Thursday, July 18, 2019

Markets recover losses after NY Fed's Willliams' comments on rate cut

Dow finished the day up 3 (after earlier losses), advancers over decliners 5-4 & NAZ climbed 22.  The MLP index was off 1+ to the 253s & the REIT index slid back a tad to the 388s.  Junk bond funds drifted lower & Treasuries rose in price.  Oil retreated 1+ to the 55s (more below) & gold jumped up 23 to 1446, a new 6 year high.

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Central bankers need to act quickly & forcefully when rates are low & economic growth is slowing, NY Federal Reserve Pres John Williams said.  The influential policymaker delivered a speech discussing what should be done when central banks are near the “zero lower bound,” or close to as low as rates can go.  “It’s better to take preventative measures than to wait for disaster to unfold,” he said.  Rather than keep rates elevated to give central banks room to cut in the face of a crisis, Williams said the proper move is not to “keep your powder dry.”  “When the ZLB is nowhere in view, one can afford to move slowly and take a ‘wait and see’ approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB,” he said in his remarks.  “In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”  Williams spoke as the policymaking FOMC is expected to cut its benchmark interest rate during the Jul 30-31 meeting.  Officials are worried about persistently low inflation, spillover from a global slowdown & the fallout from back-&-forth tariffs between the US & China.  The Fed currently pegs the overnight funds rate at 2.25%-2.5% — above zero, but still well below normal levels that have prevailed during past economic expansions.  Williams did not directly address whether he favors a cut, though markets are pricing in a 100% chance of a qtr-point reduction & a 38% probability that the Fed might cut by ½ a point.  However, he said that when faced with low rates and slowing growth, the best strategy is to “take swift action” & “keep interest rates lower for longer.”  “The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall.  This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,” he added.

NY Fed President John Williams says the Fed needs to ‘act quickly’ if there is ‘economic distress’

IBM (IBM), a Dow stock, reported better-than-expected Q2 earnings, but the stock bounced around as the company's guidance for the year held steady.  The key numbers were:
  • Earnings: $3.17 excluding certain items, vs. $3.07 per share as expected.
  • Revenue: $19.16B, vs. $19.16B as expected.
Revenue fell 4% from a year earlier even as earnings grew 3%,. Year-over-year revenue has now declined for the 4th quarter in a row.  IBM's biggest business segment, Global Technology Services — which includes technology support services as well as infrastructure & cloud services — produced $6.84B in revenue, down almost 7% & below the $7B consensus estimate.  The Cloud & Cognitive Software unit — including cloud & data platforms, cognitive applications & transaction processing platforms — contributed $5.65B in revenue, above the estimate of $5.55B   IBM's Global Business Services segment, which includes application management, consulting & global process services, had revenue of $4.16B, just under the $4.17B estimate.  Systems revenue totaled $1.75B, down almost 20% & shy of the $1.82B estimate.  IBM said growth from the Power product line more than offset the impact from “product cycle dynamics” in the company’s storage & Z mainframe-computer products.  The Z line in past qtrs helped to lift IBM’s revenue as businesses made upgrades, but now it making for tougher comparisons.  In Q2, IBM announced a partnership with Cloudera & the sale of commerce & marketing software properties to funds advised by affiliates of Centerbridge Partners.  The company also announced layoffs.  It also took a charge because of “an unfavorable legal ruling” in a case against the state of Indiana that had been outstanding for around 10 years, James Kavanaugh, the company’s senior VP & CFO said.  Kavanaugh said that large deals in the qtr were down 20% on an annualized basis.  “Signings are not all equal. Signings vary,” he said.  IBM closed its $34B acquisition of Red Hat earlier this month.  The stock rose 6.56.
If you would like to learn more about IBM, click on this link:

IBM reports better-than-expected earnings, maintains full-year guidance

The leading economic index fell 0.3% in Jun to mark the biggest decline in 3 years, suggesting US growth is likely to be softer in the months ahead.  The decline in Jun, however, appears to be a bit of an anomaly.  Weekly jobless claims spiked in Jun, but have since fallen again.  And manufacturing orders & housing permits were unusually weak last month, suggesting a rebound might be in the cards soon.  A measure of current conditions rose 0.1% & a " lagging" index climbed 0.6%.  The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks & valleys.

U.S. leading economic index posts biggest drop since 2016

The Philadelphia Fed said its gauge of business activity in its region rebounded strongly in Jul after hitting its lowest level in 4 months in Jun.  The regional Fed bank's index rose to 21.8 in Jul from 0.3 in Jun.  The Jul level is the highest in a year after the index was 16.6 in May.  Any reading above zero indicates improving conditions.  The forecast called for a 4.5 reading.  The barometer on new orders increased 11 points to 18.9 while the shipments index rose 8 points to 24.9.  The measure on 6-month business outlook rose 17 points to 38, its highest reading since last May.  51% of the manufacturers surveyed said they have seen a “modest“ increase in demand for their products over recent months.  The surprising gain offsets some of the gloom surrounding manufacturing.  On Mon, a similar survey conducted by the NY Fed saw sentiment rebound partially in Jul.  Manufacturing has hit a rough patch this year, with the impact of intl trade policy tensions & a strong $ holding down activity.   Industrial production has declined for 2 straight qtrs, according to figures released Tues.

Philadelphia Fed manufacturing gauge rebounds sharply in July to highest level in a year

Earlier gains for oil futures on the back of increased tensions in the Middle East gave way to sizable declines, pushing US & global benchmark prices to their lowest settlements in a month.  Aug WTI crude lost $1.48 (2.6%) to settle at $55.30 a barrel after falling 1.5% yesterday.  Intl benchmark Sep Brent declined $1.73 (2.7%) to $61.93 after tumbling 1.1% yesterday.  Both benchmarks logged their lowest front-month contract finish since Jun 19.  Prices had been trading higher early today, after Iran's Revolutionary Guard said it seized a foreign oil tanker, which it claims was smuggling 1M liters of fuel near the island of Larak in the Persian Gulf on Sun.  Prices also posted declines yesterday after the Energy Information Administration yesterday reported that domestic crude supplies fell for a 5th consecutive week, but by less than the market expected—& petroleum products posted sizable gains.

Oil prices drop nearly 3% to lowest settlement in a month

There was some excitement for stocks today.  The market was lower on dreary word about trade talks.  Then Williams gave helpful comments (above) about a rate cut at the end of Jul.  The Dow shot up more than 100.  Meanwhile gold, bets against the stock market, had a stellar day.

Dow Jones Industrials

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