-introduce sanctions against Iran, OPEC's 3rd-largest producer, which could result in further supply reductions from the Middle East.

Oil near late-2014 highs as Saudi backs higher prices

US filings for unemployment benefits fell to a 3-week low, continuing a trend that indicates a tight labor market, Labor Dept figures showed.  Initial filings decreased 1K to 232K (est 230K).  Continuing claims fell by 15K to 1.863M in the latest week.  The 4-week average of initial claims, a less-volatile measure than the weekly figure, rose to 231K from the prior week's 230K.  A widespread shortage of qualified workers is prompting employers to retain staff, keeping claims near the lowest level in 45 years.  While the week-to-week numbers can be volatile, benefits applications below 300K are considered consistent with a healthy labor market.  The latest results may get extra scrutiny from economists because they cover the week including the 12th of the month, the Labor Dept's reference period for its monthly employment report.  Recent reports show the job market remains robust, with the unemployment rate staying near the lowest since late 2000, though worker pay has yet to develop a sustained acceleration.  The Federal Reserve's latest Beige Book said that while companies were struggling to fill open jobs, wage growth was modest.   Unemployment rate among people eligible for benefits held at 1.3% for a 7th week.

This was a profit-taking day for traders.  Stocks have had a good run in the last 2 weeks & this was not meant to last forever.  Today the Dow fell back into the red YTD, not a good sign for the coming days.  The stock market is a bit stronger than it has been in the last 3 months, but headwinds from trade negotiations are going to make it tough for the bulls to get back to the good old days when it seemed like "the sky was the limit."

Dow Jones Industrials

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