Tuesday, October 2, 2018

Markets drifts lower while the Dow reaches its 14th record in 2018

Dow rose 122, decliners over advancers 3-2 & NAZ lost 37.  The MLP index fell 1+ to the 279s & the REIT index was off 3+ to the 348s.  Junk bond funds crawled higher & Treasuries were purchased on troubles in Italy (more below).  Oil slid lower in the 75s & gold vaulted, up 15 to 1206 (more below on this rally).

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Live 24 hours gold chart [Kitco Inc.]

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Federal Reserve policymakers have been able to stave off sharply higher inflation even with low unemployment by managing expectations, central bank Chairman Jerome Powell said.  Should those attitudes change, Powell said in a speech, the Fed won't hesitate to respond.  "From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the [Federal Open Market Committee's] symmetric 2 percent inflation objective, and stand ready to act with authority if expectations drift materially up or down," he said.  The past several years have seen an economic anomaly: sharply lower unemployment without an associated rise in labor costs.  That defies an economic model called the Phillips Curve, which generally shows that when joblessness falls inflation will rise.  Central bankers still believe in the Phillips Curve even though the relationship seems to have broken down during a recovery that is less than a year away from being the longest on record.  Powell said the model isn't dead, but instead is part of a change in circumstances that has taken place during an unprecedented time for the Fed.  "What is more likely, in my view, is that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation," he added.  The central bank kept its benchmark interest rate anchored near zero for 7 years while engaging in a bond purchasing program that ballooned its balance sheet to more than $4.5T.  Along with that, the Fed used guidance to help manage inflation expectations, letting the market know that while the FOMC would be content to let inflation hold somewhat above or below its 2% target for a period of time, it would remain vigilant at making sure it didn't move too far in either direction.  "When monetary policy tends to offset shocks to inflation, rather than amplifying and extending them, and when people come to expect this policy response, a surprise rise or fall in labor market tightness will naturally have smaller and less persistent effects on inflation," Powell said.  The unemployment rate currently stands at 3.9%, near a 50-year low, & core inflation is right around 2%.  Powell said the 2 numbers are part of a "very good" economy that boasts "a remarkably positive outlook" from forecasters.  He indicated the Fed will continue to raise rates but in the gradual manner that has accompanied the current cycle that began in Dec 2015.  The central bank approved a qtr-point hike in the funds rate last week that brought the target range to 2-2.25%.  FOMC members indicated another hike before the end of the year, 3 more in 2019 & likely one more in 2020 before pausing.  Powell said the policy is mindful of controlling growth while making sure the recovery continues.  "Removing accommodation too quickly could needlessly foreshorten the expansion," he added.   "Moving too slowly could risk rising inflation and inflation expectations. Our path of gradually removing accommodation, while closely monitoring the economy, is designed to balance these risks."

Powell pledges the Fed will 'act with authority' if inflation spikes

Gold settled back above $1200 an ounce, as jitters surrounding Italy's financial picture filtered into broader financial markets, lifting prices for the precious metal to their highest closing level in nearly 2 weeks.  The European Commission raised concerns over the budget plans of the antiestablishment Italian gov.  Last week, Italy's gov proposed a budget deficit target of 2.4% of its GDP, which would triple the deficits proposed by previous govs.  The budget plans are seen as putting Italy in conflict with the EU's stringent fiscal rules.  Against that backdrop, Dec gold rose $15.30, (1.3%) to settle at $1207 an ounce, the highest in nearly 2 weeks for a most-active contract.  Gold futures fell 4.6% in Q3 & is down 7.8% YTD.  The rally briefly positioned gold futures for a settlement above its 50-day moving average of $1,207.44, which hasn't happened since Apr.  The yellow metal was knocked back to 6-week lows in recent sessions as the ICE $ index revived its 2018 march higher, including a 0.2% increase today.  Losses in global markets today, also helped to boost gold's investment appeal, though US stock indices saw mixed trading.  Beyond the haven boost, interest rates remain the chief driver for precious metals.  They’re sensitive to Federal Reserve interest-rate increases because they can push up US bond yields, which can reduce the attraction of nonyielding bullion, & tend to boost the $, which makes gold more expensive for buyers using other currencies.

Gold settles at nearly 2-week high amid Italy budget jitters, even as dollar gains

Toyota Motor (TM) said US sales for Sep fell 10.4% to 203K vehicles, as total car sales dropped 25.2% while truck sales declined 0.3%.  Adjusting for having one less selling day in 2018, the daily selling rate for total vehicles fell 6.8%, while the DSR for trucks increased 3.7%.

Toyota vehicle sales fall 10.4% in September, as truck sales slip 0.3%

The Dow had its 14th record close this year (after starting from record territory).  It reached a peak on Jan 26 & then plunged 2700 in a couple of weeks.  Currently it's 160 above the Jan peak, quite a turnaround.  The NAZ has had an excellent year, but stumbled in Sep & has started Oct with more selling.  The divergence of the indices will not last.  With so much going on in intl trade & now the Italy, the Dow looks vulnerable.

Dow Jones Industrials

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