Wednesday, October 17, 2018

Markets pare losses after FOMC minutes point to more rate hikes

Dow losses were reduced to 91, decliners over advancers about 2-1 & NAZ was off only 2.  The MLP index lost 3+ to the 272s & the REIT index was up 6+ to the 339s.  Junk bond funds fluctuated  & Treasuries were slightly lower, bringing the yield on the 10 year Treasury up 2 basis points to 3.18%.  Oil slumped below 70 (more below) & gold fell 4 to 1226.

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Pres Trump's chief economic adviser Larry Kudlow has become increasingly cynical about the likelihood of a trade deal between the US & China, which for the past 7 months have been locked in an increasingly tense, back-&-forth tariff battle.  “China is a problem,” Kudlow said.  “They have not responded to our asks, and it’s not just the trade deficit, per se. It’s the theft of [intellectual property].”  In a slap to the US, China in early Oct issued a new regulation granting police the power to inspect internet service providers & users, including those that belong to Americans, Kudlow said.  According to a China nespaper, the legislation gives “few details about implementation,” making it difficult for foreign companies to circumvent possible repercussions.  “That’s outrageous,” Kudlow said.  “They have been unsatisfactory. Me, I want to see a trade deal. I have become very cynical, because we’ve given our asks and China does not respond. I worry that they’re moving in the wrong direction, with a more closed economy and less liberal economy.”  But the director of the National Economic Council dismissed concerns that leaders in Beijing were biding their time to strike a trade deal in the hopes that Dems win control of the House or Senate in the Nov elections.  Even if that were to happen -- “I think it’s going to be very close,” he said -- Dems are supportive of cracking down on Chinese trade practices.  “China will miscalculate if they think there’s going to be some type of change in November, regardless of who wins,” Kudlow added.  Trump's tariffs on more than $200B worth of Chinese goods has drawn a rebuke from both members of the political aisle.  In a signed letter to US Trade Representative Robert Lighthizer, 169 representatives, including a number of House Reps who are running in competitive midterm races, urged the administration to reconsider granting some exclusions to American companies that have been adversely affected by the import taxes

US-China trade: Larry Kudlow 'cynical' about its prospects

Federal Reserve officials remain convinced that continuing to gradually increase interest rates is the best formula to preserve a steady economy, according to minutes released of the central bank's most recent policy meeting.  That may not please Pres Trump who has been vocal in his criticism of the central bank's actions.  A summary of the Sept 25-26 Federal Open Market Committee session reflected both confidence in the rate of economic growth & some hesitancy over the impact that tariffs might have on the future path.  Ultimately, the committee unanimously voted to approve a qtr-point hike to its benchmark rate target, with members indicating that more increases are on the way.  The increase took the target range to 2-2.25%.  "With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term," the minutes read.  Policymakers discussed what the future path would be, with members saying that there might be a period where the Fed even will need to go beyond normalization of rates & into a more restrictive stance.  That would be to control inflation from overshooting the Fed's target & to address "the risk posed by significant financial imbalances."  The Fed's determination to continue raising rates comes in the face of increasingly heated levels of disparagement from Trump.  While most of his predecessors have veered away from public comments about monetary policy, Trump has been vocal in his disdain for what the Fed is doing.  He has called FOMC members "loco," openly criticized Fed Chairman Jerome Powell, & asserted that higher rates are the single biggest threat to the economic recovery.  The meeting for which the minutes cover occurred before the recent stock market volatility that appeared to coincide with remarks from Powell that the Fed remains a good distance away from reaching an equilibrium on rates, indicating more increases are ahead.  Trump's comments were not mentioned in the minutes.  According to the FOMC's discussion, however, some of Trump's own policies also endanger the above-trend GDP gains seen during his presidency.  Fed members' business contacts indicated general confidence about the prospects for growth, while citing several potential obstacles once fiscal policy started to wear off.  "Despite this optimism, a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy," the minutes said."  In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade — both imports and exports — as a result of uncertainty over tariff policy," the summary added.

Fed indicates it's staying the course on rate hikes despite growing criticism from Trump

Pres Trump said that he will ask each of his Cabinet secretaries to cut 5% of their respective budgets, shortly after he pledged to reduce spending & lower the US budget deficit.  "We're going to be asking for a 5 percent cut from every secretary today," Trump said.  The proposal comes days after the administration announced a $779B budget deficit for fiscal 2018, a 6-year high & a 17% jump from the previous fiscal year.  "He's asking them to cut the fraud, the waste, the abuse," White House senior advisor Kellyanne Conway said.  "Cut the fat, not the essentials."  Trump had said in an earlier interview that "We're going to cut spending, absolutely."  "It's not as tough as you think, and frankly there's a lot of fat in there," Trump added, while noting that "we had to get the military done last time."  Trump signed a $716B defense spending bill into law in Aug.  The pres did not mention any specific area of gov spending he planned to examine for cuts.  But he also said during the interview that his administration will "continue with the tax cuts, because we have other tax cuts planned.  "Pushing through more tax cuts, along with plans he mentioned to pursue an infrastructure package after the midterm elections, would apparently contrast with his stated goal of reducing budget deficits.  Trump also appeared to blame Dems, at least in part, for the ballooning deficit.  "In order to get that $716 billion, I had to give up things to the Democrats that I hated to give up," he said.  "But we had to rebuild the military."  Trump's comments follow remarks from Senate Majority Leader Mitch McConnell, in which he blamed rising budget deficits on social safety net spending rather than tax cuts.  Dem leaders & candidates, who have repeatedly used fears about cuts to Social Security, Medicare and Medicaid as a tactic to motivate voters, quickly seized on McConnell's comments ahead of the Nov 6 midterm elections.

Trump says each Cabinet secretary should slash 5% of their budgets after he pledges to cut spending

CSX Corp (CSX) reported quarterly profit that topped expectations, as the #3 US railroad operator benefited from ongoing cost-cutting, broad-based volume growth & higher prices for moving freight.  Q3 EPS rose to $1.05, topping the estimate of 94¢.  In the same period last year, EPS was 51¢.  Revenue increased 14% over the year-ago qtr to $3.13B.  Expenses fell 2% to $1.84B, as expenses associated with increased volume & higher fuel prices were more than offset by efficiency gains.  The stock gave back 1.49.
If you  would like to learn more about CSX, click on this link:

Railroad operator CSX's quarterly profit tops Wall Street target

Oil prices fell, with US futures dipping below $70 a barrel for the first time in a month, after US stockpiles rose 6.5M barrels, almost triple the forecast, while exports dropped.  Brent crude was down $1.31 (1.6%) at $80.10 after gaining $1.15 over the previous 3 sessions.  The global benchmark is trading nearly $7 below a 4-year high of $86.74 reached 2 weeks ago.  US light crude oil the session down $2.17 (3%) at $69.75.  Oil had been rising on worries about Iranian sanctions & tensions between the US & Saudi Arabia after the apparent death of Saudi journalist Jamal Khashoggi.  US crude stocks rose 6.5M barrels last week, the 4th straight weekly build, as exports were down to 1.8M barrels per day, the Energy Information Administration said, in a report  characterized as bearish.  Inventories rose sharply even as US crude production slipped 300K bpd to 10.9M bpd last week, which was attributed to the effects of offshore facilities closing temporarily for Hurricane Michael.  The scandal over the disappearance of prominent Saudi critic & journalist Jamal Khashoggi, who disappeared 2 weeks ago after entering the Saudi consulate in Istanbul, had underpinned oil markets earlier in the week.  US lawmakers pointed the finger at the Saudi leadership, suggesting sanctions could be possible.  Western pressure mounted on Riyadh to provide answers, but Pres Trump's comments suggested that White House may not take additional action against the Saudis, particularly after Saudi Arabia said it will conduct an investigation.   Investors worry Saudi Arabia could use oil supply to retaliate against critics.

Oil slumps after large build in US crude stockpiles

This was just another highly volatile day in Oct.  The Dow finished lower, although 200 above session lows.  Prior to noon eastern time, it rallied after which selling returned in the late PM.  Tech stocks fared better, as late day buying reduced the NAZ loss to slightly under breakeven.  Besides earnings, the goings on in DC (some call it confusion) is getting more attention.  More wild price swings lay head for stocks, especially in Oct.

Dow Jones Industrials

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