Wednesday, October 3, 2018

Markets pare gains when Treasury yields soar

Dow rose only 54 (more than 100 below the earlier highs) to another record, decliners modestly ahead of advancers & NAZ gained 25.  The MLP index went up 2+ to the 281s & the REIT index fell to the 347s.  Junk bond funds fluctuated & Treasuries sank in price, driving the yield on the 10 year Treasury up an enormous 11 basis points to 3.16%.  Oil shot up 1+ to the 76s (more below) & gold gave back 4, falling to 1202, after yesterday's rally.

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Retailers across the US are gearing up for a bump in sales to end the year.  But holiday sales aren't expected to climb as much as they did in 2017, in what ended up being the best holiday season in a decade.  Holiday retail sales in Nov & Dec — excluding automobiles, gasoline & restaurants — are expected to increase 4.3-4.8% this year, reaching up to $721B, according to the National Retail Federation (NRF).  In 2017, sales were $692B.  This year's forecast by the NRF isn't predicting as much growth as last year, when holiday sales climbed 5.3%.  But growth of 4.3-4.8% would be better than a 5-year average of 3.9%.  Holiday sales are critical to the industry.  For some retailers, Nov-Dec can account for 40% of annual sales.  "Thanks to a healthy economy and strong consumer confidence, we believe that this holiday season will continue to reflect the growth we've seen over the past year," NRF CEO Matthew Shay said.  "While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year."  NRF's forecast is one of the most closely watched in the industry & follows those from Deloitte & PwC, which both call for holiday retail sales increasing around 5%.  Another less-optimistic forecast from AlixPartners says sales will grow 3.1-4.1% because "2017 will be a tough year to follow."  "Last year's strong results were thanks to growing wages ... complemented by anticipation of tax cuts that led consumers to spend more than expected," the NRF's chief Economist, Jack Kleinhenz, said.  NRF added that it expects seasonal employment by retailers to reach 585-650K jobs, up from 582K in 2017.  Amazon (AMZN) earlier this week said it plans to hire 100K workers this holiday season & will raise its hourly minimum wage to $15, effective next month.  Target (TGT), a Dividend Aristocrat, is hoping to hire as many as 120K workers, while Macy's (M) aims to hire 80K people to handle peak traffic in its stores & online.

Retail trade group sees holiday sales rising 4.3 to 4.8 percent this year

Following Federal Reserve chairman Jerome Powell's description of the U.S. economic outlook as "remarkably positive," market watchers are fielding questions as to how long this rosy period might last.  The answer? Quite some time, in the words of Chicago Fed chief exec Charles Evans -- but only if interest rates are hiked to above neutral, which Evans describes as just over 3%.  "The U.S. economy is doing extremely well. Fundamentals are strong, the labor market is doing terrific," Evans said.  Indeed, unemployment is currently below 4%, its lowest level in 18 years; payroll employment has added more than 200K jobs per month & inflation is up to the Fed's target level of 2%.  "I spent quite a long time indicating that I think inflation needs to get up to 2 percent, and here we are," Evans said.  "So I think things are going very well, this is something that can be continued for a number of years, in fact I think that by setting the policy rate just a little above neutral, that will continue to keep things going for quite some time."  The current federal interest rate is 2-2.5%, its highest since the 2008 financial crash.  The last hike took place in Sep, the 8 increase since the Fed began normalizing its historically easy monetary policy in late 2015.  The Fed also indicated it would raise rates once more this year & 3 times in 2019, & dropped language saying its policy would "remain accommodative."  The move underscored policymakers' optimism on the US economy, stemming from positive data including an FOMC estimate that upwardly revised the 2018 GDP forecast to 3.1% from a prior projection of 2.8%.  But by 2021, the forecast was reduced to 1.8%, indicating less confidence for the economy's long-term strength.  The FOMC indicated one more increase in 2020, bringing the median range to 3.4% where it's expected to stay thru 2021 before settling to 3% over the longer run.  The combination of low unemployment & low inflation are fueling hopes for an extended expansion, which Evans believes can be sustained with rate hikes that are less restrictive.  Normally, low unemployment & rising wages would trigger inflation to rise, forcing the Fed to raise rates faster.  "It's only in the last 15 years or so that the Fed has been able to achieve our 2 percent inflation objective in a competent fashion," he pointed out.  "Long-term inflation expectations are now, in my opinion, a little bit too low. We don't need to fight that battle, so we don't have to raise the funds rate as restrictively as we may have in the past. That allows us to set, if the outlook continues to be as good as it is, at a slightly restrictive level and then hold there for quite some time until we begin to see signs that we need to make an adjustment."

The Federal Reserve should return to role as a 'supporting actor' in the economy, Fed's Evans says

Investment banks & hedge funds say oil prices have rallied too far too fast, but the fear & uncertainty gripping the market will keep pressure on crude futures in the coming weeks.  Brent crude oil hit a new 4-year high at $86.74, fueled by concerns about a shortfall in global supply as US sanctions whittle away at Iranian crude exports.  The market is just one month away from the Nov 4 deadline that Pres Trump set for oil buyers to stop purchasing Iran's crude.  In May, Trump pulled the US out of the 2015 Iran nuclear deal & restored sanctions on OPEC's 3rd largest oil producer.  Much of the world — including the EU, China & Russia — oppose the move, but companies around the world have curtailed their imports from Iran for fear of running afoul powerful US sanctions.  That has pushed oil prices higher and left some analysts saying they cannot rule out a rally to $100 a barrel.  There are too many questions about how strictly the Trump administration will enforce the sanctions, how many oil importers will ignore the penalties & how quickly a group of producers led by Saudi Arabia & Russia can turn on the taps.  US crude the trading session at $76.41, climbing more than $1 a barrel to its highest since Nov 2014.

Oil market 'fever' pushing prices toward $100 won't break soon

The Federal Reserve can pause from its steady pace of interest-rate hikes in Dec because low inflation allows the central bank to take its time, said Philadelphia Fed Pres Patrick Harker.  “I have not seen an acceleration of inflation yet,” Harker said.  “We still see these good jobs numbers. So I don’t think there is a rush. I don’t think we have to rush the normalization process, going back to neutral.”  At the Fed meeting last week, 12 out of 16 Fed officials backed a Dec rate hike.  “I was one of the four” that did not, Harker said.  The Philadelphia Fed pres said he'd like to see a slower pace of interest-rate hikes.  He added that he wanted to avoid an inversion of the yield curve, the spread between short-term securities & long-term bonds.  Historically, if the 2-year Treasury note yield rises above the 10-year note yield, a recession has followed.  Harker said he forecast 3 rate hikes this year, 2 more in 2019 & 2 in 2020.  The median dot of the Fed's “dot-plot” graphic of projections, updated last week, calls for 4 rate hikes this year, 3 in 2019 & 1 in 2020.  Fed hikes interest rates, signals strong support for another increase in Dec.  “I think it is just a question of timing,” Harker added.  “I still think we can take our time in moving rates up,” he said.  Harker won't be a voting member of the Fed's interest-rate committee until 2020.

Fed’s Harker backs a December pause from interest-rate hikes

Economic data was looking rosy.  Then Treasury yields climbed sharply & that shook traders.  They sold stocks, limiting today's rally.  The 27K ceiling on the Dow held, at least for today.  Even with unsettled trade disputes, the US & world economies are doing well.  In early Apr (6 months ago), the Dow was under 24K.  Today it's pushing on 27K.  That advance is because of strength in economic data.  Higher interest rates should not curtail fundamental strength exhibited in 2018.  For what it's worth, the Dow bounced back 50 in the last ½ hour & remains not far away from 27K.

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