Friday, August 24, 2018

Markets rise after comments by Fed officials

Dow shot up 133, advancers over decliners 2-1 & NAZ went up 68.  The MLP index was slightly higher to the 289s & the REIT index slid fractionally lower to the 358s.  Junk bond funds crawled higher & Treasuries were off a tad.  Oil rose to the 68s for its first weekly gain in 7 weeks (more below) & gold finally soared, up 17 to 1211.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Federal Reserve Chairman Jerome Powell said in his keynote speech at the annual gathering of global central bankers in Jackson Hole, Wyoming ,that he anticipates the central bank will continue on its current path of gradually raising interest rates, despite pressure from Pres Trump to do otherwise.  In his highly anticipated address on the heels of a record-setting stock market week, Powell noted that while the US economy is strong, the Fed is working to find a balance between the “shoals of overheating and premature tightening.”  "I see the current path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks," Powell said.  “While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating,” Powell added.  “This is good news, and we believe that this good news results in part from the ongoing normalization process.”  Policymakers at the central bank have already voted to hike the benchmark federal funds rate twice this year & are expected to do so twice more in 2018, bringing the yearly total to 4.  Officials previously indicated that 3 rate hikes would come this year.  Ahough he did not directly address the geopolitical turmoil, Powell did say that if strong growth in income & jobs continues, further gradual increases for the federal funds rate will “likely be appropriate.”  “My colleagues and I are carefully monitoring incoming data,” he said.  “And we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.”

Fed chair Jerome Powell says more rate hikes likely

Agricultural producers are encouraged by reports the US & Mexico are closer to an informal NAFTA deal, but some remain wary of celebrating until a final pact is struck that also includes Canada.  The US & Mexico achieved progress in bilateral trade talks over the past several weeks but issues remain on rules for auto production.  One agricultural issue that appears to have gone away in the North American Free Trade Agreement renegotiations is the US demand for certain restrictions on seasonal exports from Mexico.  "The idea is to do our best to finish this agreement as soon as possible," Mexico's Economy Minister Ildefonso Guajardo said as he prepared for talks with US Trade Representative Robert Lighthizer in DC.  Any "handshake" deal to overhaul NAFTA must involve Canada, Guajardo told reporters.  Reports suggest Canada could re-enter NAFTA talks within days, but thorny issues such as Canadian dairy policies remain outstanding.  The administration claims Canada's protectionist policies have essentially shut out US dairy producers in unfiltered milk, which is used to make cheese, yogurt & ice cream.  In Apr 2017, Pres Trump called the Canadian action "a disgrace."  Mexico ranks as the 3rd largest agricultural export market for the US.  Mexico & Canada together represent nearly 1/3 of total US agricultural exports (about $40B last year).  Indeed, Mexico is the largest colume  market for US pork products & 2nd in $ value to Japan as well as a major destination for American dairy products, especially cheeses.  In 2017, Mexico bought more than $1.3B worth of dairy products from the US as well as about $1.5B in pork products, according to the USDA.  Corn exports to Mexico totaled $2.6B last year & beef shipments reached nearly $1B.  "When the ink's on the paper, that's when I'll be ready to celebrate," said Brian Duncan, VP of the Illinois Farm Bureau.   "We're happy to see this as an intermediate step, if there's a 'handshake' deal, but there's still issues that might need to be worked through."  Meantime, the push for restrictions on certain Mexican agricultural exports appears to have been dropped by the US trade negotiators.  They involved seasonal & perishable produce trade remedies sought by certain seasonal crop producers in the southeastern US.  For more than a year, lawmakers from Florida & Georgia have urged the Trump administration to insist on these anti-dumping policies as part of the NAFTA overhaul.  Florida grower groups have been the most vocal, complaining that Mexico is essentially subsidizing its domestic fresh tomato industry at the expense of US farmers by "dumping" fresh produce into the US market at prices below the cost of production.  "We continue to stress to the administration that the specialty crop sectors in Florida and the Southeast can't survive without fair trade recourse against Mexico's unfair dumping and subsidy practices," said a spokesperson for the Florida Fruit & Vegetable Association.  Western US growers, though, have largely opposed the anti-dumping provisions because they feared the change could make them vulnerable in seasonal trade with Mexico or Canada, such as shipping apples.  An outstanding issue that remains unresolved in the NAFTA talks is the Trump administration's insistence on a sunset clause in the updated trade pact that would essentially cause the agreement to expire every 5 years unless renewed by the 3 countries.  Canada has opposed such provisions by warning it could chill long-term investment by adding uncertainty to the pact, which originally took effect in 1994.

Farmers cautiously optimistic about progress in NAFTA talks but not ready to celebrate

Oil prices rose, but pared gains ahead of the close, as the market remained on edge about potential oversupply despite signs that Iran sanctions could curb output.  West Texas Intermediate crude rose 89¢ (1.3%) to $68.72.   For the week, WTI gained 4.3%, snapping a 7-week losing streak.  Benchmark Brent crude oil was up $1.02 (1.4%) at $75.75 a barrel.  Brent had a gain of more than 5% this week, following 3 consecutive weekly losses.  Concerns that an escalating trade war between China & the US could slow economic growth & weigh on crude purchases eased slightly after sources said that China's Unipec will resume purchases of US crude oil in Oct, after a 2-month halt due to the fight.  Worries that Mexico's incoming administration would not strike a bilateral agreement over NAFTA with the US also weighed on the market.  A dispute over opening up the oil & gas sector is weighing on the talks.  At the same time, concerns about global crude supply intensified with signs that US sanctions on Iran are curbing shipments.  The US gov re-imposed sanctions on Iran this month after withdrawing from a 2015 intl nuclear deal, which the US saw as inadequate for curbing Tehran's activities in the Middle East & denying it the means to make an atomic bomb.  Tehran says it has no ambitions to make such a bomb.  Iran is the 3rd-biggest producer in OPEC supplying around 2.5M barrels per day (bpd) of crude & condensate to markets this year, equivalent to about 2.5% of global consumption.  US energy companies cut 9 oil drilling rigs this week, the biggest reduction since May 2016.  Changes in the rig count serves as an indicator of future production trends.  Traders kept an eye on the North Sea, where workers on 3 oil & gas platforms plan to strike next month.  Oil production will stop during the strikes.  The 3 fields contribute about 45-50K bpd to the North Sea's Forties & Brent crude streams.

US crude rises 1.3%, settling at $68.72 and snapping 7-week losing streak

After hovering near record a high all month, the S&P 500 finally reached a new high today as did the NAZ.  However, the Dow still needs another 800 for a new record.  Friendly comments from Fed officials were welcomed by investors.  Additionally, getting closer to a new trade deal with Canada & Mexico helped.  The chart below for the Dow looks pretty & the bulls will attempt to push it into record territory next week (traditionally a slow time for stocks).  Despite all the commotion in DC, investors remain optimistic.

Dow Jones Industrials

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