Thursday, May 16, 2019

Markets rebound on trade hopes

Dow went up 214, advancers over decliners 2-1 & NAZ gained 75.  The MLP index rose 2 to the 254s & the REIT index went up 2+ to the  285s.  Junk bond funds did little today & Treasuries were sold after recent buying.  Oil added 1 to the 73s (more below) & gold pulled back 11 to 1286 as stocks rose in price.

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The Federal Reserve erred by raising interest rates during the recovery, part of a policy implementation that misread key signals & threatened to send the economy into recession, Minneapolis Fed Pres Neel Kashkari said.  In an unusually harsh rebuke of central bank actions, Kashkari said the central bank shouldn't have tightened monetary policy with inflation so low.  Instead, he said, the policymaking FOMC should be signaling that it will allow inflation to run higher than the 2% target, a move that would send a clear signal that the Fed is serious about stimulating the economy.  The FOMC hiked rates 9 times starting in Dec 2015 as part of an effort to normalize policy following the extreme accommodations made during after the financial crisis & recession.  Those hikes came even as inflation stayed well below the Fed’s goal.  “In my view, these rate increases were not called for by our symmetric framework,” Kashkari said.  The remarks came as part of a review the Fed is doing of its framework & the approach it has taken to jolting the economy back to life.  They also jibe closely with sentiments from the White House.  Pres Trump has repeatedly criticized the rate hikes & has said the economy would be much stronger had the Fed backed off.  While acknowledging the aggressive measures the central bank took, bringing its target rate down to near-zero & implementing 3 rounds of asset purchases that took its balance sheet to $4.5T,  Kashkari said the Fed should have kept its foot on the pedal.  He based his position on a job market that is still growing even though wage gains are still tame & inflation is averaging around 1.6%.  “With inflation somewhat too low and the job market still showing capacity after 10 years, the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery,” he added.  He said one of the main problems was that Fed officials didn’t see how low unemployment could go without generating inflation.  The current unemployment rate is at 3.6%, the lowest reading in nearly 50 years.  “I believe that we misread the labor market, thinking we were at maximum employment when, in fact, millions of Americans still wanted to work, and fearing that if we hit maximum employment, inflation might suddenly accelerate, and we would then have to raise rates quickly to contain it,” he said.  “The headline unemployment rate has been giving a faulty signal,” he added.  Even with the low rate, another gauge that includes discouraged worker & those holding part-time positions for economic reasons remains at 7.3%, reflective of slack remaining in the job market.  Kashkari said the lesson from the tightening cycle is that the Fed probably will want to be even more aggressive with policy in the next downturn.  Evidence of tightening too fast came in Q4-2018, when markets feared the Fed would continue raising rates & reducing its balance sheet & sold off aggressively.  “Perhaps we’d have achieved maximum employment already if monetary policy had been more accommodative,′ he said, adding that “by raising rates more quickly than called for by our symmetric framework, we ran the risk of overtightening and causing a recession. Markets signaled this risk with the steep drop in bond yields and equity prices late last year.  The FOMC’s quick adjustment to pause further rate hikes was appropriate and, thankfully, seems to have mitigated this risk for now.”  However, he said he fears what may happen next time if the Fed doesn't do a better job of listening to economic & market signals.  “For our current framework to be effective and credible, we must walk the walk and actually allow inflation to climb modestly above 2 percent in order to demonstrate that we are serious about symmetry,” Kashkari said.  “Make-up strategies such as price-level targets offer this attractive feature. But we must honestly ask ourselves: If we felt compelled to raise rates when inflation was below target in this recovery, would we really keep rates low when inflation is above target next time? Count me as skeptical.”

Fed’s Neel Kashkari says rate hikes ‘were not called for’ and that policy has been ‘too tight’

A top Federal Reserve official said  the central bank's commitment to maintaining stable prices would benefit from a modest rise in inflation over the coming years, an indication the central bank wouldn't need to raise interest rates should inflation increase.  Fed governor Lael Brainard said underlying inflationary pressures, after filtering out transitory & idiosyncratic factors, “appears to be somewhat below” the Fed's 2% goal, a surprising development given continued declines in unemployment.

Fed’s Brainard Says Central Bank Should Welcome Modest Rise in Inflation

A gauge of home building across the US increased in Apr, driven by an uptick in single-family construction across much of the country.  Housing starts rose 5.7% in Apr from the prior month to a seasonally adjusted annual rate of 1.235M, the Commerce Department said.   Residential building permits, which can signal how much construction is in the pipeline, climbed 0.6% from Mar to an annual pace of 1.296M in Apr, the first monthly increase since Dec.

Home Building in the U.S. Rose in April

The number of people who applied for unemployment benefits last week fell to the lowest level in a month, dragging new jobless claims back near a post-recession low & suggesting all is well in the US labor market.  Initial jobless claims, a rough way to measure layoffs, sank 16K to a seasonally adjusted 212K last week, the gov said.  The forecast called for new claims to total 217K.  The more stable monthly average of new claims rose by 5K to 225, reflecting a runup in Apr tied largely to a late Easter holiday & spring break.  The monthly average should subside soon in line with the weekly figures.  The number of people already collecting unemployment benefits, known as continuing claims, fell 28K to 1.66M.   Claims have gyrated sharply over the past month from a low of 193K to a high of 230, but the ups & downs are quite common around Easter & spring break.  Those events can disrupt the process gov statisticians uses to adjust the numbers for seasonal variations.  If the seasonal quirks are stripped out, new claims remain near the lowest level in ½ a century & show no sign of rising.  The strong labor market, punctuated by the lowest unemployment rate in 50 years, is keeping the economy churning forward despite stiffer headwinds such as a tense trade standoff with China.  The US is still on track to set the record for longest expansion ever by midsummer.

Jobless claims drop 16,000 to 212,000, show no hint of deterioration in labor market

Oil futures climbed again, stretching their winning streak to a 3rd session, as investors focused on still percolating Middle East tensions.  West Texas Intermediate crude for Jun delivery rose 85¢ (1.4%) to settle at $62.87 a barrel, with prices marking the highest finish for a front-month contract since May 1.  Prices posted a 3rd straight climb, trading roughly 2% higher for the week.  The global benchmark, Jul Brent added 85¢ (1.2%) to $72.62 a barrel, for the highest finish to date in May.  The Saudi-led coalition in Yemen said it launched a series of airstrikes on Iran-backed Houthi rebels.  The move was in retaliation for the Houthi attacks earlier this week on the Saudi's oil infrastructure.  Yesterday, the US ordered all nonemergency staff to leave Iraq immediately amid heightened tensions with Iran over recent attacks against oil tankers & facilities in the Persian Gulf region.  The threatening activity, which followed the US removal of waivers for select buyers of Iranian oil, is seen potentially disrupting getting oil out of the region to feed the global market.

Oil tallies third straight gain as Middle East tensions persist

Stocks began the day higher & kept rising to midday.  Once again, enthusiasm faded & the Dow finished 100 below the highs.  Early earnings reports from retailers have been a boost to the bulls, while trade talks with China remain stuck in the mud.  The next earnings reports may not be heartwarming & trade tensions will persist.

Dow Jones Industrials

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