Wednesday, September 12, 2018

Markets steady as tech stocks pare losses

Dow rose 27, advancers over decliners 4-3 & NAZ lost 18 (well off the lows).  The MLP index went up fractionally in the 282s & the REIT index slid to the 359s.  Junk bond funds continued in demand & Treasuries inched higher.  Oil jumped over 70 (more below) & gold shot up 10 to 1212.

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The US is seeking to restart trade talks with China, according to a new report.  Senior US officials led by Treasury Secretary Steve Mnuchin sent an invitation to Chinese officials, proposing a meeting in the next few weeks to discuss trade issues.  Last Fri Pres Trump said he was "redy to go" on tariffs for another $267B in Chinese goods "if he wants," which would be on top of the proposed tariffs on $200B in goods already being considered.  The public comment period on the $200B tariff plan expired Thurs.  The world's 2 largest economies have already applied tariffs to $50B of each other's goods.  The Treasury Dept & Commerce Dept declined to comment.

US proposing new trade talks with China in the near future: DJ, citing sources

Chinese Pres Xi Jinping wants more investment projects with neighboring Russia, at a time when the world is facing rising protectionism.  Xi said Beijing's relationship with Moscow was at an "all-time high" & there was further scope for investments in Russia.  "China has always been and is still a participant in development projects in the eastern part of Russia," the Chinese leader told an audience in Vladivostok.  "We have unique geographic benefits. China and Russia are the biggest neighbors, we have solid political ties … Chinese and Russian relationships are at an all time high level," Xi noted.  The Chinese pres suggested both countries should continue investing in energy, agricultural projects, tourism, infrastructure an education.  "There are deep and complex changes underway in the international situation, the politics of force, unilateral approaches and protectionism are rearing their head," he said.  He added that "China is open for international cooperation" & is "willing to study" other opportunities with other countries.  Earlier in the session, Russian Pres Putin also appeared to criticize protectionist policies.  During the meetings this week, both countries discussed further military cooperation & ways to boost trade in their local currencies.  The meetings are taking place at a time when Russia's relationship with the West is being tested by economic sanctions.  At the same time, China is also being impacted by new trade tariffs from the US.

China's Xi calls for closer ties with Russia amid rising protectionism

The Federal Reserve likely will continue gradual interest rate increases but will accelerate the pace if signs that financial imbalances continue to build, central bank Governor Lael Brainard said in a speech today.  She echoed recent remarks from Chairman Powell that while the current gradualist approach is appropriate, officials are on the lookout for an acceleration in inflation or distortions in financial markets that would trigger more aggressive action.  "While the information available to us today suggests that a gradual path is appropriate, we would not hesitate to act decisively if circumstances were to change," Brainard said.  "If, for example, underlying inflation were to move abruptly and unexpectedly higher, it might be appropriate to depart from the gradual path."  The remarks echoed Powell's speech last month, when he said the policymaking FOMC would take a "whatever it takes" approach to policy "should inflation expectations drift materially up or down or should crisis again threaten."  Brainard said the progress of the economy, with GDP moving above trend, unemployment low & inflation stable & around the Fed's 2% goal, represent positives.  However, she said that various parts of the financial markets are showing excesses.  She again echoed Powell's comments in saying that overheating sometimes shows up in markets before more conventional inflation measures.  "The past few times unemployment fell to levels as low as those projected over the next year, signs of overheating showed up in financial-sector imbalances rather than in accelerating inflation," she added.  "The Federal Reserve's assessment suggests that financial vulnerabilities are building, which might be expected after a long period of economic expansion and very low interest rates."  In particular, she said corp debt is rising & is susceptible to downgrades if conditions should change.  She also noted that leveraged lending is rising as underwriting standards ease & added that stock market valuations are "elevated."  Brainard spoke ahead of the FOMC's Sep 25-26 meeting, during which the committee is widely expected to raise its benchmark funds rate a qtr point.  Markets expect another hike in Dec.

Fed's Brainerd backs gradual rate hikes but warns of 'imbalances' that could trigger faster action

Canadian Foreign Minister Chrystia Freeland is planning to return to DC to hold more talks on NAFTA on tomorrow, but plenty of work remains before the 2 sides can strike a deal, according to a Canadian source.  "I expect we'll probably have several more sessions. This won't get resolved in an afternoon," said the source.  Freeland plans to fly to DC late tonight assuming the weather is good enough.

Canada's Freeland plans NAFTA talks Thursday

3 of the Fed's 12 districts reported weaker growth in Aug, according to the Federal Reserve's latest Beige Book report.  While the overall US economy expanded at a “moderate pace,” trade concerns & a lack of workers delayed projects.  There were also “some signs of a deceleration” in prices of final goods & services.  Shortages of workers & possible additional trade tariffs continued to be the biggest worries for businesses, they said.  Worker shortages spread from trucking & high-skilled sectors to lower-skilled sectors like restaurants & retailers.  Still, wage growth remained “modest to moderate” as firms tried to use benefits to attract employees, the report said.  Concerns about trade seen over the summer have now morphed into some businesses deciding to “scale back or postpone capital investment.”  While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices.  A few districts reported increased inflation expectations.  Contacts at the ports along the East Coast had not seen any effects from tariffs, but said they were concerned the effects could be delayed since shipments are often planned well in advance.  In Atlanta, some businesses said they were unable to pay the higher wages demanded by experienced workers & planned to “wait it out” & not fill positions.  The labor shortage of restaurant workers was very troublesome on Cape Cod.  The tick down in housing starts had caused lumber producers in the Pacific Northwest to lower prices.  The price of West Texas Intermediate crude oil remained in the high $60s but some producers in the Dallas district were getting prices $10-$17 lower due to limited pipeline capacity.  The picture presented is not one of an economy that is in any danger of overheating.  Top Fed officials, led by Fed Chairman Jerome Powell, seem committed to raising the benchmark short-term interest rate again at the next policy meeting.  Only a few voices on the central bank have been urging their colleagues to hold off on further tightening.  With the unemployment rate low & inflation near the 2% target, most economists see the Fed sticking to a gradual rate hike pace until the middle of next year.  However, if reports of weakness multiply, a pause in Dec is not out of the question.

Fed’s Beige Book finds pockets of weaker growth

Federal Reserve interest-rate setters aren’t paying enough attention to what the bond and stock markets tell them, St Louis Fed Pres James Bullard said.  Bullard's preferred approach to monetary policy relies on placing more weight on financial-market signals, such as the slope of the yield curve & market-based inflation expectations, than has been customary in past US monetary-policy strategy, he said.  Markets, he added, are also more reactive to real-time factors including gov stimulus & trade uncertainty.  His view is based in large part on a belief that the empirical relationship between inflation & unemployment, known as the Phillips curve, & a closely watched relationship by many at the Fed, has largely broken down over the last 2 decades, leaving monetary-policy makers without a clear guidepost for action.  Bullard does not have a vote on the Fed's interest-rate panel in 2018 but does vote in 2019.  “Handled properly, current financial-market information can provide the basis for a better forward-looking monetary-policy strategy,” he said, & that includes helping the FOMC better identify the neutral policy rate.  “The flattening yield curve & subdued market-based expectations suggest that the current monetary-policy stance is already neutral or possibly somewhat restrictive,” Bullard said.  Yield-curve inversions have historically predated recessions, though their telling powers aren't perfect.

Fed should pay more attention to market signals with next rate moves: Bullard

The oil price rallied towards its highest level this year, after a drop in US crude inventories & as the prospect of the loss of Iranian supply added to concerns over the delicate balance between consumption & production.  Brent crude futures were up 59¢ at $79.65 a barrel & briefly broke above $80 while US crude fuures rose $1.12 (1.6%) to settle at $70.37 a barrel.  The Energy Information Administration said that US crude oil inventories dropped by 5.3 million barrels last week.  Outside the US, traders have been focusing on the impact of US sanctions against Iran that will target oil exports from Nov.  Russian energy minister Alexander Novak today warned of the impact of US sanctions against Iran.  "This is a huge uncertainty on the market how countries, which buy almost 2M barrels per day (bpd) of Iranian oil, will act.  The situation should be closely watched, the right decisions should be taken," he added.  Novak said global oil markets were "fragile" due to geopolitical risks & supply disruptions.  Oil traders were also watching the progress of category 4 Hurricane Florence which is expected to make landfall by Fri.

US oil rises 1.6% after US crude stocks fall by 5.3 million barrels

Stocks finished little changed with buying coming into tech stocks late in the day.  Apple (AAPL), a Dow & NAZ stock, finished down 2+ after hyping the new iPhones.  But  a few buyers returned in the PM.  Trade talks are resuming although a lot more work is needed.

Dow Jones Industrials

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