Wednesday, July 31, 2019

Markets tumble after Fed disappoints by sounding "more neutral"

Dow slumped 333, decliners modestly ahead of advancers & NAZ fell 98.  The MLP index dipped lower in the 248s & the REIT index was off fractionally to the 389s.  Junk bond funds slid lower & Treasuries were in strong demand, taking the yield on the 10 year Treasury down 4 basis points to 2.92%.  Oil inched higher in the 58s & gold gave back 10, falling to 1431 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The Federal Reserve cut interest rates for the first time since the start of the financial recession more than a decade ago, hoping to preserve the 11-year economic expansion from growing global uncertainties.  During its 2-day meeting, the FOMC voted, as expected, to ease the benchmark federal funds rate by 25 basis points, ending an era of monetary policy tightening by policymakers, who have voted 9 times since 2015 to hike rates.  In approving the cut, the range is 2-2.25%, the central bank cited "the implications of global developments in the economic outlook as well as muted inflation pressures."  Those uncertainties include Brexit, the US-China trade war & softening global growth.  Policymakers said they will continue to act "as appropriate" to sustain the economic expansion in weighing a potential future cut.  Currently, traders are pricing in a 77% chance of a 2nd qtr-percent cut during the FOMC's Sep meeting.  The cut should placate Pres Trump, who frequently belittles the Fed, & its chair, Jerome Powell, for raising interest rates too high, too quickly — but also raised questions about whether the central bank is truly independent, given the stronger-than-expected economic data out of the US in the past few months.  For instance, in the spring, the US economy expanded at a 2.1%  annualized rate, beating expectations.  "The issue is more the downside risks and the shortfall in inflation," Powell said.  "We’re trying to address those. In addition, going forward, I would say, we’ree going to be monitoring those same things, the evolution of trade uncertainty, of global growth and of low inflation. We’ll also, of course, be watching the performance of the U.S. economy...We’ll be putting all of those together, and that’s how we’ll be thinking of policy going forward."  It is a fairly remarkable policy shift for what is typically viewed as a slow-moving regulatory body, reversing years of slow-but-steady tightening.  The Fed has not reduced interest rates since 2008, when it essentially dropped rates to zero to cope with the fallout from the financial crisis.  At the time, the GDP was at -0.1% & unemployment was at 6%.  Experts caution, however, that concerns over a slowing economy are warranted, are not necessarily evidence of the Fed caving to external pressure from the White House.  For consumers, lower interest rates — which affect borrowing costs, including auto loan rates & 30-year-fixed mortgage rates — can mean thousands of $s in savings, spurring spending.  Although the lending rate is the highest level in years, it's low by historical standards.   But Fed officials believed it was better to cut rates now to prevent a recession than to wait for an economic slowdown.

Fed cuts interest rates for first time since the financial recession

When the Fed, as expected, cut interest rates by a ¼ point, it disappointed markets because it did not tip its hand on future rate reductions.  Bond yields fluctuated, but were off lows of the session, which were hit right before the Fed statement.  Yields rose & backtracked, & stocks fell.  The 2-year yield was at 1.83% & the Dow was down about 50 points just before Fed Chair Jerome Powell began speaking.  2 Fed officials, Kansas City Fed Pres Esther George & Boston Fed President Eric Rosengren dissented, as expected, but the dissents themselves create a lack of clarity about future policy.  The Fed also ended its quantitative tightening program 2 months early, as expected.  That program involved the rolldown of securities on the Fed's balance sheet, which the Fed will now replace as they mature.  The Fed revised its statement to include that it was cutting rates because of “the implications of global developments for the economic outlook as well as muted inflation pressures”  Strategists said the Fed was facing the difficult task of explaining why it was cutting interest rates at a time when US data appears to be improving.  The Fed has been citing soft inflation & concerns about global growth & trade war uncertainties.

Fed disappoints markets by sounding more ‘neutral’ than dovish

Federal Reserve Chair Jerome Powell said the central bank's rate cut was part an ongoing move to adjust to economic conditions though no guarantee of future cuts.  Cutting rates as way to brace against “downside risks,” to support the economy and to boost inflation, Powell added after the vote.  “We’re thinking of it essentially as a mid-cycle adjustment to policy,” he said.  He added that Fed officials “think it will serve all of those goals” that he mentioned.  Looking at the history of the Fed, Powell cautioned against assuming that this week's cut is the beginning of the cycles that happened in the past.  “That refers back to other times when the FOMC has cut rates in the middle of a cycle and I’m contrasting it there with the beginning of a lengthy cutting cycle,” he said.  “That is not what we’re seeing now, that’s not our perspective now.”  Markets took Powell's comments to be less dovish than anticipated, prompting a sharp selloff that pushed the Dow briefly down 470.  The Fed voted to reduce its benchmark lending rate a qtr point to 2-2.25%.  It was the first reduction in the benchmark funds rate since Dec 2008.  Powell said the policy loosening is part of an evolution that began earlier this year, when the Fed switched from intending to hike rates twice this year to agreeing to a “patient stance.”  As concerns intensified over global growth, tariffs & low inflation, officials switched their stance in Jun to seeing a greater case for rate hikes to deciding to approve the rate cut at the 2-day meeting.  He added that there was “definitely an insurance aspect” to the cut.  “What you’ve seen over the course of the year as we’ve moved to a more accommodative policy, the economy has performed about as expected with the gradually increasing support,” Powell said.  “Increasing policy support has kept the economy on track and kept the outlook favorable.”

Fed Chief Powell says rate move was a ‘mid-cycle adjustment,’ hinting more cuts not a guarantee

Gold futures finished lower, then extended their decline in to the electronic trading session after the Federal Reserve reduced its key interest rate by a qtr point, as expected.  The vote was 8-2, with Boston Fed Pres Eric Rosengren & Kansas City Fed Pres Esther George dissenting.  They preferred no change.  The most-active Dec gold contract was trading at $1439 an ounce in electronic trading about ½ an hour after the Fed announcement.  It had settled down by $4 (0.3%) at $1437 before the news.  For  the month, the yellow metal gained 1.7%, based on the most-active Aug contract finish of $1413.  It notched a 3rd consecutive monthly rise.  Gold has benefited from hope that the FOMC will reduce benchmark borrowing costs & signal a willingness to do what it takes to sustain US economic expansion in a record-setting 11th year of expansion.

Gold futures finish with a loss, then extend their decline after Fed cuts key interest rate, as expected

When it comes to the oil prices, market bulls are hoping Jerome Powell & his band of Federal Reserve policy makers can do what falling US crude inventories & rising geopolitical tensions haven't managed by giving crude a lasting kick higher.  Despite 6 straight weeks of falling US crude inventories & the rising danger of military conflict between the US & Iran near the Strait of Hormuz, the world's most sensitive oil choke point, West Texas Intermediate crude, the US benchmark, is barely up in Jul, while Brent crude, the global benchmark, is up 0.6%.  So far this year, WTI is up nearly 29%, while Brent has gained around 21%, bouncing back from a Q4-2018 selloff.  But both have lost ground over the past 12 months by nearly 15% & 12%, respectively.  The $ often carries an inverse correlation with commodities.  A weaker $, for instance, makes goods priced in $s less expensive to users of other currencies while a stronger $ has the opposite effect.  The lack of a rally has left some market bulls nervous.  OPEC & the Intl Energy Agency, which represents oil-consuming economies, have both lowered their forecasts for demand growth.  The IMF earlier this month cut its outlook for global economic growth & ECB Pres Mario Draghi last week lamented a “worse and worse” outlook for the eurozone's manufacturing sector.

Oil bulls look to Fed rate cut to overcome demand worries

The Fed meeting created a lot of excitement, much more than it usually does.  After the Fed announcement, the Dow plunged almost 500.  But the commentary after the meeting calmed some nerves & late day buying trimmed that loss.  The rate cut was delivered, but future reductions are now less clear making investors nervous.  Going forward, jitters will dissipate & US-China trade tensions will be getting more attention.  For the month, the Dow managed a gain of about 260 & was able to reach record territory at mid month. 

Dow Jones Industrials

Markets waver after US-China trade talks conclude

Dow slid back 3, advancers modestly ahead of decliners & NAZ crawled up 5.  The MLP index was fractionally lower in the 248s & the REIT index added 1 to the 391s.  Junk bond funds did little today & Treasuries were bid higher.   Oil climbed in the 58s & gold gave back 1 to 1440.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil58.34

GC=FGold   1,441.90

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The Federal Reserve is widely expected to cut interest rates for the first time in a decade in hopes of shielding the 11-year economic expansion from growing global uncertainties.  The central bank is expected to lower it by a modest qtr of a percentage point — will end an era of monetary tightening by policymakers, who have voted nine times since 2015 to raise interest rates, as recently as Dec.  The latest round of trade negotiations between the US & China seems to have ended with no progress.   Envoys for both countries met today for talks aimed at ending a tariff war after Pres Trump rattled financial markets by accusing Beijing of trying to stall in hopes he will fail to win re-election in 2020.   With more ½ the companies in the S&P 500 already out with earnings it’s noteworthy that the results are coming in much better than expected.  ¾ of the names reporting have beaten forecasts & nearly 2/3 have surpassed revenue estimates.

Stocks rise ahead of Fed decision on interest rates

The latest round of trade negotiations between the US & China seems to have ended with no progress.  Envoys for both countries met for talks aimed at ending a tariff war after Pres Trump rattled financial markets by accusing Beijing of trying to stall in hopes he will fail to win re-election in 2020.  The meeting ended about 40 minutes ahead of schedule.  Neither delegation spoke to reporters before Trade Representative Robert Lighthizer & Treasury Secretary Steve Mnuchin left for the airport.  According to a source familiar with the matter, the US & China will continue trade negotiations next in Sep.  It has been expected that breakthroughs were unlikely because the 2 govs face the same disagreements over China's technology policy & trade surplus that caused talks to break down in May.  Trump & Pres Xi Jinping agreed in Jun to resume negotiations but neither has given any sign of offering big concessions.  The dispute over US complaints that Beijing steals or pressures companies to hand over technology has battered exporters on both sides & disrupted trade in goods from soybeans to medical equipment.  Trump has raised tariffs on $250B worth of Chinese imports while Beijing responded by taxing $110B of US products.  Chinese leaders are resisting US pressure to roll back plans for gov-led development of industry leaders in robotics, artificial intelligence & other technologies.  The US complains those efforts depend on stealing or pressuring foreign companies to hand over technology.


Companies added more jobs than expected in Jul amid concerns that the US economy was slowing & the labor market was nearing full employment.  Private payrolls increased 156K for the month, according to a report from ADP & Moody's Analytics that beat estimates of 150K.  The number was an increase from the 112K in Jun, revised higher from the initially reported 102K.  While the number showed strength in the overall labor market, recent months have seen a departure from the consistent gains above 200K over the past several years, providing more signs that conditions are tightening.  “Job growth is healthy, but steadily slowing,” Mark Zandi, chief economist at Moody's Analytics, said.  “Small businesses are suffering the brunt of the slowdown. Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.”  Indeed, companies with fewer than 50 employees lagged their counterparts, adding just 11K positions for the month.  By contrast, those with more than 500 workers grew by 78K, while medium-sized businesses added 67K.  The services sector accounted for 146K of the total while goods producers added 9K (the numbers don't add to the final total due to rounding).  By industry, professional & business services grew the most, with 44K new jobs.  Education & health services were next with 37K while trade, transportation & utilities rose 27K.  On the goods side, construction added 15K but natural resources & mining fell by 6K & manufacturing contributed just 1K to the total.  The ADP/Moody's report is watched as a potential benchmark for the more widely followed nonfarm payrolls report, which the Labor Dept will release Fri.  The 2 reports can differ widely, though, as Jun's gov count reflected growth of 224K against the much smaller ADP total.  The forecast is calling for payrolls to be up 165K for Jul & the unemployment rate is expected to edge lower to 3.6%, a 50-year low.

Private payroll growth tops estimates as jobs market shows signs of tightening

US & Chinese negotiators wrapped up a brief round of trade talks that Beijing described as “constructive,” including discussion of further purchases of American farm goods & an agreement to reconvene in Sep.  The first face-to-face trade talks since a ceasefire was agreed last month amounted to a working dinner yesterday at Shanghai's historic Fairmont Peace Hotel & a ½-day meeting today, before Trade Representative Robert Lighthizer & Treasury Secretary Steve Mnuchin flew out.  “Both sides, according to the consensus reached by the two leaders in Osaka, had a candid, highly effective, constructive and deep exchange on major trade and economic issues of mutual interest,” China's Commerce Ministry said after the US team left Shanghai.  Negotiators discussed more Chinese purchases of agricultural products from the US, which had become a bone of contention after Pres Trump said China had not delivered on promised purchases.  The talks began amid low expectations, with Trump accusing Beijing of stalling, & warning of a worse outcome for China if it continued to do so.  Today, the Chinese Foreign Ministry said that it was not aware of the latest developments during the talks, but that it was clear it was the US continued to “flip flop.”  The spokeswoman said, “I believe it doesn’t make any sense for the U.S. to exercise its campaign of maximum pressure at this time.”  “It’s pointless to tell others to take medication when you’re the one who is sick,” she said.  The 2 sides will reconvene in Sep in the US, the Commerce Ministry said.

US, China trade meeting ends with sharp response to Trump

Not much for traders to do now except twiddle their thumbs.  A ¼ point rate cut is widely expected & the post meeting statement is not going to reveal new thoughts about changes coming in the future.  Earnings have been fairly good & Jul economic data is coming in the next week.  Aug which begins tomorrow has a reputation for being a slow month in the stock market.

Dow Jones Industrials


Tuesday, July 30, 2019

Lower markets as worries on a trade deal with China grow

Dow fell 23, advancers over decliners 5-4 & NAZ was off 19.  The MLP index fell 1+ to the 248s & the REIT index pared its advance & finished up 2 to the 389s.  Junk bond funds fluctuated & Treasuries were weak.  Oil jumped up 1+ to the 58s & gold gained 10 to 1443 (more on both  below).

AMJ (Alerian MLP Index tracking fund)

Americans’ spending moderated slightly in Jun but remained strong, a sign that high consumer confidence & low unemployment continue to fuel economic growth.  Personal-consumption expenditures, a measure of household spending on everything from airline tickets to furniture, increased a seasonally adjusted 0.3% in Jun from the prior month, the Commerce Dept said.

U.S. Consumer Spending Slowed Slightly in June

Merck (MRK), a Dow stock, reported Q2 earnings & revenue that easily beat expectations & narrowed its earnings & revenue forecast for the year.  The company expects full-year EPS of $4.84-4.94 versus the $4.75 forecast by analysts.  It sees 2019 revenue of $45.2-46.2B.  Analysts were expecting revenue of $44.74B.  The reduction in the earnings range reflects the inclusion of a charge of about $1.1B  related to the acquisition of biotech firm Peloton Therapeutics, announced in May.  “Our science-led strategy and execution across our key growth pillars have driven another quarter of accelerating revenue growth with strength across our global portfolio,” CEO Ken Frazier said.  Sales of Keytruda immunotherapy surged 58% in the qtr to $2.6B.   Keytruda, which boosts the immune system to attack cancer, has driven growth & put pressure on the competition.  Sales of Gardasil vaccine to prevent certain types of cancer were up 45.7% to $886M.  Sales of vaccines to children, which includes the company's MMR vaccine for measles, jumped 58% to $675M.  The stock went up 78¢.
If you would like to learn more about MRK, click on this link:

Merck smashes Wall Street earnings and revenue estimates

Home prices moved higher, & while the gains were shrinking in May on a national level, some markets are seeing stronger price appreciation yet again.  Nationally, home prices rose 3.4% annually in May, down from the 3.5% annual gain in Apr, according to the S&P CoreLogic Case-Shiller home price indices.  The 10-city price composite rose 2.2%, down from 2.3% the month before.  The 20-city composite showed a 2.4% annual gain, down from 2.5% in Apr.  “Nationally, year-over-year home price gains were lower in May than in April, but not dramatically so and a broad-based moderation continued,” said Philip Murphy, managing director & global head of index governance at S&P Dow Jones Indices.  Other more recent indices have shown price gains growing.  This particular read is a 3-month running average ended in May, so it is less current.  Home prices in some major markets have been heating up due to tight supply of houses for sale.  Inventories had been rising at the start of this year but are now flat nationally & lower in some cities, compared with a year ago.  Inventory is also most slim on the low end of the market, where demand is strongest.  The median existing-home price in Jun reached an all-time high of $285K, up 4.3% from Jun 2018 ($273K), according to the National Association of Realtors.

Seven cities see home prices heating up again, but Seattle prices are sinking

Gold futures settled higher, marking a 3rd straight session of gains, as investors digested economic data suggesting the US economy remains healthy with low inflation, while waiting for a Federal Reserve decision on interest rates tomorrow.  Aug gold added $9.30 (0.7%) to finish at $1429 an ounce, after gaining only 0.1% yesterday.  The metal marked its 3rd straight climb, representing its longest such streak since a 4-session advance ended Jun 25.  US personal-consumption expenditures, a measure of household spending, increased a seasonally adjusted 0.3% in Jun from the prior month, the Commerce Dept said.  The report showed inflation, a key measure of economic health for the Fed, was muted.  The personal-consumption expenditures, the Federal Reserve's preferred inflation measure, rose 0.1% in Jun & was up 1.4% from a year earlier. The rate-setting FOMC is widely expected to cut rates by at least 25 basis points at the conclusion of its 2-day policy gathering tomorrow.  The yellow metal has benefited from hope that the FOMC will reduce benchmark borrowing costs & signal a willingness to do what it takes to sustain US economic expansion in a record-setting 11th year of expansion.

Gold marks longest string of gains in 5 weeks ahead of Fed decision

US oil futures scored a 4th straight gain, with traders bidding up crude a day ahead of the conclusion of a Federal Reserve policy meeting that's expected to deliver a qtr percentage point interest rate cut.  The resumption of US-China trade talks were also viewed as a positive, despite downbeat comments from Pres Trump.  West Texas Intermediate crude for Sep delivery rose $1.18 (2.1%) to end at $58.05 a barrel after the benchmark rose 1.2% yesterday.  Meanwhile, Oct Brent crude the global benchmark, rose $1.01 to $64.63 a barrel, a gain of 1.6%.  The Fed is seen as virtually certain to cut interest rates, most likely by a qtr of a percentage point tomorrow.  Oil traders said the move could provide a lift to crude by soothing worries about demand fostered by signs of a slowing global economy, though the main catalyst could be through a weaker $.  A weaker $ can be a positive for commodities priced in the US unit, making them cheaper to users of other currencies.  While support also tied in part to the resumption of US-China trade talks, enthusiasm was tempered after Trump delivered a series of tweets accusing Beijing of negotiating in bad faith.

Oil pushes higher as investors focus on trade talks, Fed meeting

Stock indices meandered, spending most of the day in the red.  The interest rate cut is widley baked into the market, so China trade talks are getting most of the attention from investors.  That outlook is glum, to say the least.  But the Dow still remains within 1% of its record highs

Dow Jones Industrials