Thursday, May 31, 2018

Markets tumble after new US tariffs are announced

Dow dropped 251 (not far from the lows), decliners over advancers 3-2 but NAZ was off a modest 20.  The MLP index was steady in the 267s & the REIT index continued at 341.  Junk bond funds edged lower & Treasuries rose slightly, taking the yield on the 10 year Treasury down to 2.82%.  Oil remained weak, dropping 1+ to 67, & gold pulled back 2 to 1304, but holding above the support level of 1300.

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Fewer Americans signed contracts to buy homes in Apr, reflecting the dearth of properties being listed for sale right now.  The National Association of Realtors said that its pending home sales index fell 1.3% in Apr to 106.4, after rising for 2 consecutive months.  The index has drifted downward 2.1% from a year ago as the housing shortage has grown more intense.  The association reported previously that sales listings in Apr had declined 6.3% over the past 12 months.  A relatively robust job market has led more Americans look for homes.  But the housing shortage & rising mortgage rates over the past year are putting home ownership out of reach for an increasingly large number of people.  Home prices are rising at more than double the gains in average hourly earnings, meaning that many first-time buyers are being forced into lower down payments to afford a home.  The S&P CoreLogic Case-Shiller 20-city home price index released this week climbed 6.8% in Mar from a year earlier.  Pending sales over the past year have fallen in the Northeast, Midwest & West, a sign of those cost pressures.  But pending sales have risen 2.7% in the South where home prices are generally lower.  New construction has yet to alleviate the supply shortage.  Builders have said they, too, face price pressures from rising land values, a dearth of construction workers & higher costs for building materials, which could become more expensive given tariffs announced today on aluminum & steel.  The EU immediately said that it would impose countermeasures on trade & Mexico opened its defense with its own tariffs minutes after the announcement.

US pending home sales fell 1.3 percent in April

Oil production in the US could soar to 11M  barrels per day bpd by the end of 2018, especially if the Trump administration puts the necessary infrastructure – pipelines, refineries, export facilities – in place, according to Sec of the Interior Ryan Zinke.  “There’s no reason why we can’t produce over 11 barrels a day,” he said.  “If we have the infrastructure in place, my God, we could be at 14 million barrels a day.”  US crude output, which has shown no sign of slowing, has surged more than 27% in the past 2 years to 10.73M bpd, inching closer to Russia's 11M bpd.  Russia is the top oil producer in the world, followed by Saudi Arabia & the US.  Baker Hughes latest rig count showed US energy companies added 13 new oil rigs to production last week, increasing total drilling activity to its highest level since Mar 2015.  “That’s a lot of leverage overseas with Russia [and] Iran,” Zinke said.  “This is unheard of in the history of this country.”

US oil production could hit 11M barrels per day this year

Chinese factory activity grew at its fastest rate in 8 months on stronger demand, a survey showed, a positive sign for the world's #2 economy despite trade tensions with the US.  The official purchasing managers' index rose to 51.9 in May from 51.4 the previous month (readings above 50 indicate expansion, while lower numbers indicate contraction on the 100-point scale).  Production, new export orders & overall new orders all increased from the previous month, indicating an uptick in demand, the China Federation of Logistics & Purchasing's survey found.  "The pace of manufacturing expansion has accelerated and development momentum has been further strengthened," said the National Bureau of Statistics.  The latest figures show China's outsized export-manufacturing sector remains resilient despite continued tensions with the US over the trading relationship between the 2 economies.  Tensions had been ebbing until earlier this week, when Pres Trump's administration renewed its threat to slap $50B worth of tariffs on Chinese goods & said it would also limit US exports of high-tech goods to China.  It's part of US efforts to contain China's state-directed efforts to transform itself into a tech superpower.  But despite DC efforts, activity expanded in May, according to the survey's high-tech manufacturing sub-index, which rose in May to 54.8, up 1 point from the previous month.  The tariff threat came ahead of Commerce Dept Sec Wilbur Ross's visit to Beijing on Sat for further negotiations on economic & trade issues.  Activity in China's increasingly important services sector also expanded.  The group's non-manufacturing PMI rose to 54.9 for the month from 54.8 previously.  China's services industry is playing a bigger role as communist leaders upgrade economic growth, shifting it from a worn-out model based on wasteful trade & investment to one focused on domestic spending.

China factory activity rises to 8-month high in upbeat sign

Canada will retaliate against new US tariffs by imposing its own trade barriers on US steel, aluminum & other products, Canadian Foreign Minister Chrystia Freeland said.  Freeland said Canada plans to slap $-for-$ tariffs on the US.  The Nafta partner's proposed import taxes would also cover whiskey, orange juice & other food products alongside the steel & aluminum tariffs.  The retaliatory measures will cover CA$16.6B in imports, Freeland added.  The products being targeted will be subject to tariffs between 10% & 25%.  Canadian Prime Minister Justin Trudeau said that the tariffs  announced today are an affront to the security partnership between the US & Canada.  Ross said the tariffs will take effect at midnight tonight, when previously set exemptions for Canada, Mexico and the EU are set to expire.  The tariffs are "totally unacceptable," Trudeau said, though he noted that Canada will continue to negotiate with the US.  Trudeau warned that the Trump administration's soon-to-be-applied tariffs, of 25% on steel imports & 10% on aluminum imports, will harm both countries' economies.  Canada took umbrage with the US finding, outlined in a proclamation from Pres Trump, that "steel mill articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States."  Freeland said: "It is entirely inappropriate to view any trade with Canada as a threat to the United States' national security."  The EU condemned the US trade maneuver in similar tones.  Jean-Claude Juncker, pres of the European Commission, said the EU has no choice but to introduce countermeasures.  Mexico, too, said it would impose tariffs in response to US actions.

Canada announces retaliatory tariffs on steel and aluminum

The European Commission (EC) has angrily reacted to news that the US will impose steel & aluminum tariffs on Canada, Mexico & the EU.  Commerce Sec Wilbur Ross announced that tariffs of 25% on steel imports & 10% on aluminum imports will take effect from midnight.  The EC said: "The EU believes these unilateral U.S. tariffs are unjustified and at odds with World Trade Organization rules. This is protectionism, pure and simple."  EC Pres Jean-Claude Juncker said the EU was being hurt as much as the US by overcapacity in the steel sector.  He added that the US was "playing into the hands of those responsible for the problem" & that the EU now had no choice but to proceed with legal challenge via the World Trade Organization (WTO).  "We will defend the Union's interests, in full compliance with international trade law," said Juncker.  The UK added that it was "deeply disappointed" by the US decision.  "The U.K. and other European Union countries are close allies of the U.S. and should be permanently and fully exempted from the American measures on steel and aluminum," a UK gov spokesperson said.  Prior to the announcement, German Chancellor Angela Merkel said the tariffs would be incompatible with WTO rules & that Europe's response must be "smart and determined."  French Finance Minister Bruno Le Maire also said that Europe would take "all necessary measures" to respond.  The EU had previously said it would impose its own tariffs on US products such as motorcycles & jeans.  German Finance Minister Olaf Scholz said that the EU's response to the tariffs must be "clear, strong, and smart."  When asked if there were any signs that the trade dispute could be resolved, Scholz added:  "No, there are no such signs."

'Protectionism, pure and simple:' Europe promises WTO action over US tariffs

New applications for US unemployment benefits fell more than expected last week, but claims for several states were estimated.  Initial claims for state unemployment benefits dropped 13K to a seasonally adjusted 221K for the latest week, the Labor Dept said.  The forecast called for claims falling to 228K.  The Labor Dept said claims for numerous states were estimated last week because of the Memorial Day holiday.  The labor market is viewed as being close to or at full employment.  The jobless rate is near a 17-year low of 3.9%, within striking distance of the Federal Reserve's forecast of 3.8% by the end of this year.  The 4-week moving average of initial claims, viewed as a better measure of labor market trends as it irons out week-to-week volatility, rose 2K to 222K last week.  The claims report has no bearing on May's employment report, which is scheduled for release tomorrow which may show nonfarm payrolls increased 188K jobs after rising by 164K jobs in Apr.  Job growth is slowing, with employers struggling to find qualified workers.  The Federal Reserve's latest Beige Book report of anecdotal information on business activity collected from contacts nationwide showed labor market conditions remained tight across the country in late Apr & early May.  The Fed said contacts continued to report difficulty filling positions across skill levels.  There were notable shortages of truck drivers, sales personnel, carpenters, electricians, painters & information technology professionals.  The claims report also showed the number of people receiving benefits after an initial week of aid fell 16K to 1.72M & the 4-week moving average of continuing claims dropped 8K to 1.74K, the lowest level since 1973.

US weekly jobless claims fall more than expected

Stocks sank in the first hour & remained in the dumps for the rest of the trading session.  This has been a tough year for stocks after a substantial post election rally.  With new tariffs & retaliation coming, the prospects for stocks are gloomy.  The Dow is only about 400 above the important 24K support level & that could be tested soon.  The Dow was up about 250 this month & that was earned by May 4.  Since then, no net advance.

Dow Jones Industrials

Lower markets after US adds new tariffs on EU, Canada and Mexico

Dow sank 191, decliners over advancers 3-2 & NAZ went up 4.  The MLP index was about flat in the 267s & the REIT index jumped up 4+ to the 341s (not seen since the end of Jan).  Junk bond funds were little changed & Treasuries had tiny gains in prices.  Oil dropped 1+ to 67 & gold added 2 to 1309.

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CL=FCrude Oil67.30-0.91 -1.3%

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The White House announced that it would end a 2-month exemption for the EU, Canada & Mexico from the 25% steel & 10% aluminum import tariffs announced in Mar, once again pointing to national security concerns as a primary motivating factor.  Commerce Secretary Wilbur Ross said that slow progress on the NAFTA renegotiation is another reason why Canada & Mexico will now be subject to the import tariffs.  The tariffs will go into effect on the trio of countries at midnight.  The decision sparks new concerns of a trade war with 3 of the Americas's most important trading partners.  When asked about the possibility of escalating tensions, Ross said it would be up to the other countries to respond in kind to the decision.  He also said the administration is eager to stay at the negotiating table with all 3 countries.  3 other countries that were exempted from the initial tariff implementation – Argentina, Australia & Brazil – will be subject to arranged limitations on the volumes of steel & aluminum they can ship, instead of facing the import levies.  Meanwhile, the commerce secretary said he plans to go to China for trade talks tomorrow, another country with which the US has developed an extremely tense relationship over trade differences.

EU, Canada, Mexico exemptions from US tariffs removed

US consumer spending increased more than expected in Apr, a further sign that economic growth was regaining momentum early in Q2, while inflation continued to rise steadily.  The Commerce Dept said that consumer spending, which accounts for more than 2/3 of US economic activity, jumped 0.6% last month, the biggest gain in 5 months.  Data for March was revised up to show spending rising 0.5% instead of the previously reported 0.4% increase.  The forecast called for consumer spending advancing 0.4%.  Spending was boosted by purchases of gasoline & other energy products.  Nondurable goods purchases increased 0.9% & outlays on services rose 0.5%, lifted by demand for household utilities.  Prices continued to gradually rise.  The personal consumption expenditures (PCE) price index excluding the volatile food & energy components increased 0.2% for the 3rd straight month.  That left the year-on-year increase in the core PCE price index at 1.8%.  The core PCE index is the Federal Reserve's preferred inflation measure.  The central bank has a 2% inflation target.  Economists expect the annual core PCE price index will breach the Fed's target in the coming months.  The Fed is expected to raise interest rates next month.  It increased borrowing costs in Mar & has forecast at least 2 more rate hikes for this year.  Moderate inflation also helped support consumer spending last month.  When adjusted for inflation, consumer& spending rose 0.4% in Apr after increasing 0.5% in the prior month.  That suggests an acceleration in consumer spending after it grew at a 1.0% annualized rate in Q1, the slowest pace in nearly 5 years.  The solid consumer spending added to data on trade & industrial production that have left economists anticipating a pickup in economic growth in Q2.  Gross domestic product estimates for Q2 are above a 3.0% rate after growing at a 2.2% pace Q1.  In Apr, personal income rose 0.3% after rising 0.2% in Mar.  Wages increased 0.4%.  Savings fell to $419.6B last month from $445.7B in Mar & the saving rate dropped to 2.8% from 3.0% in Mar.

US consumer spending records biggest gain in five months

China's gov said it reserves the right to retaliate if DC goes ahead with proposed investment controls Beijing said violate global trade rules.  The Commerce Ministry's comment came as the 2 sides prepared for weekend talks in Beijing on American complaints about China's trade surplus & Beijing's promise to buy more American goods.  The White House announced plans this week to restrict Chinese investment in the US & purchases of high-tech goods.  It renewed threats to impose 25% tariffs on $50B of Chinese goods in response to complaints Beijing steals or pressures foreign companies to hand over technology.  Such curbs would violate the "rules and basic spirit" of the World Trade Organization, said a Commerce Ministry spokesman.  "The Chinese side will carefully evaluate the U.S. measures and reserves the right to take corresponding measures," he said at a regular briefing.  Meanwhile, the ministry said a team of more than 50 American officials was meeting with Chinese officials to prepare for the talks due to start Sat involving Commerce Secretary Wilbur Ross.

China reserves right to retaliate for US investment curbs

Trade tensions are rising, making traders nervous.  Talks have just begun in recent weeks & many more will be needed to resolve all the issues.  The Dow is back under 24.5K & the outlook is gloomy.  Testing 24K may be the next major test for the Dow.

Dow Jones Industrials