Friday, December 21, 2018

Mixed markets after Williams says Fed could reassess view in 2019

Dow slid back 13 (sharply off earlier highs), advancers over decliners about 3-2 & NAZ slid back 60.  The MLP index rebounded 1+ to the 226s (still depressed as shown below) & the REIT index gave back 4+ to the 332s.  Junk bond funds drifted lower & Treasuries were of a tad.  Oil crawled up to the 46s & gold fell 6 from a multi month high to 1261.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil45.44
-0.44-  1.0%

GC=FGold    1,261.80
-6.10 -0.5%

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Investors weighed positive & negative developments as the worst month for the markets since 1931 approaches its end.  The gov reported a modest decline in Q3 product to 3.4% from 3.5%, the period's 3rd & final reading, plus a weaker-than-expected Nov durable goods report.  Such tepid results could give the Federal Reserve pause in its plans to raise interest rates two times next year as a way to prevent inflation.  But fears that the budgetary standoff between Pres Trump & Dems in Congress will result in a gov shutdown weighed on investor sentiment.  The House passed a spending package that includes funding for Trump's campaign-promised border wall.  The bill heads to the Senate where 60 votes are needed for passage, a grim feat with 49 Dem strongly opposing funding for the wall.  Yesterday, US shares tumbled with the Dow falling nearly 500 (2%) & sliding below 23K for the first time in 14 months.  Along with the blue-chip index, the tech-heavy NAZ also plummeted, now flirting with bear market territory.  The NAZ & S&P 500 lost over 1% during the session.  At the same time, volatility spiked to the highest level since Feb.  The selling accelerated after Pres Trump told House Rep leaders he will not sign a Senate-passed spending package that does not include sought-after border security funds, upending negotiations to avert a government shutdown by the end of the week.  In Hong Kong, the Hang Seng index closed out the day higher by 0.5%, but fell 1.3% for the week.  In European trading, London's FTSE traded little changed, Germany's DAX added 0.2% & France's CAC was little changed.

Stocks burdened by shutdown fears but buoyed by economic data

Pres Trump threatened to shut down the gov for a “very long time” if Senate Dems reject a funding bill passed by the House that includes money to build a wall along the US-Mexico border.  “The Democrats, whose votes we need in the Senate, will probably vote against Border Security and the Wall even though they know it is DESPERATELY NEEDED,” he wrote on Twitter.  “If the Dems vote no, there will be a shutdown that will last for a very long time. People don’t want Open Borders and Crime!”  The Rep-controlled House late yesterday passed a funding bill that included Trump's mandated $5B for the border wall, a centerpiece of his 2016 campaign.  In order to pass funding legislation, the Senate needs a 60-vote threshold, but Reps only hold 51 seats.  Trump urged Senate Majority Leader Mitch McConnell to use the “nuclear option” -- cutting the needed 60 votes for passage to 51 -- to force the funding thru but he has been reluctant to do so (he's previously said the support does not exist for extending the simple-majority threshold to limit debate to the legislative calendar).  The pres signed a bipartisan stopgap spending bill last Fri to avert a shutdown, extending the original Dec 7 deadline to Dec 21.  The House & the Senate unanimously passed the bill.

'Very long' government shutdown coming, Trump warns if no border wall funding

When is a trade pact less like a marriage & more like a renewal of vows?  Perhaps that's the best metaphor for the US-Mexico-Canada-Agreement (USMCA), the successor to the North American Free Trade Agreement (NAFTA).  Given the close integration of the 3 economies, this new agreement is more about renewing & enhancing decades-long ties than starting a new life together.  The US Chamber is pleased to support USMCA & we're already rolling up our sleeves to ensure it wins approval by Congress.  Consider the virtues the USMCA brings to the celebration.  First, there’s something old.  As Sen Chuck Grassley, the once & likely future chairman of the Senate Finance Committee, recently said that “95 percent” of USMCA is “the same as NAFTA.”  He's right.  The new agreement maintains many positive elements from the original NAFTA, which eliminated virtually all tariffs between the 3 North American nations.  This openness allows Americans to trade more than $3.5B in goods & services with our North American neighbors every day ($1.2T annually) & this trade supports more than 11M American jobs.  Our support for the USCMA rests in large part on this continuity, which we see as a reflection of the simple advice we offered throughout the negotiations:  “First, do no harm.”  But there’s also a fair amount of something new.  The USMCA includes some of the most innovative rules ever achieved in a US trade agreement.  When NAFTA was negotiated a ¼ century ago, there was no ecommerce, so it's no surprise the agreement did not address this sector.  The digital trade chapter in the USMCA is the best ever negotiated, by any country.  Similarly, the new agreement protects classes of intellectual property, such as biologics, that the old NAFTA did not for the simple reason that they had not yet been invented.  These negotiations were also a chance to revisit some NAFTA outcomes that disappointed.  For instance, USMCA expands US dairy producers’ access to the Canadian market, which NAFTA had opened in a very limited way.  Then, there’s something borrowed. In a number of areas, USMCA borrowed liberally from the Trans-Pacific Partnership (TPP), the Asia-Pacific trade pact negotiated by the Obama administration.  The TPP included, for the first time, a chapter imposing new rules on state-owned enterprises (SOEs), which often enjoy regulatory or financial advantages over their private sector competitors.  Sometimes SOEs even act as a player in a market they also regulate.  USMCA borrowed heavily from the TPP’s SOE text, adding improvements along the way.  The TPP also included strong rules blocking “behind the border” barriers to trade that lack a clear basis in science.  All too often, the arbitrary use of technical regulations or standards to block imports is just protectionism in disguise.  Here again, the USMCA borrows from and improves on the TPP to make free trade promises a reality.  The USMCA also has something blue — & something green, too.  The agreement's labor & environmental chapters break new ground.  Unlike those in NAFTA, USMCA's labor & environmental obligations are fully enforceable under the agreement's dispute settlement procedures.  In particular, Mexico has committed in USMCA to “specific legislative actions to provide for the effective recognition of the right to collective bargaining.”

Why the U.S. Chamber supports the new three country trade deal

Federal Reserve Bank of NY Pres John Williams said the Fed is open to reconsidering its views on rate hikes next year.  "We are listening, there are risks to that outlook that maybe the economy will slow further," Williams said.  Williams added despite this week's forecasts, the central bank is not "sitting there saying we know for sure what's going to happen" in 2019.  "What we're going to be doing going into next year is reassessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views," he said.  The market jumped after Williams signaled more willingness for the Fed to rethink rate hikes & its balance sheet policy.  The Dow jumped 350 after the interview.  Investors were focused on Fed Chairman Jerome Powell's comments on Wed that the balance sheet reduction program is going well & will proceed as planned.  Currently, the Fed is allowing $50B a month to run off the balance sheet, which is mostly a portfolio of bonds the central bank purchased to stimulate the economy during & after the financial crisis.  "We did not make a decision to change the balance sheet normalization right now, but as I said, we're going to go into the new year with eyes wide open, willing to read the data, and reassess the economic outlook and take the right policy decisions," he said.  The Federal Reserve Wed hiked its target range for benchmark interest rates to 2.25-2.5%.  Central bank officials also forecast 2 hikes next year, down from 3 previously projected. Williams said the Fed could could rethink those the 2 hikes.  "Things can change between now and next year," he said.  "Something like two rate increases would make sense in a really strong economy going forward. But we're data dependent, we're going to adjust our views dependent on how the outlook changes."  Powell also left the door open to other options next year.  He emphasized "data dependency" & said if data do not hold up in 2019, the Fed may change course.  Markets stumbled up & down after the decision Wed, then ultimately turned negative during Powell's news conference.  Major equity indices have moved into correction territory & are mostly negative for the year.

This looks to be another volatile day for stocks.  Comments by Williams were greeted with cheer, but that enthusiasm did not last.  Forecasting interest rate hikes next year remains highly uncertain.  Meanwhile the gov shutdown is getting the most attention by traders & nobody knows where that will lead.  The Dow is already 400 below its early high while NAZ is deeply in the red, a very ugly sign for trading in the PM.  Hang on for another wild day of trading.

Dow Jones Industrials

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