Wednesday, May 16, 2018

Markets rise despite North Korea uncertainties

Dow gained 62, advancers over decliners about 2-1 & NAZ went up 46,  The MLP index rose 1+ to the 265s & the REIT index continued lower.  Junk bond funds were mixed & Treasuries declined, taking the yield on the 10 year Treasury up to 3.10% (more below).  Oil inched higher in the 71s & gold added 1 to 1291.

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US manufacturers are hiring more workers, boosting wages & increasing domestic investments following the passage of the Tax Cuts & Jobs Act.  72% of manufacturers are ramping up workers' wages & benefits, according to a new survey from the National Association of Manufacturers (NAM).  Meanwhile, 77% of survey respondents said they were hiring more workers, while 86% are investing more in plants & equipment.  “Manufacturing in America is now rising to new heights, thanks to tax reform, and as a result, manufacturers of all sizes are already investing more, growing more, hiring more and paying more. They are already improving lives and livelihoods,” NAM Board Chair David Farr said.  Meanwhile, optimism among manufacturers remains near all-time highs.  More than 93% of manufacturers have a positive outlook on their company's prospects in the US economy, the 2nd-highest level ever recorded by the National Association of Manufacturers, its most recent quarterly survey revealed.  Wage growth among those manufacturers surveyed last month also rose at the fastest pace in 17 years, despite remaining sluggish in the broader US economy.  Manufacturers expected full-time employment to increase by 2.9% on average over the next year, an all-time high by the standards.

Tax reform has led to US manufacturers hiring, paying more: survey

US factory output rose in Apr, although new estimates of manufacturing & overall industrial production showed less growth in prior months than initially believed, casting a shadow over the economic outlook.  Manufacturing output rose 0.5% last month, the Federal Reserve said in a report on output across the industrial sector, which comprises manufacturing, mining, & electric & gas utilities.  The forecast called for a 0.5% rise in manufacturing.  But the Fed's new estimates of factory output in prior months showed output was slightly lower than previously believed in each month between Nov & Mar.  Overall industrial output expanded 0.7% in Apr & estimates of output in 3 of the previous 4 months were also lowered, including a sharply reduced estimate for Feb.  A 2.3% increase in machinery production bolstered the overall gain in factory output, although a drop in production of primary metals & fabricated metal products weighed on the sector.  The report follows a survey of factory managers published earlier this month that showed a slowdown in factory activity, with manufacturers complaining about rising commodity prices in the wake of the administration's tariffs on steel & aluminum imports.  A recent Fed report based on comments of the central bank's business contacts across the country showed rising concern about the tariffs, although Fed Chairman Jerome Powell said last month it was too early to know how they would affect the economic outlook.  The utilities index jumped 1.9% last month.  In the 12 months thru Apr overall industrial output rose 3.5%.  The percentage of industrial capacity in use rose 0.4 percentage point in Apr to 78.0%.  Fed officials look to capacity use as a signal for how much further the economy can accelerate before sparking higher inflation.

US manufacturing output rises, while past months were revised lower

Potential oil supply disruptions in Iran & Venezuela have prompted oil traders to focus on geopolitics rather than fundamentals, the International Energy Agency (IEA) said in its latest monthly report, warning that any supply cuts could prompt prices to rocket.  "The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality," the organization said.  Pres Trump's decision to withdraw the US from the Iran nuclear deal just over a week ago, & the expected re-imposition of sanctions on the country, coupled with political & economic disorder in recession-hit Venezuela has cast the supply of Iran & the Latin American country into doubt.  The IEA said that "the stability of the market" could be at stake.  "If there is a large shortfall in Iranian exports then clearly that will have an impact on a market that is already quite tight," it added.  "And it's not beyond the realms of possibility that by the end of 2018, production in Venezuela could be several hundred thousand barrels lower than in its today. If that shortfall there coincides with a large shortfall in Iranian exports as the sanctions are implemented that potentially poses a challenge."  It's yet uncertain how much of Iran's supply could be affected under new US sanctions which have yet to be detailed.  The IEA noted that the last time sanctions were imposed in 2012 until 2015, production from the world's 5th-largest producer fell by about 1.2M barrels a day (Mb/d) "but only time will tell the extent of the disruption this time round."  "In these early days, there is understandable uncertainty about its potential impact on Iran's oil exports, which are currently about 2.4 mb/d," the IEA noted.  The IEA emphasized that customers for Iranian oil have 180 days to adjust their purchasing strategies & make other arrangements "if that's what they decide to do."  "We can't be sure how much lower Iranian exports will be ... We just don't know, we'll just have to see how the U.S. implementation of the decision plays out over the next few months," it added.  In the May report, OPEC (of which Iran is a member) put Iran's daily production at 3.82M barrels a day, making it the 3rd largest OPEC producer & potentially making any supply loss a challenge.  In Venezuela, meanwhile, the IEA noted that "the pace of decline of oil production is accelerating and by the end of this year output could have fallen by several hundred thousand barrels a day."  In Apr, Venezuela's crude oil output sunk to 1.42 Mb/d, the lowest level since the early 1950s.  Describing Venezuela as being in "freefall," the IEA said its production collapse was significant.

Iran and Venezuela are 'a major challenge' to avoiding oil price hikes, IEA warns

Prices for US benchmark oil futures settled a bit higher, giving up their losses in the last ½ hour of trading.  The Energy Information Administration reported a 2nd straight weekly decline in US crude supplies, easing concerns over expectations for further gains in US production.  Traders also weighed a mixture of price supportive & non-supportive news from the International Energy Agency, which lowered its forecast of oil demand growth this year, but also said that commercial oil inventories from industrialized nations fell in Mar to their lowest level in 3 years.  Jun West Texas Intermediate crude  rose 18¢ (0.3%) to settle at $71.49 a barrel, rebounding from an intraday low of $70.66.

U.S. oil benchmark erases earlier losses to finish higher

Buyers returned to take the stock market higher.  Their reasoning is not clear.  Talks with North Korea are uncertain.  In addition, intl trade talks are dragging on.  Treasury yields keep climbing.  Macro economic data continues to be good, but higher gas prices have the potential to crimp consumer spending (2/3 of the economy).  The Dow is still about even YTD.

Dow Jones Industrials

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