Thursday, April 11, 2019

Markets drift lower as traders await earnings reports

Dow fell 14, advancers slightly ahead of decliners & NAZ lost 16. The MLP index added 1+ to the 256s & the REIT index was little changed in the 382s.  Junk bond funds slid lower & Treasuries were also sold today.  Oil fell 1 to the 63s (more below) & gold tumbled 18 to 1295.

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US wholesale prices increased in Mar by the most since last fall, driven largely by more expensive gas & electricity.  The Labor Dept said that the producer price index, which measures price changes before they reach consumers, rose 0.6% in Mar after falling in 3 of the previous 4 months.  Wholesale prices rose 2.2% from last year.  Excluding the volatile food & energy categories, core wholesale prices rose 0.3% in Mar & 2.4% compared with a year ago.  The figures suggest that inflation is largely in check, a trend that has enabled the Federal Reserve to pull back from last year's steady rate hikes.  Fed policymakers suggested at their most recent meeting in Mar that they did not expect to hike short-term rates for the rest of this year.  Other measures of inflation are also mostly tame.  The consumer price index, released yesterday, rose 0.4% in Mar, a healthy gain, but increased just 1.9% in the past year.  Excluding food & energy, core consumer prices increased just 0.1% from the previous month & 2% from a year earlier.  That's right at the Fed's inflation target.  The Fed lifted the short-term interest rate it controls 4 times last year & in Dec projected 2 further hikes this year.  But signs of slower growth, a volatile stock market & modest inflation caused them to switch gears.  Pres Trump & his advisers have also cited low inflation as a reason the Fed should actually cut rates.  Larry Kudlow, director of the National Economic Council, said last week that the White House wants the Fed to reduce its benchmark rate, currently at a historically low level of 2.25-2.5%, by ½ percentage point.  In minutes from their Mar meeting, several Fed policymakers said they could shift toward either cutting or raising rates this year, depending on what the incoming economic data showed.

US wholesale prices rise 0.6% in March, lifted by gas costs

Just one month ago, Pres Trump's top envoy for Iran told a major energy conference that oil market conditions are making it easier to choke off the Islamic Republic’s crude exports without causing a price spike.  “When you have a better supplied oil market, it allows us to accelerate our path to zero,” Special Representative for Iran Brian Hook said at CERAWeek in Houston.  Since then, the cost of US crude oil has jumped 12%, intl Brent crude is trading above $70 a barrel & the national average gasoline price is up 30¢ a gallon.  The primary reason for the run-up is simple: The market is tightening.  That means a global oversupply of crude is draining, bringing supply & demand into balance & putting the market at risk of flipping into shortage.  The Intl Energy Agency said global oil supplies are tightening in Q2 as OPEC & its allies slash production & US sanctions on Iran & Venezuela look increasingly effective.  That tightening will make it more difficult for Trump to justify significantly curtailing Iran's crude shipments next month.  In just a few weeks, the pres must decide whether to extend waivers that allow several countries to import oil from Iran, which is under wide-ranging US economic sanctions.  Analysts doubt Trump will refuse to extend the waivers, despite administration officials repeatedly invoking the administration's goal of driving Iran's oil exports to zero.  Yesterday, Secretary of State Mike Pompeo appeared to indicate that the move is not imminent.  “I think we’ve been clear about our objective of getting Iran to zero just as quickly as we possibly can, and we will continue to do that,” Pompeo said during a Senate Foreign Relations Committee hearing.  But the question remains how much crude the Trump administration will allow to flow to countries like China & India.

Trump wants to drive Iran’s crude exports to zero. The oil

Oil futures finished lower, pulling back from their highest level in months as a monthly report from an intl agency warned that a slowdown in global economic growth could hurt demand for crude.  US benchmark West Texas Intermediate crude for May delivery lost $1.04 (1.6%) to settle at $63.58 a barrel.  It finished a day earlier at $64.61, meaning that prices for a front-month contract saw the strongest finish since Oct 31.  On the ICE Futures Europe exchange, Jun Brent lost 95¢ (1.3%) to $70.78 a barrel, a day after the front-month contract logged its highest close since Nov 7.  “Although the main sources of growth are doing well, there are mixed signals from elsewhere,” said the Intl Energy Agency (IEA) in a monthly report released today.  The agency said demand factors remain resilient but cautioned that sluggishness in economic expansion could erode crude appetite.  Demand for crude among countries within the Organization for Economic Cooperation & Development (OECD), including Australia, Canada & Belgium, fell 300K barrels a day in Q4, marking the first quarterly demand decline for the group since 2014.  That IEA report comes a day after a monthly OPEC report showed a significant Mar output cut by OPEC, which the IEA report also affirmed.  Market participants said that, in line with IEA's comments, a reassessment of economic weakness & its potential impact on crude prices has given commodity investors reason to pause.  Yesterday, the Energy Information Administration (EIA) reported that US crude supplies climbed by a larger-than-expected 7M barrels for the week ended Apr 5.  That marked a 3rd straight weekly rise.  Gasoline stockpiles, however, dropped by 7.7M barrels last week.   The EIA said total domestic crude output was unchanged at 12.2M barrels a day last week, but in a separate monthly report issued Tues, the gov agency lifted its forecasts for 2019 & 2020 U.S. crude production.

Oil finishes lower as IEA warns that an economic slowdown would hurt demand for crude

Traders are getting anxious, waiting for Q1 earnings reports.  The big banks should be reporting in the next few days.  With a lack of significant economic news, there is not much to be done other than await developments.  However, as mentioned before, the REIT sector is doing quite well with the index at record highs.  Generally they don't have large price moves, but the yields are attractive in a low yield environment.

Dow Jones Industrials

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