Wednesday, May 22, 2019

Markets edge lower after Trump says no infrastructure deal

Dow fell 100, decliners over advancers 3-2 & NAZ slid back 34.  The MLP index was fractionally lower in the 255s & the REIT index was fractionally higher to the 382s (around record territory).  Junk bond funds drifted lower & Treasuries were purchased, taking the yield on the 10 year Treasury below 2.4%.  Oil sank 1+ into the 61s (more below) &  gold was steady at 1273.

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Federal Reserve officials approved a patient approach to monetary policy in 2019 during their 2-day meeting earlier this month, signaling there will be no interest rate moves in either direction for “some time.”  Minutes from the Apr 30-May 1 FOMC revealed that even in the face of increased global economic growth (or more moderate growth), better financial conditions & moderating global uncertainties, rates will remain steady.  "Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve," the minute summary said.  Policymakers at the central bank noted that inflation remained well below the Fed's target range of 2%.  In Mar, the Fed's preferred measure of inflation registered just 1.5%, a big reason that policymakers chose to halt interest rate hikes.  Most members thought, however, that the recent low dip in inflation was likely only "transitory."  While members did not explicitly mention rate cuts (or deflation, or a shrinking economy, both of which typically precede cuts) the minutes said that a few participants "noted that if the economy evolved as they expected, the Committee would likely need to firm the stance of monetary policy to sustain the economic expansion and keep inflation at levels consistent with the Committee’s objective."  The Fed also sounded a relatively optimistic note on the state of the global economy, easing the language surrounding global uncertainties, such as Brexit & the US-China trade war -- both of which prompted policymakers in Jan to vote to keep the benchmark federal funds rate unchanged in the near-term.  "In their consideration of the economic outlook, members noted that financial conditions had improved since the turn of the year, and many uncertainties affecting the U.S. and global economic outlooks had receded, though some risks remained," the minutes added.

Fed minutes reveal no interest rate moves coming for 'some time'

China is exploring more drastic action as a result of its trade fight with the US, according to the South China Morning Post.  While China is open to resuming trade talks, “government advisers are now highlighting the risk of sourcing critical supplies from an increasingly hostile US...and are exploring ways for the country to cut its exposure to the US,” the paper said, citing Chinese researchers.  The article was titled, “Donald Trump’s trade war and Huawei ban push China to rethink economic ties with US.”  And China is considering cutting natural gas purchases from the US as part of this movement, the paper said.  The move came after Pres Trump's latest action to blacklist Huawei, effectively halting its ability to buy American-made parts & components.  China is now threatening to stop funding an industry that the 2 countries have done sizable deals in.  In 2017, China agreed to fund a natural gas project in Alaska worth $43B, the South China Morning Post said.  China bought $6.3B worth of US crude & LNG in 2017, 3.6% of the country’s purchases of foreign energy products, adding that China's reliance on US energy products is “limited.”  US restrictions on Huawei had forced tech companies & chipmakers to cut ties with the Chinese telecom giant until the US granted a 90-day license to keep existing networks online.  The ban sparked a big sell-off in semiconductor stocks Mon.  Chinese Pres Xi Jinping ramped up his rhetoric on the trade war Mon by saying China is embarking on a “new Long March, & we must start all over again!”

The trade war is forcing China to ‘rethink economic ties’ to the US

Stocks that would benefit from a federal infrastructure spending program fell more than the rest of the market & hit their lows of the day after Pres Trump abruptly ended a meeting on infrastructure spending with Dem leaders.  “I walked into the room and I told Sen. Schumer and Speaker Pelosi, ‘I want to do infrastructure’…but we can’t do it under these circumstances,” Trump told the press in the Rose Garden.  Trump appeared to be reacting to comments Pelosi made earlier in the day when she said, “We believe the president of the United States is engaged in a cover-up” by blocking White House aides from giving testimony & responding to document requests from ongoing congressional investigations.  A White House official said the meeting between Trump & the Dems lasted just about 7 minutes.

Infrastructure stocks tumble after Trump says no spending deal while Democrats investigate him

Certain must-pass pieces of legislation, including a debt ceiling hike & critical gov spending bills, will move forward despite Pres Trump's claim that he cannot negotiate with congressional Dems while they continue to investigate him, a senior White House official said.  “Debt ceiling is must-pass, as is Govt funding,” the official wrote in a text message following Trump's walkout on a meeting with Dem congressional leadership.  “So no, that isn’t precluded by what happened today.”  Today's meeting was supposed to be the 2nd official sit-down between the pres & Dem congressional leadership specifically focused on infrastructure.  The debt ceiling hike that will be necessary later this year to keep the Treasury from missing debt payments, or from defaulting on its debt, is currently being hammered out as part of broader fiscal year 2020 budget negotiations on Capitol Hill.  This AM, Treasury Secretary Steve Mnuchin told a congressional committee that he hopes a deal to raise the debt ceiling will be reached before the end of the summer.  “From my meetings with senior leadership, everyone understands this issue, and I hope we never get to the point, late summer, where we’re even talking about these things,” Mnuchin said.  “I would hope for the benefit of the American people that we raise the debt limit soon.”  The prospect of a deal between the Rep-majority Senate & the Dem controlled House to both fund the gov & raise the debt ceiling seemed to improve this week, after Senate GOP leaders said they had personally lobbied the pres on the issue.  “I had a really good session with the president, just the two of us, about a week ago about the options available to us when it comes to government spending over the next two years,” Senate Majority Leader Mitch McConnell told reporters.

Investigations will not hold up debt ceiling hike, government funding bills: White House official

Federal Reserve Bank of NY Pres John Williams said that while inflation remains lower than he'd like, he doesn't see much chance the central bank will lower rates any time soon to bolster price pressures.  “I don’t see any strong move interest rates one way or the other” & the current setting of monetary policy is “well positioned” for what's going in on the economy, Williams said at a briefing on housing issues held at the NY Fed.

Fed’s Williams: Doesn’t See Strong Argument to Raise or Lower Rates

Oil futures dropped, with US prices posting their biggest single-session loss in nearly 3 weeks, after gov data revealed a hefty weekly increase in domestic crude stockpiles, defying expectations for a decline.  West Texas Intermediate crude for Jul delivery fell $1.71 (2.7%) to settle at $61.42 a barrel, the largest single session $ & percentage drop since May 2.  Global benchmark Jul Brent declined by $1.19 (1.7%) to $70.99 a barrel.  Both WTI & Brent crude marked their lowest front-month contract settlements since May 13.  The Energy Information Administration reported that US crude suppies rose 4.7M barrels last week, marking a 2nd weekly climb in a row.  The forecast called for a fall of 2M barrels.  However, data from the American Petroleum Institute yesterday had shown an increase of 2.4M barrels.  Total domestic crude production was estimated at 12.2M barrels a day last week, up 100K barrels from the previous week, the report said.

Oil prices drop as U.S. crude supplies post a second straight weekly climb

Dallas Fed Pres Robert Kaplan said that he is solidly in the "patient" camp on interest rates & had no position on whether the next interest rate policy move will be to ease or tighten.  Asked if the next move by the Fed would be a rate cut, Kaplan replied: "We're basically, I think, at the right policy setting.  I'm sort of agnostic at this point between about moving rates up or down."  Kaplan said he would need to see something "compelling" that would cause him to end this patient stance.  Financial stability concerns was one reason not to cut rates now, he added.  "I'm hesitant while we're at or past full employment and the economy is running at solid rates... that adding further accommodation to the economy could create excesses and imbalances that could be painful to deal with in the years ahead," Kaplan said.  While he is not a voter, Kaplan is influential given that he is a member of a small subcommittee of Fed officials that focuses on communication strategy.

Dallas Fed's Kaplan: 'Agnostic' whether next interest rate move will be 'up or down'

The FOMC minutes added little new on the future of changes in interest rates.  No increases are predicted for this year & the possibility of a rate cut this year is possible.  Dysfunctional DC kicked into high gear when quibbling seems to have brought an end to the prospects for an infrastructure bill.  Meanwhile US-China trade negotiations headed south today.  While the Dow was in the red all day, the amount of selling was not serious.

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