Thursday, October 25, 2018

Markets rebound after yesterday's rout

Dow shot up 401 (but finished under 25K), advancers over decliners 3-1 & NAZ recovered 209.  The MLP index went up 1+ to the 258s & the REIT index gained 3 to the 341s.  Junk bond funds crawled higher & Treasuries were off a tad.  Oil rose to the 67s (more below) & gold inched up 1 to 1232.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

The White House is anticipating the economy will advance by about 3.5%, ahead of tomorrow's reading of Q3 GDP.  “I haven’t seen the numbers yet, our internal modeling shows it’s going to be around 3.5 percent, but it could be north of 4 percent,” Chair of the Council of Economic Advisers Kevin Hassett said.  “I think 3.5 percent is a good guess right now.”  In Q2, the economy advanced by a rate of 4.2%, the strongest since Q2-2014, according to the Bureau of Economic Analysis.  GDP Now, an up-to-date tracker monitored by the Federal Reserve Bank of Atlanta, is currently estimating Q3 growth of 3.6%.  Although there was speculation that because of the 2017 Tax Cuts & Jobs Act, which slashed the corp tax rate to 21% from 35%, GDP could grow as much as 5% each qtr, Hassett dismissed that.  “We were told we’d get 3 percent growth,” he said, adding, “That’s more than double the growth rate that President Trump inherited. That’s pretty good news, right?”  Hassett also estimated that capital spending will remain around 10%.  “We’ve got a sustained capital spending boom, and that gives you growth, because what’s going to happen now is all those new factories are going to start producing output in Q4 and Q1 of next year,” he added.

White House eyes 3.5% GDP growth in 3Q

Orders to US factories for big-ticket manufactured goods slowed significantly in Sep, while a key category that tracks business investment fell for a 2nd straight month.  Demand for durable goods edged up a slight 0.8% in Sep, a sharp slowdown from a 4.6% jump in Aug, the Commerce Dept reported.  The swing was heavily influenced by the volatile aircraft category, which fell 17.5% in Sep after having surged 63.7% in Aug.  The category that serves as a proxy for business investment dipped 0.1% in Sep following a 0.2% fall in Aug.  The recent weakness in investment orders has raised concerns about whether a growing trade war with China & stock market volatility were making businesses more cautious.  The gov will provide its first estimate of overall economic growth in Q3 tomorrow.  Economists are projecting that the growth in GDP slowed to an annual rate of 3%  in Q3 after a sizzling 4.2% annual growth rate in Q2, the best in nearly 4 years.  Still, economists believe that annual GDP growth should come in around 3% for the full year, the best performance in 13 years.  Pres Trump often cites the GDP gains as evidence that his economic policies are working.  But many private economists believe the support from the $1.5T tax cut passed by Congress last Dec will start to fade next year.  The durable goods report showed that demand for autos was up a solid 1.3%, while demand for military aircraft rose 119% but orders for commercial aircraft fell.  Overall, transportation orders were up 1.9%.  Excluding transportation orders, durable goods were up a tiny 0.1% after a 0.3% gain in Aug.  Orders for machinery increased 0.8% while demand for primary metals such as steel rose 0.1%.  Demand for computers fell 0.4% while orders for communication equipment slipped 0.1%.

US durable goods orders edged up modest 0.8 percent

Federal Reserve Vice Chair Richard Clarida, in his first major policy speech since being seated at the central bank, said more interest rate increases are likely warranted as the economy continues to gather strength.  In assessing current conditions, Clarida said growth broadly & with the job market in particular has surprised him.  “Based on my reading of the accumulating evidence, I believe that trend growth in the economy may well be faster and the structural rate of unemployment lower than I would have thought several years ago,” he added.  While his remarks were a bit more tempered than those of his colleagues earlier this week, Clarida said he sees “further gradual adjustment” in the Fed's benchmark funds rate as likely.  He said that could change if the data move & inflation turns lower.  His views were fairly sanguine on inflation, saying it could remain tame even with stronger growth.  “I believe monetary policy today remains accommodative, and that, with the economy now operating at or close to mandate-consistent levels for inflation and unemployment, the risks that monetary policy must balance are now more symmetric and less skewed to the downside,” he said.  He described the current state of policy as accommodative, even though the FOMC removed the word following its most recent policy meeting.  The remarks come as the Fed finds itself at the center of attention in both the financial markets & the political arena.  Pres Trump has repeatedly criticized the central bank's moves to raise rates.  Earlier this week, the pres repeated that monetary policy is the biggest threat to the economy, & wondered aloud whether he made the right choice in appointing Jerome Powell as Fed chairman.  Clarida also is a Trump appointee & was confirmed last month by the Senate.  In his speech, Clarida cited research, similar to that used by Powell, that shows the danger of waiting too long to raise rates.  Specifically, he talked about the “neutral” rate of interest that is neither stimulative nor acommodative, & said history has shown that staying below neutral risks letting inflation run too hot.  He conceded, though, that inflationary pressures seem low now, even with a tightening labor market & rising wages.  Above-trend economic growth also might not trigger worrisome inflation, Clarida added.  The economy, he added, likely has room to grow.  Rising savings rates suggest that consumers have more buying power, while tax cuts have provided an incentive for business investment.

Fed's new Vice Chair Clarida backs more rate hikes in first major policy speech

The US trade deficit in goods widened for a 4th straight month in Sep, bringing it to $76B, according to the Census Bureau.  The data showed exports grew 1.8% from Aug to Sep, from $138.4B to $141B.  Imports, meanwhile, expanded by 1.5% to $217B from $214B on a month-over-month basis.  Wholesale inventories grew by 0.3% to $644B in Sep from $642B in Aug.  The overall trade deficit's growth comes as the US & China engage in a trade war.  Both countries have slapped tariffs on B$ worth of each other's goods this year.  The Trump administration is using tariffs to try to narrow its deficit between imports & exports.  This has kept global investors on edge, as they fear tighter trade conditions will slow the global economy.

US trade deficit in goods widens for fourth straight month, hits $76 billion

Home sales eked out a small gain in Sep, but the pace is still lower than last year, as affordability weighs on buyers.  Signed contracts to buy existing homes rose 0.5% from Aug but were 1% lower than Sep 2017, according to the National Association of Realtors.  This is the 9th straight month of annual sales declines.  “This shows that buyers are out there on the sidelines, waiting to jump in once more inventory becomes available and the price is right,” said Lawrence Yun, chief economist for the Realtors.  “The general condition of the economy is excellent, it simply has not lifted home sales this year. Home prices are still rising, so people who are purchasing are still seeing wealth gains.”  Affordability, however, has been weighing on buyers.  Mortgage interest rates began to rise at the start of Sep & are now a full percentage point higher than one year ago.  These numbers represent homebuyers who were out shopping and making deals in Sep, calculating, for the first time, what they could pay based on higher rates.  Regionally, pending home sales in the Northeast fell 0.4% for the month & were 2.7% below a year ago.  In the Midwest, the index rose 1.2%  monthly but fell 1.1% annually.  Sales in the South fell 1.4% monthly but were 3.3% higher than a year ago.  The index in the West increased 4.5% monthly but dropped 7.4% compared with Sep 2017.  Homes in the West are the most expensive in the nation on average.  Home sales closings have been slowing already for much of this year, due to a critical shortage of homes for sale.  Now, more homes are coming on the market, increasing supply, but affordability is the new barrier to entry.  The average monthly payment for a buyer getting a mortgage is now 15% higher than a year ago, according to Zillow, which factored in higher interest rates & higher home prices.  Sales of newly built homes slid 5.5% in Sep & were 13% lower compared with Sep 2017, according to the US Census Bureau, which also measures sales by signed contracts.  Mortgage applications to purchase a home are now flat compared with a year ago.

Pending home sales rose 0.5% in September, but were lower than last year

Oil prices stabilized, bouncing back from an early sell-off after Asian & European stock markets plunged in the wake of the biggest daily decline in the US since 2011. Brent crude oil fell 82¢ (1.1%) to a low of $75.35 a barrel before rallying to around $76.94, up 77¢.  The global benchmark has lost more than $10 a barrel since hitting a high of $86.74 on Oct 3.  US light crude settled up 51¢, (0.8%) at $67.33 after touching an intraday low of $65.99.  The turnaround followed a rebound in US stocks, with the 3 major indices surging more than 1% each.  Financial markets have been hit hard by a range of worries, including the US-China trade war, a rout in emerging market currencies, rising borrowing costs & bond yields, as well as economic concerns in Italy.  Weakness is also starting to show in container & dry-bulk rates, both of which have declined significantly in Oct, pointing to a slowdown in global trade.  Many investors are concerned about rising oil inventories as supply exceeds demand in some key markets, including the US.  US crude oil production has risen steadily over the past decade & hit a record high of 11.2M barrels per day (bpd) this month.  US commercial crude stocks rose for a 5th consecutive week last week, increasing 6.3M barrels to 422.8M barrels, the Energy Information Administration said.  Saudi Arabia's OPEC governor said the oil market could face oversupply in Q4.  “The market in the fourth quarter could be shifting towards an oversupply situation as evidenced by rising inventories over the past few weeks,” Adeeb Al-Aama said.  Saudi Energy Minister Khalid Al-Falih said that there could be a need for intervention to reduce oil stockpiles after increases in recent months.  Investors will also be paying close attention to US sanctions on Iranian crude exports, due to kick in from Nov 4.  Bowing to pressure from the US, Chinese oil majors Sinopec & China National Petroleum Corp (CNPC) have yet to buy any oil from Iran for Nov because of concerns that sanctions violations could hurt their operations.  China has been Iran's biggest oil customer.

US oil closes 0.8% higher at $67.33 per barrel as stocks rebound

Will wonders never cease?  Buyers returned today to bid stocks higher.  However there was selling in the last hour, limiting gains.  The Dow finished 120 off its highs. The Volatility index (VIX) finished in the 22s, still close to its highs in the last decade (aside from a few temporary spikes).  These are not good times for timid investors.

Dow Jones Industrials

No comments: