Wednesday, January 30, 2019

Markets soar as Fed says it will have a "patient" policy with rate hikes

Dow surged 434, advancers over decliners about 4-1 & NAZ skyrocketed 154.  The MLP index added 2+ to the 252s & the REIT index rose 2+ to the 358s.  Junk bond funds went up & Treasuries climbed higher.  Oil rose almost 1 to the 54s & gold at the NY close shot up 9 to 1324 (more on both below).

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The Federal Reserve unanimously voted to keep the benchmark federal funds rate unchanged during its first policy meeting of the year, while reiterating a patient approach for future hikes.  “Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed,” the Federal Open Market Committee said.  The move was widely expected, as Fed Chair Jerome Powell acknowledged in Jan investor concerns about a volatile stock market, saying that policymakers were closely watching the economy for signals of a potential economic slowdown.  That sentiment has been echoed by other his predecesors, who have preached patience in the approach to monetary policy in the year ahead.  "In light of global economic & financial developments & muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes," the FOMC said.  In mid-Dec, the FOMC voted to raise interest rates for the 4th & final time in 2018, even as Pres Trump continued to slam Fed members & most recently urged them to “feel the markets.”  At the time, Powell said there was a “fairly high degree of uncertainty” about the future of further rate hikes, but not that rates have effectively arrived at the lower-end range of neutral.  Fed officials also signaled a willingness to end the reduction of bonds it's holding on its balance sheet, if necessary.  Policymakers, however, indicated that the runoff rate for the balance sheet will remain at $50B per month for now.

Fed keeps interest rates steady, will be 'patient' in future

Federal Reserve Chairman Powell issued his strongest statement yet that the central bank has changed its outlook regarding interest rate hikes.  “The case for raising rates has weakened somewhat,” Powell said following this week's meeting.  The statement came after the FOMC decided to leave its benchmark interest rate target unchanged at 2.25-2.5%.  In addition, the committee vowed to take a “patient” approach toward further hikes. Powell added that the funds rate is “in the committee’s” range of a neutral rate estimate, a key measure for the Fed.  The position on rates marks an evolving process for Powell, who has sent jitters thru markets in recent months from remarks that indicated he believed the Fed would be continuing to raise interest rates at least until it found a neutral range.  “I would want to see a need for further rate increases,” Powell said, adding that inflation would be key.  Also causing some concern on the Fed are geopolitical issues like the ongoing Brexit negotiations & an economic slowdown in China.  He did not mention, nor the committee's statement mark, any issues regarding the recently ended partial gov shutdown.  As things currently stand, Powell said the committee can take its time before additional rate moves.  The Fed has hiked its benchmark rate 8 times since it began the normalization process in 2015 & has indicated 2 more increases in 2019.  However, futures markets are pricing in no further tightening & in fact are noting a small chance for a rate cut over the next year.  “Today, the FOMC decided that the cumulative effect of those developments … warrant a patient wait-and-see approach regarding future policy changes.”

Fed Chair Jerome Powell says the case for raising interest rates ‘has weakened’

European Commission Pres Jean-Claude Juncker told British Prime Minister Theresa May today that the bloc's Brexit divorce deal with London cannot be renegotiated.  “The Withdrawal Agreement remains the best and only deal possible,” Juncker told the European Parliament.  “The debates and votes in the House of Commons yesterday will not change that. The Withdrawal Agreement will not be renegotiated.”  “Ireland’s border is EU’s border and is our joint priority,” Juncker said of the contentious issue of the Brexit border backstop.  “Yesterday’s vote has further increased the risk of a disorderly Brexit.”  But Junker also said he was an optimist & hence believed “there can and will be agreement with UK.”

Oil futures rose, with weekly domestic crude supplies up less than expected & US sanctions on Venezuela's state-run oil company lifting US benchmark prices toward their highest finish in over 2 months.  The US sanctioned Venezuela's Petróleos de Venezuela, earlier this week, raising the risk of disruptions to global oil supply from the OPEC member, which is also home to the world's largest oil reserves.  West Texas Intermediate crude for Mar delivery was up $1.45 (2.7%) to $54.76 a barrel.  Based on the front-month contracts, prices looked to log their highest finish since Nov 16.  Mar Brent crude  rose $1.12 (1.8%) to $64.22 a barrel.  The contract expires tomorrow.  The Energy Information Administration reported that domestic crude supplies edged up 900K barrels last week.  That was smaller than the 3.1M-barrel rise expected.  The American Petroleum Institute reported yesterday a weekly climb of about 1.1M barrels, but the group also upwardly revised the previous week's total by roughly 1M barrels.  Meanwhile, in Venezuela, self-proclaimed “interim president” of Venezuela Juan Guaido, who has U.S backing, is the biggest challenge to strongman Nicolás Maduro's gov in years.  Guaido has urged the country's powerful military forces to defect, promising amnesty, as the country strains under an economic crisis & sky-high inflation.  Venezuelan factors play out against the broader OPEC-led production cuts of 1.2M barrels a day for H1-2019 aimed at rebalancing an oversupplied market.  As supply is curbed, the oil market has also been weighing signs of slower global economic growth & the potential for weaker energy consumption especially after the IMF last week lowered its economic growth outlook for 2019.

U.S. oil prices end at 2-month high on modest crude supply rise, Venezuela turmoil

Gold futures marked their highest finish since mid-May, stretching their win streak to the longest in a month.  Prices continued to move up in electronic trading after the Federal Reserve left interest-rates unchanged & said it would be “patient” on its next rate move.  Shortly after the Fed decision, the most-active Apr gold contract  climbed to $1321 an ounce in electronic trading.  It had tacked on 30¢ to settle at $1315 an ounce before the Fed news.  The contract for Feb delivery rose $1 to finish at $1310 an ounce.  The commodity notched a 4th straight gain, its lengthiest winning streak since Dec 28.

Gold marks highest finish since mid-May, extends gains after Fed decision

The Fed's story was a well advertised event & it warmed the hearts of investors.  However it will fade rapidly in a world of multiple changes.  Trade talks with China have just begun & their outcome can not be predicted.  Another gov shutdown is looming, only 2 weeks away.  In less than 2 months, Britain has to come up with a plan for Brexit.  However the Dow went over 25K, needing just another 10% for a new record.  The bulls will be challenged to extend this rally while gold continues to rise.

Dow Jones Industrials

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