Thursday, January 10, 2019

Higher markets for a fifth straight day

Dow finished the day up 122 (closing at the highs of 24K), advancers over decliners 4-3 & NAZ rose 28.  The MLP index dropped 3+ to the 248s & the REIT index was off fractionally to the 334s.  Junk bond funds inched higher & Treasuries were a tad lower.  Oil crawled higher in the 52s & gold slid back 4 to 1287.

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The Federal Reserve's balance sheet will be reduced significantly from where it is now, Chairman Jerome Powell said, signaling that more monetary tightening is ahead.  Powell did not specify how much smaller the central bank's portfolio of bonds would get, but the remark seemed to take some momentum out of the stock market during PM trading.  “It will be substantially smaller than it is now,” the chairman said.  “It will be smaller than it is now, but nowhere near where it was before.”  The Fed had been holding about $4.5T worth of mostly Treasuries & mortgage-backed securities (MBS) that it accrued during 3 rounds of monetary stimulus during & after the financial crisis.  Starting in Oct 2016, the Fed began allowing a fixed cap of proceeds from those bonds to run off each month, with the level now reaching a ceiling of $50B.  The Treasury & MBS holdings have contracted by about $400B since the operation began & the overall balance sheet is below $4T.  The balance sheet roll-off has been referred to “quantitative tightening” as opposed to the “easing” that beefed up the balance sheet.  Traders have questioned whether the Fed should be cutting the balance sheet at the same time it is raising its benchmark interest rate.  The FOMC approved 4 rate hikes in 2018 & has indicated perhaps 2 more are ahead this year.  Fed officials have said they expect the run-off to happen without disruption, former Chair Janet Yellen likened it to “watching paint dry.”  “We wanted to have the balance sheet return to a more normal level, which is a level no larger than it needs to be for us to conduct monetary policy,” Powell said.  Minutes from the Dec FOMC meeting show some concern over where the process is headed.  Fed economists cautioned that the federal funds rate that the central bank uses as its benchmark could become volatile during the roll-off.

Powell says Fed's balance sheet will be 'substantially smaller,' indicating more tightening ahead

The number of Americans filing applications for jobless benefits fell more than expected last week, pointing to a strengthening labor market that could further ease concerns about the economy's health.  Initial claims for state unemployment benefits fell 17K to a seasonally adjusted 216K last week, the Labor Dept said.  Data for the prior week was revised up to show 2K more applications received than previously reported.  The forecast called for claims declining to 225K.  Claims were boosted as workers furloughed because of a partial shutdown of the US gov applied for benefits.  The federal gov partially closed on Dec 22.  The shutdown, which has affected a qtr of the gov, including the Commerce Dept, has left 800K employees furloughed or working without pay.  Private contractors working for many gov agencies are also without pay.  Claims by federal workers are reported separately & with a one-week lag.  Furloughed federal gov workers can submit claims for unemployment benefits, but payment would depend on whether Congress decides to pay their salaries retroactively.   The 4-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2K to 221K last week.  Labor market strength has helped to calm fears that the economy was slowing sharply following steep declines in consumer confidence & manufacturing activity in Dec, which rattled financial markets.  Tighter financial market conditions & slowing global growth, however, could make the Federal; Reserve cautious about raising interest rates this year.  The claims report also showed the number of people receiving benefits after an initial week of aid fell 28K to 1.72M.  The 4-week moving average of the continuing claims increased 15K to 1.72M.

US weekly jobless claims fall more than expected

Oil prices ticked higher, extending a winning streak into a 9th session, with gains capped by the lack of any clear resolution to US-China trade talks & weak Chinese economic data.  US West Texas Intermediate (WTI) crude futures ended the session up 23¢ at $52.59 per barrel.  The modest gain was enough to push WTI to a 5-week closing high.  Intl Brent crude futures were up 30¢, at $61.74 per barrel.  Both benchmarks rose by around 5% the previous day, capping off a week-long climb that marked oil’s longest sustained rise since last summer.  Global financial markets had surged on hopes that DC & Beijing may soon end their dispute & avert an all-out trade war between the 2 biggest economies.  But the rise in global markets began to dwindle after the 2 sides issued vaguely positive statements that lacked concrete details.  Pres Trump said the countries were having “tremendous success” in their discussions, but offered no other de was hardly convincing.tails.  Disappointing data from China added to concerns about the global economy.  China’s producer prices in Dec rose at their slowest pace in more than 2 years, a worrying sign of deflationary risks.  The US stock market, which oil futures have tracked closely, was also mostly flat after a 4-day rise.

US crude ticks up 23 cents to 5-week high, settling at $52.59

With limited buying in the last 2 hours, the averages managed a gain for a 5th straight day of advances.  However that was hardly convincing.  Holiday retail sales data was gloomy, especially after other economic data has been underwhelming.  The big stories remain unchanged.  There was essentially nothing said about the US-China trade talks (a negative signal) & the gov shutdown continues to be stuck in the mud.  Without a change in those stories, the bulls will have a tough time extending the 5 day stock market rally when the Dow gained 1300.

Dow Jones Industrials

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