Friday, March 29, 2019

Markets rise on optimism for trade talks

Dow rose 211, advancers over decliners 3-2 & NAZ went up 60.  The MLP index added 1+ to the 255s & the REIT index went up 1+ to 381 (a new record).  Junk bond funds fluctuated & Treasuries were sold as stocks rose in price.  Oil finished the month over 60 & gold crawled up 1 to 1297.

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Federal Reserve Governor Randal Quarles voiced confidence in the US economy & added that more interest rate hikes likely will be appropriate, countering the prevailing market wisdom.  Quarles, who serves as the central bank's vice chair for supervision, said the labor market looks strong & productivity is improving.  At the same time, he was largely dismissive of recent data that showed a slowdown in nonfarm payrolls creation & weak consumer spending.  “In regard to policy, I am very comfortable remaining patient at this point and monitoring the incoming data,” he said, echoing the Fed's most recent policy statement.  “That said, my sense is that further increases in the policy rate may be necessary at some point, a stance I believe is consistent with my optimistic view of the economy’s growth potential and momentum. In the language of central banking, my estimate of the neutral policy rate remains somewhat north of where we are now.”  The remarks come 9 days after the policymaking FOMC voted to hold rates steady & indicated that no additional increases are likely this year.  However, in recent days several Fed officials have said that talk about rate cuts is premature.  Current market pricing is for the first cut to come as soon as Sep, with about a 25% chance of another decrease before the end of 2019.  Quarles acknowledged that “growth has slowed, at least temporarily,” as shown in recent data.  “That said, I remain optimistic about the outlook for the U.S. economy, and I think that we have the potential to maintain growth at a healthy pace in the years ahead,” he said.  “Looking past the near-term data, I see many reasons to expect relatively strong growth in the coming years, supported by gains in the productive capacity of the economy,” he added.  While veering from the notion that the Fed is on indefinite hold, Quarles said the Fed should be data-dependent in its decision-making.  However, he qualified that by saying that it shouldn't make decisions based on only isolated metrics.  “I prefer a framework where we make it clear that we are focused on broad trends--elsewhere I have used the aviation analogy that we should not ‘chase the needles’ on the instrument panel.  We should be clear that, while we will respond to clear& durable evolution in these broad trends, we are not reacting to every piece of volatile data,” he said.

Fed’s Quarles says more rate hikes could be ahead ‘at some point’ as economy improves

Pres Trump's top economic advisor Larry Kudlow said he believes the “underlying” US economy “looks very good.”  “I don’t think the underlying economy is slowing,” Kudlow added.  “The fundamental economy,” a phrase he used to mean “consumption and business investment … looks very good,” Kudlow said.  Kudlow, the director of Trump's National Economic Council, made the remarks shortly after saying in another interview that he wants the Federal Reserve to “immediately” cut US interest rates by ½ a percentage point.  “I am echoing the president’s view – he not been bashful about that view – he would also like the Fed to cease shrinking its balance sheet. And I concur with that view,” Kudlow said.  The central bank announced last week that it would hold off on raising interest rates & hinted that another rate hike might not be necessary for the rest of the year.  Though Fed Chairman Jerome Powell highlighted slowdowns in overseas economic growth, the Fed did not indicate at its Mar meeting that rate cuts would be necessary.  The critiques from the Trump White House break with the precedent set by past presidents, who have generally allowed the Fed to act independently.  Kudlow said that he respected the Fed’s independence — but noted that “we don’t want to threaten this great recovery.”

Larry Kudlow: ‘I don’t think the underlying economy is slowing’

New-home sales ran at a seasonally adjusted annual 667K pace in Feb, the Commerce Dept said.  That was 4.9% higher than Jan's rate, but just 0.6% above year-ago levels.  The pace of sales of newly-constructed homes in Feb was the highest since last Mar.  It easily beat the consensus of a 625K annual pace, but downward revisions to prior months were hefty.  At the current sales rate, it would take 6.1 months to exhaust the available supply of homes.  Over many decades, 6 months of supply has been the number that's generally considered a sign of a market evenly balanced between supply & demand.  The median price of a home sold during the month was $315K, about 4% lower than at the same time last year.  The gov's home-construction reports are based on small samples & are often revised heavily, making it hard to rely on any one month's data for a complete picture of the housing market.  For the year to date, sales were 2.8% higher than during the same period last year.  Since the housing crisis of a decade ago, it’s been hard for home builders to get back into a groove.  They've struggled to balance secular, long-term headwinds with the fallout from the housing bust & to meet customers at the price points they can afford.  That’s kept conditions in the industry choppy.  Thru the noise, however, there’s been steady, & growing, customer demand for new homes.  The average existing home in America is 37 years old, according to the National Association of Home Builders.  And many current homeowners aren't willing or able to sell their properties.

Pres Trump threatened to close large parts of the US-Mexico border next week if America's southern neighbor does not “immediately” stop illegal immigration.  In a series of tweets, the pres wrote that he would shut down “the Border, or large sections of the Border,” if Mexico does not “immediately stop ALL illegal immigration coming into the United States throug (sic) our Southern Border.”  He claimed closing off border crossings, key avenues for trade with a major partner, “would be a good thing!”  Trump, who has made cracking down on illegal immigration a top political priority, has said he could shut down border crossings before without following thru on the threat.  However, his threat today comes at a particularly delicate time: his administration hopes Congress will ratify a replacement of the 1994 North American Free Trade Agreement by this summer.   It would likely be difficult for Mexico to “immediately” stop “all” illegal immigration, as Trump asks.  In response to these tweets, Mexican Foreign Secretary Marcelo Ebrard said Mexico would not respond to threats.  He called Mexico a “great neighbor” to the US & added that 1.5M Americans live in Mexico.  Trump has long hammered Mexico over trade, pledging to crack down on what he calls abuses that sap American jobs.  His claims about Mexico making money off the United States appear to relate to inaccurate assertions he has repeatedly made about the US trade balance with other countries.

Trump threatens to close ‘large sections’ of US-Mexico border

Stocks had a rare sideways month in Mar, with the Dow finishing at around breakeven, as trade talks with China drone on.  The roaring stock market ended its advance in mid Feb.  Q2 should be very interesting.

Dow Jones Industrials

Higher markets after an upbeat assessment on trade talks

Dow went up 86, advancers over decliners  5-2 & NAZ gained 36.  The MLP index added 1 to the 254s & the REIT index rose 2+ to 381 (a new record).  Junk bond funds hardly budged in price & Treasuries were sold after the recent rally.  Oil shot up to 60 & gold rebounded 4 to 1299.

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GC=FGold   1,302.50

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Stocks opened higher in the final day of Q1 trading, after Treasury Secretary Steve Mnuchin tweeted an upbeat assessment of US China trade talks.  Mnuchin said on Twitter that he "concluded constructive trade talks in Beijing. I look forward to welcoming China's Vice Premier Liu He to continue these important discussions in Washington next week."  US Trade Representative Robert Lighthizer & Mnuchin attended a working dinner with Liu yesterday, shortly after their arrival in the Chinese capital.  The meetings seek to end the 2 countries' tariff conflict that is disrupting trade in goods from soybeans to medical equipment.  "Both teams are currently sparing no effort" on the negotiations, Chinese commerce ministry spokesman Gao Feng said yesterday.  In Asia, major averages closed higher: Japan's Nikkei 225 added 0.8%, the Hang Seng rose 1% & the Shanghai Composite was up 3.2%.  European bourses also gained.  London's FTSE 100 added 0.3%, France's CAC 40 climbed 0.8% & Germany's DAX rose 0.9%.

Stocks rise on US-China trade talk optimism

Americans' incomes barely budged last month, while the overall US economic growth shows signs of slowing.  The Commerce Dept said personal incomes rose just 0.2% in Feb, primarily reflected in wages & salaries & an increase in Social Security benefits at the start of the year.  Gains were offset by a decline in personal interest income, according to the Bureau of Economic Analysis.  Meanwhile, personal income declined in Jan by 0.1%, while disposable personal income fell 0.2%.  These losses were attributable to declines in personal div income, farm proprietors' income & personal interest income.  Personal consumption expenditures rose 0.1%, the primary drivers were spending on financial services & insurances.  On the flip side, the data reflected weak sales of new motor vehicles.  The personal savings rate, as a percent of income, was 7.5%.  The report combines data from Jan & Feb due to the partial gov shutdown, during which no statistics were released.  Meanwhile, consumer spending increased by just 0.1% in Jan, falling short of expectations, while Dec's numbers were revised slightly lower.  Many are anticipating softness in economic growth, after the Federal Reserve announced this month it did not intend to raise interest rates in 2019.  During the central bank's Dec meeting, it had projected 2 hikes for the year.  “There’s been some evidence the economy is slowing,” Minneapolis Federal Reserve Pres Neel Kashkari said today.  “I’m not yet sure is this just a blip or is this a real slowdown?”

US income growth off to slow start in 2019

Pres Trump has a signature achievement within his grasp.  All he needs to do is weave through a skeptical Congress, a task that has proven difficult for his White House in the past.  The pres reached an agreement with Mexico & Canada last year to revise the 1994 North American Free Trade Agreement, which the pres has long slammed as a "disaster" that saps American jobs.  Reps & the US neighbors want Congress to ratify the deal by this summer.  Getting the pact, which Trump has called the United States Mexico Canada Agreement (USMCA), approved would give Trump another policy to tout as he hits the 2020 re-election campaign trail.  After the conclusion of special counsel Robert Mueller's Russia investigation, Trump set out to follow thru on reworking relationships with several countries that the pres has accused of trade abuses. The next few months are pivotal for the pres as he tries to ratify the North American pact & reach a new deal with China.  But approval of the USMCA, which Dems have dubbed NAFTA 2.0 in part to signal that Trump made few changes, is not certain.  Not only the majority House Democrats but also a key Senate Rep have expressed concerns about the deal.

Trump’s NAFTA facelift hits bipartisan roadblock in Congress

The Univ of Mich's consumer sentiment index improved to a reading of 98.4 in Mar from 93.8 in the prior month.  That was better than the mid-Mar reading of 97.8.  Current conditions & expectations indices both improved in the month.  Sentiment was aided by more favorable real income expectations.   Expectations of inflation were lower.  Consumers still expect the Federal Reserve to raise its benchmark interest rate this year.  After slumping in Jan, due to the partial gov shutdown, sentiment has rebounded.  “Overall, the data do not indicate an emerging recession but point toward slightly lower unit sales of vehicles and homes during the year ahead,” said Richard Curtin, the chief economist of the survey.  The index is slightly above the average of 97.2 recorded over the past 26 months.  The release of the summary of the Mueller report had no impact on the data, but said it could affect the Apr sentiment, Curtin said.

Consumer sentiment improves for second straight month in March

Stocks are in demand again as investors are praying for a favorable outcome in the China trade talks.  The Dow is down only 100 in Mar, but that merely reflects its sideways trend which will need a major news story for either a big rise or decline.  There is talk about Q2 being the best qtr in a decade (up 10% YTD).  However that comparison is helped by the averages beginning the year at a depressed level.

Dow Jones Industrials