Tuesday, May 15, 2018

Markets drop on trade worries and rising interest rates

Dow slumped 193 (not too far off the lows), decliners over advancers  more than 2-1 & NAZ dropped 59.  The MLP index fell fractionally to the 263s & the REIT index dropped 2+ to 335.  Junk bond funds declined & Treasuries pulled back again, taking the yield on the 10 year Treasury to 3.08%.  Oil remained over 71 & gold dropped 26 to 1291, the lowest settlement this year.

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US homebuilders are feeling more confident about their sales prospects, reflecting strong demand for newly built homes with existing homes in short supply.  The National Association of Home Builders/Wells Fargo builder sentiment index rose 2 points to 70 this month, up from a revised reading of 68 in Apr.  That ends a 4-month slide for builders.  Any reading above 50 indicates more builders see sales conditions as good rather than poor.  The index has remained above 60 since Sep 2016.  May's index exceeded expectations for a reading of 69.  Builders' view of current sales conditions rose 2 points to 76 this month & the outlook for sales over the next 6 months held at 77.  A measure of buyer traffic held steady at 51.

Builder optimisms bounces in May after 4 month slide

US business inventories saw no improvement in Mar, falling short of predictions.  The Commerce Dept's measure of business production remained flat in Mar at $1,929B.  It was expected to gain 0.1%.  Inventories were up 3.8% from the prior year.  The key technical indicator, based on data from 3 trade & manufacturing surveys, rose 0.6% in Feb.  The ratio of inventories to sales in Mar was 1.34, short of the 1.38 ratio from the prior year.  The Manufacturing & Trade Inventories & Sales survey adds up the value of trade sales & manufacturers' shipments.  The measure helps track & make predictions about near-term business production activity.

Business inventories fall flat of expectations

Chief White House economic advisor Larry Kudlow believes the US & China can avoid a trade war despite a multitude of issues continuing to split the 2 nations.  As one of the administration's most ardent free trade supporters, Kudlow has been pushing for an agreement that can eschew heavy tariffs that the financial markets have been fearing.  However, he said China has a long way to go before a deal can be reached.  "China has got to reform its system," Kudlow, head of the National Economic Council, said.  "They've been breaking  [World Trade Organization] rules for years on this stuff.  They've been behaving like a third-world country."  One of the pillars for his hopes rests on the relationship between Pres Trump & China's Xi Jinpin.  "I think there's a little bit of a bromance between Pres Trump and president for life Xi," Kudlow said.  "Where this leads I don't know. It might even lead to a trade deal, which would make me very happy."  Kudlow also addressed a related issue — the controversy over Chinese telecom company ZTE, which itself has run afoul of global regulations on multiple occasions.  Trump tweeted over the weekend that he & Xi have been working on giving a break to ZTE from US sanctions.  However, Kudlow said the ZTE situation is independent of the broader negotiations with China, calling it "principally an enforcement issue. It's divorced from the trade story."  He added there are "gradations" involved in the ZTE case in which the US is trying to find a way to keep the company, which is a major employer, in business.

Kudlow: Trump-Xi 'bromance' could lead to a China trade deal

The neutral level of short-term interest rates that is neither boosting nor retarding the US economy is 2.5%, said San Francisco Fed Pres John Williams.  After the last rate hike in Mar, the federal funds rate is below neutral, in a range of 1.5-1.75%, meaning it is still boosting growth.  In a speech, Williams said he supports the Fed's target of 3 or 4 rate hikes this year with further gradual increases over the next 2 years.  "I view this to be the right direction for monetary policy," he said.  While the neutral rate is not fixed, Williams said he didn't see it moving much higher, even with the forecast of a healthy economy over the next few years.  The neutral rate is affected by global economic conditions, not just those in the US, he added.  Williams, a voting member of the Fed policy committee, is moving to take over the influential NY Fed pres post next month.

Fed's Williams defines neutral short-term interest rate as 2.5%

Dallas Federal Reserve Bank Pres Robert Kaplan said he wasn't concerned with the rise in the yield on the 10-year Treasury note which pushed further above 3% to its highest level since 2011.  Kaplan said he was "very carefully watching the shape of the curve because...I for one do not want to in the future to knowingly create an inverted yield curve."  Kaplan, who isn't a voter this year on the  rate-setting Federal Open Market Committee, added that "to the extent the curve gets a little steeper, that gives the Fed a little more operating room."  The yield curve, as measured by the spread between 2-year & 10-year yields, steepened today, with the 10-year yield rising 6.7 basis points to 3.056%, while the 2-year yield rose 3.3 basis points to 2.577%.  In his earlier remarks, Kaplan said the Fed should continue to raise rates but didn't offer a view on how many more increases it should deliver in 2018.

Dallas Fed's Kaplan: More concerned with shape of curve than 10-year yield

Kellogg's (K) announced that it will end its operations in Venezuela, citing “economic and social deterioration” in the country.  “In December of 2016, Kellogg deconsolidated its Venezuela business from the company’s results,” Kellogg's statement read.  “The current economic and social deterioration in the country has now prompted the company to discontinue operations.”  The maker of Frosted Flakes & Rice Krispies did not specify what led it to pull out of Venezuela, but said none of its products should be commercialized there without its permission.  While the move is not expected to worsen food shortages in the country, Kellogg's is the most popular & easily accessible cereal for citizens in the country.  Kellogg's is the most recent company to pull out of Venezuela.  Social & economic upheaval have made operating in the country difficult for foreign companies.  Venezuela is undergoing a multiyear recession even though it sits on one of the largest oil reserves in the world. Inflation accelerated to over 2600% in 2017.  Last year, GDP shrank more than 13%, as reported by the opposition-led party.  The stock fell 40¢.
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Kellogg’s exits Venezuela over social ‘deterioration’

Good times have to come to an end & today sellers returned to the market.  Trade negotiations are stumbling along, as expected.  These talks will take time, maybe weeks or even months because the issues are complicated.  Then there was the spike up in interest rates, hardly a surprise.  Interest rates will continue to rise, raising borrowing costs for just about everybody.  Additionally higher oil prices will be working their way thru to gas pumps, squeezing consumers spending.  Dow began the day down around 200 & remained in the dumps all day.  Market rally days have become a distant memory.  The May advance for the Dow has been reduced to 500.

Dow Jones Industrials

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