Friday, September 28, 2018

Markets struggle on last day of trading in the quarter

Dow crawled up 18, advancers over decliners better than 4-3 & NAZ added 4.  The MLP index rose 2+ to 275 & the REIT index was about even at 347.  Junk bond funds did little & Treasuries were flat.  Oil shot up over 73 (more below) & gold recovered 8 to 1196.

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Stocks were flat on the final trading day of the month & the qtr.  Traders were digesting the news of the week, which included the final revision on Q2 GDP & the Federal Reserve's decision to increase interest rates.   The final Q2 GDP reading came in at 4.2%, matching estimates.   Durable goods orders climbed to a 6-month high in Aug.  The Federal Reserve's preferred measure of inflation, the year-over-year change in core personal consumption expenditures minus food & energy, held steady at 2% in Aug, & is in line with the Fed's 2% inflation target.  A reading on consumer sentiment came in slightly below expectations, but remained above 100.  Stocks rose broadly yesterday as investors digested the Federal Reserve's decision to raise interest rates & looked ahead to Q3 earnings season next month.

Stocks take a breather after tech fueled rally

Reps have sped legislation thru the House to expand their massive new tax law, capping their session for the year as they rush out of town to face voters in the Nov elections.  The new bill would make permanent the individual and small-business tax cuts in the law.  The vote was mostly along party lines.  Dems continued their solid opposition to tax-cut legislation, asserting it favors corps & wealthy individuals over middle-income Americans.  It's the 2nd tax-cut proposal that Rep leaders have pushed in less than a year.  “On top of making lower rates for individuals and small businesses permanent, these bills create new savings options for families to plan for education and retirement," House Speaker Paul Ryan said.  Prospects for the legislation in the Senate are weak, given the slim Rep majority & concern over the potential for further blowing up the deficit.  Pres Trump's historic tax reform plan, enacted late last year, has been credited with reviving the US economy.  Q2 GDP grew 4.2%, the strongest showing since 2014.  Jobs are plentiful with US unemployment falling to 3.9%.  Additionally, US stocks are sitting at record levels.

House passes tax reform 2.0 to make cuts permanent

Pres Trump signed a spending bill that will avert a gov shutdown despite previously calling the measure "ridiculous" because it did not include funding for a wall along the southern border.  A leakr saidthat Trump had signed the bill.  There had been some doubts about whether the pres would sign the bill, raising the specter that funding for the gov would lapse as early as Mon.  But Trump had tamped down on concerns from top Reps in recent weeks, pledging that he would "keep the government open."  Trump had blasted the spending package, which will fund the depts of Defense, Labor, & Health & Human Services for a year, because it did not include money for his proposed border wall.  In Jul, the pres brushed off the prospect of a shutdown.  "If we don't get border security after many, many years of talk within the United States, I would have no problem doing a shutdown," Trump said at the time.  The pres appeared to double down on his pledge to obtain border wall spending as recently as late Sep.  "I want to know, where is the money for Border Security and the WALL in this ridiculous Spending Bill, and where will it come from after the Midterms," Trump wrote in a Sep 20 Twitter post.

Trump signs spending bill to avoid government shutdown, despite frustrations over border wall

Oil prices rose more than 1%, with Brent climbing to a fresh 4-year high, as US sanctions on Tehran squeezed Iranian crude exports, tightening supply even as other key exporters increased production.  Brent crude futures rose $1 (1.2%) to $82.72.  The session high of $82.87 was its highest since Nov  2014.  In Q3, Brent has so far gained 4%.  US light crude ended the session up $1.13 at $73.25 a barrel, a 1.6% gain.  The session high of $73.73 was the highest since Jul 11.  The contract is up almost 4.9% this month but down 1.2% for the qtr.  DC is demanding that buyers of Iranian oil cut imports to zero to force Tehran to negotiate a new nuclear agreement & to curb its influence in the Middle East.  China's Sinopec is halving loadings of crude oil from Iran this month, as the state refiner comes under intense pressure from DC, according to leakers.  However, India, another top buyer, is committed to buying oil from Tehran, the Iranian foreign minister said.  Other OPEC countries have been increasing production in recent months, but global inventories have been falling as supply tightens.  Saudi Arabia is expected to add extra oil to the market over the next couple of months to offset the drop in Iranian production.  Leakers said Saudi Arabia & other producers had discussed a possible production increase of about 500K barrels per day (bpd) among OPEC & non-OPEC producers.  Others have said that major suppliers were unlikely to offset losses due to the sanctions estimated at 1.5M bpd.  At its 2018 peak in May, Iran exported 2.7M bpd, nearly 3% of daily global crude consumption.  Looking to 2019, Saudi Arabia is concerned rising US shale production could create another glut, especially if a stronger $ & weaker emerging market economies reduce global demand for oil.  OPEC forecasts that its non-OPEC rivals led by the US will increase output by 2.4M  bpd in 2019 while global oil demand should grow by just 1.5M  bpd.  US crude production rose 269K bpd to a record 10.964M bpd in Jul, the Energy Information Administration said in its monthly report.

Brent hits four-year high as US sanctions on Iran tighten supply

St Louis Fed Pres James Bullard said that a successfully renegotiated North American Free Trade Agreement would be a positive development for the US economy.  He said a concrete deal would show that a "trade war does not have to go on indefinitely." Mexico & the US are about to start the process of pursuing formal approval of a Nafta deal from the US Congress.  Canada is not part of the deal but still can join.  Bullard was not optimistic on the trade fight with China.  "It does seem China is digging in, I'm not sure we can reach a deal in a reasonable time frame," he said.  Bullard repeated that he thinks the Fed should delay further interest rate increases.  Market signals show investors are not worried about inflation, which should allow the Fed to let the economy run & watch inflation closely, he added.  Only 4 of 16 senior Fed officials penciled in a pause in Dec, the rest expected another qtr-point move.

Fed's Bullard says Nafta deal would be a 'very big positive'

This was another quiet day in trading with little economic news to move stocks.  The Dow was near break even for much of the day.  But it had an excellent qtr, rising about 2.2K & reached record highs last week.  The bulls are feeling good even with all the turmoil in DC & over intl trade.

Dow Jones Industrials

Thursday, September 27, 2018

Markets pare early gains while traders watch Senate hearings

Dow rose 54 (but off more than 100 from session highs), advancers over decliners 5-4 & NAZ added 51 (still above 8K).  The MLP index went up 1+ to the 272s & the REIT index was off 4 to 346.  Junk bond crawled higher & Treasuries fluctuated.  Oil climbed to the 72s after Saudi Arabia agreed to add more crude to the market (more below) & gold dropped 11 to 1187.

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Pres & Japanese Prime Minister Shinzo Abe agreed yesterday to start trade talks in an arrangement that, for now, protects Japanese automakers from further tariffs.  The 2 countries said in a joint statement the talks "will respect positions of the other government," drawing lines on autos & Japan's agriculture sector.  Japan has a $69B trade surplus with the US with  nearly 2/3 coming from auto exports.  Trump wants a 2-way agreement to address it.  The statement said a deal governing the auto sector would be written to boost production & jobs in the US.  Tokyo had worried that Trump could demand a reduction in auto imports from Japan or that he could impose steep tariffs on such imports on national security grounds.  While economists saw the agreement as a positive outcome for Japan for now, they noted what would ultimately be agreed upon was still unknown.  Shares on the most export-reliant Japanese automakers rose, outperforming a slightly weaker Tokyo stock market.

Japan dodges US auto tariffs, for now, as Trump and Abe agree on trade talks

A 3-bill legislative package known as Tax Reform 2.0 is expected to clear the GOP-dominated House during votes today & tomorrow.  While the legislation is expected to be dead on arrival if it makes it to the Senate, some proposed changes to retirement savings could remain in play.  Among other changes, the bills would make recently enacted tax cuts for individuals permanent, expand retirement & education accounts & create tax-advantaged Universal Savings Accounts.  While supporters say a 2nd round of tax cuts would lead to continued economic growth, critics point to its $627B price tag over the next 10 years, based on an analysis by the Joint Committee on Taxation.  That's on top of the $1.5T the already-passed cuts are projected to cost during the same period.  The bill, the Retirement Enhancement Security Act (S 2526), would remove the 70½ age limit for making contributions to traditional IRAs & would make it easier for small businesses to band together to offer 401(k) plans, among other provisions.  It also would make it easier for 401(k) plans to offer annuities by creating a regulatory "safe harbor" &, as long as plan administrators meet certain requirements when choosing an annuity provider, they'd get some legal protection.  Although that provision initially was excluded from the Tax Reform 2.0 package, it was added via an amendment that was tacked on to one of the House bills late yesterday.   House GOP leaders have been committed to pushing the tax bills thru this month before members head to their districts to campaign ahead of the Nov midterm elections.  Even if most of the provisions in the House bills end up shelved, they could be revived next year when a new Congress is in place or at another time, depending on the balance of power.

House poised to pass tax-cut bills despite unlikely Senate action

With both home prices & mortgage rates continuing to rise, fewer consumers signed contracts to buy existing homes in Aug.  Pending home sales fell 1.8% for the month, according to the National Association of Realtors' seasonally adjusted index.  Sales were down 2.3% compared with Aug 2017, the 4th monthly decline in the past 5 months & the slowest sales pace since Jan.  Sales have been hampered all year by a very lean supply of affordable listings.  Inventories did rise slightly in Aug, but there is still precious little supply at the entry level, where most of the demand is.  "The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points," said Lawrence Yun, chief economist at the NAR.  Pending home sales dropped 5.9% in the West month to month & were down a striking 11.3% compared with Aug 2017.  Prices in the West, however, are still higher than a year ago, but the gains are shrinking.  Prices usually lag sales.  Sales fell 1.3% in the Northeast monthly & were down 1.6% annually.  In the Midwest, sales fell 0.5% monthly & 1.1% annually.  In the South, sales were down 0.7% monthly but were 1.3% higher than a year ago.  Despite still-low supply of homes for sale, a record high number of Americans believe now is a good time to sell, according to a recent survey.  Nearly 77% of homeowners surveyed indicated now is a good time to sell, compared with 55% a few years ago.  "With prices having risen so quickly, many consumers were deciding to wait to list their homes hoping to see additional price and equity gains," Yun said.  "However, with indications that buyers are beginning to pull out, price gains are going to decelerate and potential sellers are considering that now is a good time to list and bring more properties to the market."  Sales of newly built homes rose 3.5% in Aug month over month, according to the US Census, which tracks signed contracts.  Sales are still, however, well below the historical norms for new construction.  Prices for new homes are at near-record levels, as builders contend with higher costs for land, labor & especially materials, thanks to new tariffs on building products.  The supply of new homes for sale is far higher, but demand is lower, due to affordability issues.  Mortgage rates rose in Aug as well & are now nearly a full percentage point higher than they were one year ago.  Job creation, however, is stronger as is wage growth, which is pushing more demand for housing.  The Realtors expect total sales this year to be 1.6% lower than sales in 2017.

Pending home sales fall in August to the slowest pace since the start of the year

Saudi Arabia will quietly add extra oil to the market over the next couple of months to offset a drop in Iranian production but is worried it might need to limit output next year to balance global supply and demand as the US pumps more crude.  The kingdom, OPEC's top producer, came under renewed pressure last week from Pres Trump to cool oil prices ahead of a meeting in Algiers between a number of OPEC ministers & allies including Russia.  Sources said that Saudi Arabia is ready to put as much as 550K additional barrels onto the market.  The gains will come from about 200K barrels per day from its Kurais oil field, as well as resumed capacity from some pipeline issues with the Manifa field.  Sources said though that this increased supply is reliant on demand.  If demand is apparent, supply will grow accordingly, OPEC insiders said.  But Riyadh decided against pressing for an official increase now as it realized it would not secure agreement from all producers present at the talks, some of which lack spare production capacity & would be unable to boost output quickly.  Such a move would have unsettled relations among producers, sources said, with the Saudis keen to maintain unity among the OPEC+ alliance in case Riyadh wants to change course in future & seek their collaboration on an output cut.  "There are only two months left until the end of the year, so why create tensions now between Saudi Arabia, Iran and Russia?" one source said.  Saudi Energy Minister Khalid al-Falih said Sun he was concerned that oil production gains, mainly from the US, could outstrip a projected increase in oil demand & result in an inventory overhang globally.  "There are more demand threats next year compared to supply threats," said another source.  Oil rices rose to their highest since 2014 above $80 per barrel this week on fears that a steep decline in Iranian oil exports because of new US sanctions will deepen an oil deficit, along with production declines in Venezuela.  However, OPEC's latest report released at the weekend forecast that its non-OPEC rivals led by the US would increase output by 2.4M bpd in 2019 while global oil demand should grow by just 1.5M bpd.  That, Saudi thinking goes, could create a large surplus of crude next year, especially if a stronger $ & weaker emerging market economies reduce global demand for oil.  The big unknown, however, is to what extent Iran will be forced to reduce output next year as customers in Europe & Asia walk away from its oil, in reaction to US sanctions.  OPEC's own reports show Iranian supply has already fallen by around 300K bpd in recent weeks, although Iran insists it has remained steady at some 3.8M bpd.  Sources familiar with Saudi production plans said the kingdom would raise output by some 200-300K bpd in Sep & Oct on top of the 10.4M bpd it produced in Aug, to meet additional client demand, mainly in Asia.

Saudi Arabia will quietly add extra oil to the market to offset a drop in Iranian production

The drama in DC is getting just about everybody's attention today.  But sellers returned in the PM to trim the AM advance.  Investors are mulling over the Fed statement on interest rates & the sluggish market for home-builders is a worry (in what is a very strong economy).  Then there is the trade mess which shows no sign of getting better anytime soon.  The Dow is down 300 this week & up only about 450 in Sep.

Dow Jones Industrials