Wednesday, June 13, 2018

Markets settle lower after a rate hike & indications of 2 more in 2018

Dow finished down 119 (session lows), decliners over advancers 2-1 & NAZ lost 8.  The MLP index gave back 4+ to the 269s & the REIT index sank 7 to 340 on the prospects of higher interest rates.  Junk bond fund prices did little & Treasuries were sold, taking the 10 year yield up 2 basis points to 2.98%.  Oil rose pennies in the 66s (more below) & gold added 3 to 1303.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

The Federal Reserve hiked its benchmark short-term interest rate a qtr percentage point & indicated that 2 more increases are likely this year.  The move pushes the funds rate target to 1.75-2%.  The rate is closely tied to consumer debt, particularly credit cards, home equity lines of credit & other adjustable-rate instruments.  In an unusually terse statement that ran just 320 words, the FOMC changed multiple phrases from its previous missives, pointing to a more optimistic view on economic growth & higher inflation expectations.  Though the statement contained less than ½ the words of some of the the previous typical communiques, there was a lot to unpack in the language.  The committee said economic growth has been "rising at a solid rate," an upgrade from "moderate" in May.  The unemployment rate has "declined," as opposed to "stayed low," & household spending "has picked up," an upgrade from "moderated."  With that in mind, the committee said 2 more rate hikes were appropriate, bringing the 2018 total to 4 increases. Its first hike this year was in Mar.  "The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term," the statement said.  That sentence itself featured multiple instances of more hawkish language.  The committee previously had characterized rate hikes as "gradual adjustments" rather than "increases," & the "sustained expansion" portion was completely new.  However, the statement twice retained language that the Fed had a "symmetric" 2% inflation target, indicating a tendency to let price pressures run a little hot before putting the clamps on growth.  With the 0.25 percentage point increase already priced in, financial markets were looking for how aggressive the FOMC would be in setting monetary policy for the rest of the year.  Markets had been waffling over expectations for a 4th rate hike this year, the FOMC also increased the funds rate target in Mar, & prior to the meeting were pricing in a 46.5% chance.  The latest projections from committee members indicate the funds rate to rise to 2.4% by the end of the year, a 0.3 percentage point increase from the Mar forecast.  Stocks edged lower after the FOMC release while gov bond yields nudged higher.  Committee members indicated in the update to their quarterly economic forecast that they expected core inflation to reach the Fed's 2% target by the end of the year & now see economic growth hitting 2.8% for the full year.

Fed hikes rates, points to two more increases by year's end

The White House opposes a Senate proposal to block Pres Trump's deal to revive Chinese telecommunications company ZTE.  The Trump administration is working with Senate leaders to change language included in a defense authorization bill the chamber is set to pass this week, White House legislative affairs director Marc Short said.  The House has already passed a separate defense bill without the ZTE language.  The administration prefers that legislation, according to Short.  The White House could push for the revision later in the legislative process when the 2 chambers try to reconcile their proposals.  "The president believes that China has been instrumental in helping us to get to this point on North Korea," he said.  The effort to revise the language sets up another possible disagreement between Trump & Senate Reps supporting one of the party's few efforts to check the pres.  Sen Bob Corker, already expressed frustration this week after his party blocked him from advancing a measure to check Trump's ability to impose tariffs on imports.  A ban on buying US made parts, prompted by ZTE selling equipment to Iran & North Korea in violation of American sanctions, threatened the company's survival.  Trump then decided to help ZTE, saying he did so as a personal favor to Chinese Pres Xi Junping.  Under the deal with the Commerce Dept, ZTE has agreed to pay a $1B fine & change its leadership, among other provisions.  The US has not officially lifted the ban yet. ZTE wants to resume operations as soon as possible.  The deal give the US "complete oversight" of ZTE's activity "without undue harm to American suppliers and their workers," the White House said, adding that the Trump administration will work with Congress to make sure the final defense bill "respects the separation of powers."  Senators included the language to stop the ZTE deal in a widely supported defense bill which is expected to pass this week.  The ZTE provision has drawn bipartisan support from lawmakers, who have warned that helping Chinese company carries national security risks.

White House opposes Senate measure to block Trump's deal to save China's ZTE

Pres Trump is still angry at Justin Trudeau for a perceived slight during a speech by the Canadian Prime Minister following the G-7 meeting.  Trump explained the situation Tuesday when asked about the G-7 gathering at a press conference in Singapore following his summit with North Korean leader Kim Jong Un & his comments dashed hopes that Trump had moved on from what he believed to be was a "dishonest" action by Trudeau.  The ire directed at the prime minister by Trump & his advisors had confused some trade observers since the comments seemed to be just a reiteration of what the prime minister had said previously & not a personal insult.  Trudeau said after the G-7 meeting that the aluminum & steel tariffs imposed by the US & Canada on national security grounds were insulting & that "Canadians are polite, we're reasonable, but we also will not be pushed around."  Trump then tweeted Sat evening, "PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, 'US Tariffs were kind of insulting' and he 'will not be pushed around.' Very dishonest & weak."  The pres also withdrew US support for a G-7 communique.  The pres's staff then blasted Trudeau on Sun with economic advisor Larry Kudlow accusing Canada of stabbing the US in the back.  Trade adviser Peter Navarro said, "There's a special place in hell for any foreign leader that engages in bad-faith diplomacy with President Donald J. Trump and then tries to stab him in the back on the way out the door."  "We are being taken advantage of by virtually every one of those countries," Trump said yesterday of the G-7.  It's unclear what additional action the US would take against Canada.  The US at the end of May imposed tariffs of 25% on steel imports & 10% on aluminum imports against Canada, Mexico & the EU.  The US & Canada are in the middle of renegotiating the North American Free Trade Agreement along with Mexico.  The US had a trade surplus with Canada of $8.4B  last year, according to the office of US Trade Representative (USTR).  That figure adjusts to a $17.5B trade deficit when services are excluded, according to the USTR.

Trump says Trudeau's comments are going to cost Canada 'a lot of money'

Oil futures posted a gain for a 3rd straight session, settling at a nearly 2-week high, as US crude supplies fell more than expected last week.  Jul West Texas Intermediate crude added 28¢ (0.4%) to settle at $66.64 a barrel, the highest settlement since May 31.

U.S. oil prices settle at a nearly two-week high

Stocks dropped after the rate hike announcement, but buyers returned to limit losses.  However, sellers came back in the last hour, taking the Dow lower by the end of the day.  Even the red hot tech sector shown by the NAZ headed south in the last hour.  REITs have been doing well in recent weeks but declined on prospects of higher interest rates in the future.  Very interesting that fewer words in the statement seemed to give more information than in the past.  Excitement over the rate hikes will diminish in the coming days.  More attention will be paid to trade talks which continue to stumble (as was expected).  The Dow & NAZ saw selling to session lows at the close, always disturbing for the bulls.

Dow Jones Industrials

No comments: