Thursday, February 28, 2019

Markets slip despite stronger than expected GDP growth in Q4

Dow pulled back 69, decliners slightly ahead of advancers & NAZ dropped 21.  The MLP index was off 2+ to the 246s. & the REIT index lost 1+ to the 364s.  Junk bond funds were weak & Treasuries declined.  Oil crawled higher in the 57s (more below) & gold fell 5  to 1315.

AMJ (Alerian MLP Index tracking fund)

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White House Council of Economic Advisers Chairman Kevin Hassett identified bad math in the latest read on US economic growth.  Although the economy reportedly grew by an estimated 2.9% in 2018, Hassett said it was actually a 3.1% year, citing the figure for Q4-2018 over Q4-2017.  “There are two different ways to measure year and one is year-over-year and quarter-four-over-quarter-four,” he said.  “And everybody is picking the lower number because they don’t want to give the president credit for 3.1 [percent].”  Hassett also added that despite a poor Q1 seasonal adjustment process over the last decade, he still expects 3% growth in 2019.  “Every Q1 is about 1 percent below what you expect to have for the year,” he added.  “We still are very, very confident that we are going to have a 3 percent year for 2019 and so what that means you should expect Q1 to be about 2 [percent].”

Hassett rips bad math on US economic growth

Federal Reserve Vice Chairman Richard Clarida said that a “patient” monetary policy is “especially data dependent,” meaning the central bank should wait for the “data to flow in” before determining what “future adjustments” to interest rates may be appropriate.  The Fed has to strike a balance between being “forward looking” & understanding that the models that the central bank consults “are not infallible,” Clarida said in a speech.  For example, if the models were to predict a surge in inflation, “a decision for preemptive hikes before the surge is evident in the actual data would need to be balanced against the considerable cost of the model being wrong,” he said.  “Given muted inflation and stable inflation expectations, I believe we can be patient and allow the data to flow in as we determine what future adjustments to thee target range for the federal funds rate may be appropriate to strike this balance,” he added.  He expects somewhat slower but “still-solid growth” in 2019.  Measures of expected inflation are “at the lower end of a range” that he thinks is consistent with a 2% annual inflation target.  The 2% inflation rate is not a “ceiling” for inflation, Clarida said, but he declined to say what annual inflation rate would push the Fed off its patient stance.  There is no inflation worry at the moment, he stressed.  “Right now, wage gains are in line with underlying inflation trends and underlying productivity. There is not any real evidence of cost-push pressure in the economy. That could develop but it is not there now,” he added.  He stressed that the Fed’s review of its monetary policy strategy would not result in raising the 2% annual inflation rate target.  Some prominent economists have called for the Fed to adopt a 4% inflation target.  Asked about the possibility of an ease in monetary policy, Clarida said a rate cut was “not in my, or my colleagues, baseline view.”  He repeated Powell's observation that there are “a number of crosscurrents” buffeting the economy that bear watching, including slowing global growth & uncertain global economic policy.

Clarida says ‘patient’ approach means no need for ‘preemptive’ interest-rate moves as he says Fed won’t hike 2% inflation target

National Economic Council Director Larry Kudlow said progress on a trade deal with China has been "terrific" & that a historical deal is on the horizon.  Kudlow added that initial talks with deputies "went very poorly" before getting better later in the week.  He denied there was a difference in views between Pres Trump & US Trade Representative Robert Lighthizer, after the 2 contradicted each other in a public setting.  On GDP growth, Kudlow said, "I would just call it 3%" as the US economy grew 2.9% year-over-year.  Trump often criticized Pres Obama as the US economy didn't grow 3% during any of the calendar years of his presidency.

Kudlow talks up progress on China talks and says there's no gap between Trump and Lighthizer

The Chicago PMI surged 8 points to a reading of 64.7 in Feb, MNI Indicators said.  That's the largest monthly rise in 2 years.  Any reading over 50 indicates improving conditions.  The new orders component rose 15.2 points.

Oil futures split paths, with US prices extending gains from a weekly drop in domestic crude supplies, while global benchmark prices finished lower on weaker Chinese economic data, which fed concerns over a demand slowdown.  Both benchmarks, however, finished the month higher, up a 2nd consecutive month.  Apr West Texas Intermediate crude rose 28¢ (0.5%) to settle at $57.22 a barrel.  Based on the front-month contracts, prices climbed 6.4% for the month of Feb.  Apr WTI had jumped 2.6% yesterday, for the biggest one-day $ & percentage increase since Feb 1.  Global benchmark Apr Brent  which expired today, fell 36¢ (0.5%) to $66.03 a barrel.  Front-month prices rose 6.7% for the month.  May Brent which is now the front month, settled at $66.31, down 27¢ (0.4%).  Prices for both benchmarks gained yesterday after Saudi Arabia affirmed its commitment to reducing output, then got an added boost after data revealed an unexpected weekly drop in US crude supplies, the first decline in 6 weeks.  Oil demand uncertainty, however, was on the rise after an official gauge of China's factory activity fell to the lowest level in 3 years, as production contracted likely due to the Lunar New Year holiday, while external demand weakened further.  What’s more, US stock indices traded lower after Pres Trump said talks with North Korean leader Kim Jong Un aimed at reducing that communist country's nuclear weapons broke down abruptly.  But in the US, GDP grews at a 2.6% annual pace in Q4, better than the 1.9% growth rate forecast.  As for the supply side, the Energy Information Administration yesterday reported that US crude supplies unexpectedly dropped by 8.6M barrels.  The decline followed 5 straight weeks of increases, surprising most forecasters, who expected an increase in stockpiles.  The American Petroleum Institute data on Tues showed a decline of 4.2M barrels.  The energy minister of Saudi Arabia, Khalid al-Falih, this week reiterated his country's commitment to cutting output to rebalance the market.  Saudi Arabia is viewed as the de facto leader of OPEC because it is the biggest producer of the oil cartel & holds the most political sway in the group.  Saudi's minister also implied that production cuts could be extended into H2-2019.  OPEC & 10 producers outside the cartel, led by Russia, agreed late last year to hold back crude output by a collective 1.2M barrels a day in H1-2019.  Saudi Arabia has shouldered the largest burden of those cuts, coming down by around 350K barrels a day last month.

Oil futures split paths for the session, but tally a 2nd monthly rise in a row

Even with a flattish 2nd half in Feb, the Dow still managed an impressive gain of about 900.  Of course, momentum is negative presently & that's not a good sign.  The bulls will be challenged in Mar, looking for ways to extend the 2019 rally.

Dow Jones Industrials

Markets retreat as US-China trade talks need more work

Dow fell 20, decliners over advancers 4-3 & NAZ lost 21.  The MLP index dropped 2+ to the 246s & REIT index fell 1+ to the 364s on profit taking.  Junk bond funds drifted lower & Treasuries declined in price.  Oil crawled higher in the 57s & gold fell 5 to 1315.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil57.03

GC=FGold   1,320.10
 -1.10 -0.1%

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Stocks pared declines as the US economy grew by a rate of  2.6% this winter, beating estimates of 2.3% thanks to solid consumer & business spending.  Stocks declined originally after the summit between Pres Trump & North Korea's leader Kim Jung-Un was cut short without the 2 making a deal.  North Korea had demanded that US-led sanctions be lifted.  In 2018, the GDP increased by an estimated 2.9% (compared to 2.2% in 2017), narrowly missing the Trump administration's goal of 3% growth for the year.  Earlier, both Trump & Kim had expressed hope for progress on improving relations & on the key issue of denuclearization in their talks.  "Basically, they wanted the sanctions lifted in their entirety, but we couldn't do that ... we had to walk away from it," Trump told reporters after summit talks were cut short.  In Asian markets, China's Shanghai fell 0.4%, Hong Kong's Hang Seng was also down 0.4% & Japan's Nikkei was off 0.8%.  In European markets, London's FTSE traded lower by 0.6%, Germany's DAX slipped lower & France's CAC was also off a tad.

Stocks pare earlier losses on better-than-expected 4Q GDP

The US economy grew by a rate of 2.6% this winter, beating the estimates of 2.3% thanks to solid consumer & business spending.  It also bested GDPNow, a real-time tracker monitored by the Federal Reserve Bank of Atlanta, which lowered its estimate to 1.8% earlier this week, largely because of a grim outlook for retail sales which took a hit, in part, due to the gov shutdown.  Release of Q4 GDP by the Bureau of Economic Analysis (BEA) was delayed by almost one month as a result of the partial gov shutdown.  In 2018, the GDP increased by an estimated 2.9% (compared to 2.2% in 2017), narrowly missing the Trump administration's goal of 3% growth for the year.  In the middle of Feb, US retail sales recorded their biggest drop in more than 9 years, spurring fears about an economic slowdown & a drop in consumer spending at the end of 2018.  According to the Commerce Dept, retail sales fell by 1.2% , the largest decline since Sep 2009, when the US was still recovering from the recession.  The BEA generally provides 3 estimates of the GDP for each qtr; however, they will only provide 2 readings this qtr.  The final reading remains on track for Mar 28.  In the Jul-Sep period, the US economy grew by 3.4%.

US economy grew at 2.6% rate in fourth quarter

The summit between Pres Trump & North Korean leader Kim Jong Un ended earlier than expected without an agreement due to North Korean demands to lift US-led sanctions.  Earlier, both Trump & Kim had expressed hope for progress on improving relations & on the key issue of denuclearization, in their talks in the Vietnamese capital, Hanoi.  "Basically, they wanted the sanctions lifted in their entirety, but we couldn't do that ... we had to walk away from it," Trump told reporters after the summit.  Both leaders left the venue of their talks without attending a planned lunch together.  The UN & the US ratcheted up sanctions on North Korea when the reclusive state undertook a series of nuclear & missile tests in 2017, cutting off a cash supply.  While Trump had said he was in "no rush" to strike a deal with North Korea & wanted to do the right deal with Kim.  The White House had been confident enough to schedule a now canceled "joint agreement signing ceremony" at the conclusion of talks.

US-N. Korea summit ends abruptly with no deal

US Trade Representative Robert Lighthizer said the US is working towards formally abandoning plans to hike tariffs on Chinese goods from 10-25%.  The report said those plans would be shelved as long as the 2 countries continue talking, marking the clearest signal that a trade deal between them could be on the horizon.  Originally, the US planned on hiking tariffs on $200B worth of Chinese goods if a deal could not be reached by Sat.  Lighthizer made those remarks following his testimony to the House Ways & Means Committee.  He testified that China needs to do more than just buy additional US goods for the 2 countries to strike a trade deal & also said that "much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached."

The US is no longer threatening to jack up tariffs on China, the clearest sign a trade deal is close

There is a lot for traders to assess.  The abrupt end to the North Korean talks was not expected, but the GDP data came in reasonably good.  And the China trade talks may be making progress, although that situation is difficult to understand, even for the negotiators.  Trading in the PM could be choppy as more news is released on these stories.

Dow Jones Industrials