Markets slip lower on worries about another fed rate hike and trade talks

Dow reversed direction & fell 81, decliners over advancers about 2-1 & NAZ went up 35.  The MLP index added 1+ to 280 & the REIT index went up 2+ to the 356s.  Junk bond funds were little changed & Treasuries drifted lower, taking the yield on the 10 year Treasury up to 3% (more below).  Oil dropped 1 to the 67s (more below) & gold retreated 7 to 1226 (near 1 year lows).

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The Federal Reserve kept short-term interest rates unchanged, adding that US economic growth has been strong.  “Economic activity has been rising at a strong rate,” the central bank said following its 2-day policy meeting.  Inflation remained near an internal 2% target, according to the Fed.  Officials maintained the Fed's benchmark federal funds rate of 1.75-2%.  The Fed is expected to raise rates for a 3rd time this year in Sep as Fed policy makers have telegraphed a total of 4 rate hikes in 2018.

Fed keeps interest rates unchanged, says US economy 'strong'

Economic growth is still slowing in 9 Midwestern & Plains states amid trade & tariff disputes, according to a monthly survey report released today.  The Mid-America Business Conditions Index declined to 57.0 in Jul, from 61.8 in Jun & 67.3 in May.  It's still the 20th straight month that the index remained above 50.  Any score above 50 suggests growth.  "The regional economy continues to expand at a healthy pace, with manufacturing growth of approximately 2.6 percent over the past 12 months, compared to a lower 2.3 percent for the U.S.," said Creighton University economist Ernie Goss, who oversees the survey.  "However, I expect expanding tariffs, trade restrictions and rising short-term interest rates from a more aggressive Federal Reserve to slow growth to a more modest but still positive pace."  The results from the survey of business supply managers are compiled into a collection of indices ranging from zero to 100.  The survey covers Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma & South Dakota.  The slowdown is reflected in the Jul employment index, which dropped to 58.9 from 61.9 Jun.  "Overall employment growth in the region over the past 12 months has been healthy but expanding at a rate below that of the nation," Goss said.  "On the other hand, manufacturing job growth has been stronger in the region than the rest of the U.S."  Almost 2/3 of the supply managers who responded said the tariffs & trade restrictions have harmed or will harm their companies.  Nevertheless, the economic optimism index hit 63.9 last month, compared with 59.8 in Jun.  "Despite trade tensions and skirmishes, healthy profit growth, still low interest rates, and lower tax rates, supported robust business confidence," Goss added.

Report: Midwest's economy still growing, but at slower pace

The long list of housing headwinds is finally taking its toll on potential buyers.  Housing demand fell 9.6% in Jun, compared with Jun 2017, according to a monthly index from Redfin.  That is the largest decline in more than 2 years.  Red-hot home prices, rising mortgage interest rates, very few listings at the entry level & a high rate of student loan debt have weighed on buyers for a while, but a strong economy & growing employment had mitigated those factors.  Now, however, a market stalemate is developing as rates & prices continue to rise, further weakening affordability.  As a result, the number of people requesting home tours fell 6.1% annually in Jun, according to Redfin's index, which is seasonally adjusted & covers 15 large metropolitan housing markets.  There were 15% fewer offers made on homes as well.  The supply of homes for sale increased very slightly nationally in Jun, according to the National Association of Realtors, but in Redfin's major market index, the total number of homes for sale was 3.8% lower than a year ago & there were 1.6% fewer new listings.  While supply declined overall, Redfin noted a large rise in listings in some of the most supply starved markets, which is where home prices have overheated most.  Those include Seattle & Washington DC, which both saw double-digit increases in the number of homes for sale in Jun.   Demand in both of those markets, however, fell.

Housing demand sees biggest drop in more than 2 years

Economic growth is expected to continue at a rapid pace in Q3, according to a preliminary forecast from the Atlanta Fed.  The central bank district estimates that GDP will increase at a 5% rate in Q3, according to an update posted today.  If the forecast is accurate, it will come on top of a strong 4.1% Q2 that was buoyed by a jump in consumer & business spending.  Pres Trump boasted Fri that growth would go "a lot higher" even though many economists, including at the Fed, expect the economy to moderate in 2019 & beyond.  The Atlanta Fed's GDP Now forecast, however, has its skeptics.  The tracker often starts off optimistic early in the qtr then cools as more data flow in.  In Q1, the indicator at one point showed 5.4% growth in a qtr where GDP rose just 2.2%.  The model has proven to be particularly sensitive to the ISM manufacturing report, which came out today.  Though the Jul reading of 58.1 was below expectations of 59.5, the Atlanta Fed said the internal numbers showed that real consumer spending & real private fixed investment accelerated enough to warrant expectations that overall growth would be higher as well.  Prior to the report, GDP Now had been indicating growth of 4.7%.

Atlanta Fed predicts 5% jump in economic growth for third quarter

The yield on the benchmark 10-year Treasury note hit 3% today after data showed private payrolls increased more than expected last month.  It was the first time since Jun the yield was at the 3% mark as investors renewed bets on a stronger economy & higher inflation.  The 10-year yield is a benchmark for mortgage & auto lending rates.  The Federal Reserve's policymaking arm improved its rating of the US economy, but elected to forgo another interest rate hike in Aug.  As widely anticipated, the Federal Open Market Committee voted unanimously to keep the target range for its benchmark rate at 1.75-2%.  The statement said the labor market has "continued to strengthen."  However, the committee went on to note that "economic activity has been rising at a strong rate," a more bullish view than the Jun characterization of "solid" growth.

US 10-year Treasury yield hits 3% for first time since June after strong payrolls data

Oil prices fell as a surprise increase in US crude stockpiles & growing OPEC production fed worries that global supplies could swell, while investors continued to worry that trade tensions could hit energy demand.  US crude ended the session down $1.10 (1.6%) at $67.66, adding to the previous day's 2% loss.  Brent crude, the global benchmark, dropped $1.87 (2.5%) to $72.34 a barrel.  US commercial crude inventories rose 3.8M barrels in the latest week, the Energy Information Administration (EIA) reported.  The forecast had expected a decrease of 2.8M barrels.  The jump in the crude stocks was largely due to a buildup in inventories in the Gulf Coast, as shipments from the export hub fell 50% from the previous week.  The increase could prove temporary.  The report also showed gasoline stocks fell by 2.5M barrels, compared with expectations for a 1.3M -barrel drop.  Distillate stockpiles, which include diesel & heating oil, rose by 3M barrels, versus expectations for a 264K-barrel increase, EIA data showed.  Oil prices are also being pressured by concern that global trade tensions could crimp economic growth.  Last month, Brent fell more than 6% & US crude slumped about 7%, the biggest monthly declines for both benchmarks in 2 years.

Oil prices fall surprise jump in US crude stockpiles, trade tensions

The Fed worried traders with the use of the word "strong" several times in its statement.  They took that as a signal of another rate hike (although 2 more have already been baked into their thinking).  The Dow pulled back into the red in the PM, but there was some lat day buying that reduced losses.  The Dow is coming off a very strong month & remains near the high end of its 7 month trading range (shown below).  But profit taking has to be expected.  Meanwhile trade talks (especially with China) are stumbling along which will limit further advances.

Dow Jones Industrials