Friday, October 5, 2018

Markets extend losses on worries about higher interest rates

Dow tumbled 179, decliners over advancers 2-1 & NAZ dropped 91.  The MLP index was up pennies in the 279s & the REIT index fell 2+ to the 341s.  Junk bond funds declined & Treasuries were sold sending yields higher (more below).  Oil was steady in the 74s (more below) & gold went up 6 to 1207.

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The Sep job report may have missed expectations, but Pres Trump's chief economic adviser Larry Kudlow sounded a positive note on overall job creation in the US, which he said will likely top 2M by the end of the year.  “If you’re going to run 200,000 or 220,000 jobs a month, that’s pretty close to what we’re talking about, you're going to get 2.4, 2.6 million jobs a year,” Kudlow said.  “That is very, very good, and it’s steady.”  Kudlow also hinted there could be an upward revision of the Sep jobs number.  In Aug, for instance, the number initially came in at 201K, but was later corrected to 270K.  “These numbers bounce around,” he said.  “That’s a big upward revision. By the way, it’s very bullish for the future. So really, I will argue the number is 221,000, might even be better than that adjusted for hurricanes.”  Unemployment also fell to 3.7%, the lowest rate since 1969.  “That’s an awful good number,” Kudlow said.

US job creation will likely top 2M this year: Larry Kudlow

The benchmark 10-year Treasury yield hit its highest level since 2011 after the Labor Dept monthly jobs report showed another month of rising wages & a sharp revision higher to the Aug nonfarm payrolls.  The unemployment rate dropped to 3.7%, a level not seen in nearly 50 years even as job creation for Sep fell to its lowest level in a year.  The Labor Dept also adjusted Aug nonfarms payroll number up dramatically, to 270K from 201K.  Closely-watched average hourly earnings rose 8¢ (0.3%) over the month, matching the Aug gain.  That brings the year-over-year increase in wages to 2.8%  The report adds to the now-widespread view that the labor market is near or beyond full employment & shows wages are starting to accelerate higher, which could be a worry for the Federal Reserve trying to keep a lid on inflation.  The yield on the benchmark 10-year Treasury note was higher at 3.237%, just off it's highest level since May 2011, which it hit earlier in the session.  The yield on the 30-year Treasury bond was up at 3.414%, its highest level since 2014.  Bond yields move inversely to prices.  Rates surged on Wed following data that showed that private payrolls rose by 230K in Sep which far surpassed the 168K jobs in Aug.  The 10-year rate is up about 15 basis points on the week & about 20 basis points over the last month.  The recent economic data, such as historically low unemployment & expanding corp profits, have helped the Federal Reserve justify its 3rd qtr-point increase to the federal funds rate in Sep.  The central bank also upped its anticipation for economic growth this year to 3.1%, citing manageable inflation & an unemployment rate of 3.9%.

US 10-year yield jumps to a fresh 7-year high after unemployment rate falls to lowest in 49 years

With "a ways to go" before higher interest rates will start to slow the U.S. economy, Federal Reserve Bank of NY Pres John Williams endorsed the idea that the Fed will raise rates once more this year & 3 times next year.  Last week the central bank raised interest rates for the 3rd time this year, with the median of freshly published Fed forecasts showing policymakers expect to reach a policy target of 3.1% by the end of 2019, a full percentage point higher than the current rate.  "I think if you look at the center of the range... these are really pretty reasonable views of where the economy is likely to go and where policy needs to go in terms of sustaining this expansion," Williams said.  At the same time, he said, "We have a ways to go to get to some idea of what people think of as neutral," referring to the theoretical "neutral" level of interest rates, at which borrowing costs neither stimulate nor restrain economic growth.  Fed officials currently estimate that rate at about 3%, but Williams said "we don't really know" where neutral is.  As one of the few who have done ground-breaking work on estimating the neutral rate, his comment adds to a growing view that the Fed is relying less on the estimate of neutral to gauge how far to raise rates.  Fed Chair Jerome Powell signaled in Aug that he is not inclined to look to "neutral" as a guidepost for setting policy.  Williams, who works the closest with Powell to formulate the Fed's messaging, said that while neutral will play a role in setting rates, it is just "one piece of the puzzle" that also includes a close look at "wage growth, inflation, job growth, GDP growth: We look at a lot of indicators both in the U.S. and abroad."  US job growth slowed sharply in Sep, likely as Hurricane Florence depressed restaurant & retail payrolls, a report released earlier today showed, but the unemployment rate fell to near a 49-year low of 3.7%.  To Williams, the report signaled a strong job market & economic momentum, but with very few signs of inflation from wages or elsewhere, gradual interest rate hikes remain the "right path" for the Fed.

Fed's Williams sees 'ways to go' before rates pinch growth

Crude futures steadied after a volatile week, as US unemployment data eased concerns about demand in the world's top oil consumer ahead of a US sanctions deadline on Iranian oil exports.  The US  Labor Dept employment report showed that average hourly earnings increased 0.3% in Sep, while the unemployment rate fell to near a 49-year low of 3.7.  US West Texas Intermediate (WTI) crude futures ended the session up a penny at $74.34, rising 1.5% for the week.  Intl benchmark Brent crude oil futures was down 20¢ a barrel at $84.38.  On Wed, it hit a late 2014 high of $86.74.  Oil prices at 4-year highs have triggered concerns about demand as Pres Trump has blamed OPEC for rising gasoline prices for American consumers.  Prices have eased slightly after Saudi Arabia & Russia said they would raise output to at least partly make up for expected disruptions from Iran, OPEC's 3rd-largest producer, due to the sanctions that take effect on Nov 4.  But the pull-back did little to dent a 15-20% rise in oil prices since mid-Aug, which has pushed them to their highest since 2014.  The US wants govs & companies around the world to stop buying Iranian oil from Nov 4 to put pressure on Tehran to renegotiate a nuclear deal.  However, India will buy 9M barrels of Iranian oil in Nov, leakers have said, indicating that the world's 3rd-biggest oil importer is to continue purchasing crude from the Islamic republic.  Iranian exports are estimated to drop around 1M barrels per day (bpd).

Oil steadies near 4-year highs after volatile week of trading

Stocks had a tough day, but there was buying in the last couple of hours, limiting losses.  The Dow finished 150 above session lows & about 500 below the important ceiling of 27K.  Next week, earning season begins.  The last one brought higher stocks prices.

Dow Jones Industrials

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