Wednesday, May 15, 2019

Higher markets on trade hopes

Dow shot up 115 (but off session highs), advancers over decliners 2-1 & NAZ gained 87.  The MLP index rose 2+ to the 252s & the REIT index gained 2+ to the 382s.  Junk bond funds drifted lower & Treasuries continued to be in demand, bringing the yield on the 10 year Treasury down 4 basis points to 2.38%.  Oil went up to the 62s & gold was flattish at 1297.

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Chinese economic growth slowed sharply last month amid shaky consumer demand, even before a flare-up in trade tensions with the US & threats of another round of tariffs.  Key economic indicators, like retail sales & industrial output, posted significant declines in Apr, one month before Pres Trump hiked tariffs on $200B worth of Chinese goods to 25% from 10%.  As the world's 2 largest economies continue to retaliate with tit-for-tat tariffs this week (& as hopes for a deal dwindle), the data fueled concerns about the what the trade war means for the global economy.  Retail sales in China grew at an annualized rate of 7.2%, the slowest pace in 16 years & well below the 8.6% forecast.  Industrial production, meanwhile, grew by 5.4%, far below Mar's reading of 8.5%.  Already, China has enacted some measures to curb the effect of tariffs, including letting its currency depreciate compared to the $.  Beijing also unveiled in Mar a plan to cut taxes by $298B in order to boost growth; however, yesterday's data suggest the benefits from that fiscal stimulus may be wearing off.  In a tweet, Trump said, “China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing.”  If the Federal Reserve enacted similar measures, he argued, “it would be game over, we win!”

China's economy lost momentum, even before Trump's new tariffs

US industrial production fell in Apr, dragged by a big drop in factory output as production of autos & auto parts continued to slide.  Industrial output, reflecting total production at factories, utilities & mines, dropped 0.5% in Apr after a 0.2% Mar gain, the Federal Reserve reported.  Industrial production fell 0.5% in Feb.  Manufacturing output fell 0.5%, led by a 2.6% decline in motor vehicles & parts, which has fallen in 3 of the past 4 months.  Production at the nation's utilities fell a sharp 3.5%.  Production at mines, a sector that also covers oil & gas drilling, rose 1.6%.  Manufacturing has struggled over the past year, reflecting weakness in auto sales & the global economy & rising trade tensions.  Analysts blame the decline in auto sales in Q1 on rising vehicle prices, competition from an abundant supply of late-model used vehicles & relatively high interest rates.  In addition to falling auto sales, manufacturers have been battered by trade tensions stemming from Pres Trump's get-tough trade policies, which are aimed at narrowing America's perennial trade deficits.  He says they have cost America Ms of manufacturing jobs.  In the past week, the US & China, which had already slapped punitive tariffs on $350B worth of each other's goods, moved to impose further penalties after negotiations on a new trade deal between the 2 economies reached an impasse.  The US is seeking a new trade agreement to combat Beijing's aggressive push to challenge US technological dominance.  The increased tariffs have rattled financial markets, although Trump has said he still hopes to achieve a trade deal in coming weeks.  Total industrial production is up just 0.9% over the past year.  Manufacturers in Apr operated at just 75.7% of capacity, down from 76.2% in Mar.

US industrial production down 0.5% in April

A Federal Reserve projection on economic growth just weakened substantially, & expectations for a rate cut over the next 8 months got a lot stronger.  The Atlanta Fed's closely watched GDPNow tracker is pointing to a 1.1% gain for the economy in Q2, according to a revision posted today.  That comes on the back of a strong Q1 that saw a 3.2% gain & is substantially lower than CNBC.s Rapid Update survey, which puts the GDP tracking estimate at 2%.  Disappointing retail sales in Apr fueled the latest leg down in the Atlanta Fed outlook.  The Commerce Dept reported that sales declined 0.2% for the month against expectations of a 0.2% gain.  Along with the retail letdown, industrial production fell 0.5% against estimates of a 0.1% gain.  Taken together, the weaker-than-expected numbers took a ½ percentage point off the Fed's previous Q2 estimate.  The drop in the GDP forecast coincided with market expectations that the Fed will be lowering interest rates in the months ahead.  Futures trading indicates an 80% chance of a rate cut by Jan 2020, according to the CME's FedWatch tool.  However, the decrease could come even sooner than that, the tool assigns a 51% probability of a move lower in Sep & a nearly 42% chance of 2 cuts by Jan.  Fed officials have been unified in saying they don’t foresee a cut or an increase before the end of the year.

The Atlanta Fed’s GDP forecast is sliding, and expectations for rate cuts are surging

Macy's (M) reported Q1 & same-store sales that topped expectations, as its initiatives to refresh outdated stores & get more people to shop using its mobile app showed signs of paying off.  But its sales still fell from a year ago, as the department store chain continues to face many of the same challenges impacting all retailers today.  It’s not easy to draw people to the mall to buy clothes, when they could just shop on online sites.  CEO Jeff Gennette said e-commerce revenues grew at a double-digit percentage rate during the qtr, while mobile remained Macy's fastest-growing channel for sales growth.  However, the timing of Easter, which fell later in the season this year than last, hurt sales, as did the colder, wetter weather that has blanketed much of the country this spring, he added.  But Macy's is doing especially well with its most loyal shoppers.  Transaction growth of 5.7% during the qtr was driven by its most loyal customers “shopping more frequently than ever,” Gennette said.  EPS was 44¢, compared with 45¢ a year ago & ahead of expectations for 33¢.  Revenue dropped to $5.504B, in-line with expectations of $5.505B.  Sales at stores open for at least 12 months, on an owned plus licensed basis, were up 0.7%, better than an expected 0.2% drop.  For fiscal 2019, Macy's is still calling for net sales to be about flat with the prior year.  Same-store sales, on an owned plus licensed basis, are estimated to be flat to up 1%.  And Macy's still expects adjusted EPS of $3.05-3.25.  Analysts had been calling for annual EPS of $3.09.  The stock was off a dime.
If you would like to learn more about Macy's, click on this link:

Macy’s earnings crush estimates, boosted by online sales

International Data said that semiconductor sales are expected to suffer a sharp downturn in 2019 after growth in 3 consecutive years.  The analysis firm said that chip sales are now expected to decline 7.2% this year, after growing 13.2% in 2018.  Much of the downturn is attributed to memory chips, which were bought in large numbers in 2018 due to short supply at the end of 2017, & are now being digested by the companies that bought them, hurting memory suppliers.  Non-memory semiconductors are expected to grow sales by 1% in 2019, IDC said.  Major chip companies have predicted that the current downturn will end in H2 & IDC predicts that the bottom will likely occur by the end of Q3 & sales will bounce back in 2020 & beyond.

Chip sales to fall more than 7% in 2019 after three years of growth, IDC predicts

Stocks were bid higher in the AM.  Postponing a hike in auto tariffs was welcomed by investors, but then the bulls went home.  The indices were flattish for the rest of the trading session.  US-China trade talks are still stuck in the mud.  The 2 sides are resting, trying to figure out what to do next.  As a result, a choppy time for stocks is not going away anytime soon.  Safe haven Treasuries remain in demand bringing the lowest yields in months (even years).

Dow Jones Industrials

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