Monday, January 4, 2021

Markets tumble after starting the year with a modest gain

Dow dropped 571, decliners over advancers better than 2-1 & NAZ dropped 189.  The MLP index fell 1+ to the 137s & the REIT index sank a very big 8+ to the 364s.  Junk bonds funds slipped lower & Treasuries were little changed in price.  Oil was off to the 47s & gold jumped 49 to 1944.

AMJ (Alerian MLP index tracking fund)








CL=FCrude Oil48.64
+0.12+0.3%












GC=FGold1,936.80
+41.70+2.2%











 




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Pres-elect Joe Biden is pledging to use the power of the federal gov to buy American goods & jump-start domestic manufacturing.  Some companies say rules that are too restrictive could raise their costs & complicate supply chains for items not made in the US.   Biden's “buy American” proposals echo those of previous presidents, including Pres Trump, who issued exec orders to spur more federal purchases of US goods & sought to use tariffs to disadvantage foreign producers.  The results for companies have been uneven, with some benefiting from increased sales & others dealing with higher expenses.  Biden said during his campaign after the election that he would tighten “buy American” rules.  He has proposed $400B in federal spending on infrastructure projects that use American products such as domestically made steel & protective gear for medical workers battling the coronavirus pandemic.  He has also proposed that Congress devote an additional $300B to research & development of new products.  “From autos to our stockpiles, we’re going to buy American,”  Biden said in Nov.  Those promises could be difficult to turn into reality, however & could face resistance in a divided Congress.  Some economists & trade experts said such gov purchasing might help some companies but not the industrial sector overall.  The policies carry risks including higher prices & retaliation from other countries against US exports, said some execs & economists.

Manufacturers want Biden to boost ‘buy American’ practices

The Federal Reserve must aim monetary policy to deliver inflation around a 2.5% annual rate if the central bank is serious about having inflation average 2%, Chicago Fed Pres Charles Evans said.  He argued that Fed officials shouldn't settle for just getting inflation slightly above 2%.  “If we try to fine tune a very modest inflation overshoot of only a tenth or two, we run a very large risk of failing to achieve our 2% averaging goal within any reasonable amount of time,” Evans added.  “To me, getting inflation moving up with momentum and delivering rates around 2.5% is important for achieving on our inflation objective in as timely a manner as possible,” he said.  Under the Fed's new policy framework, the central bank is seeking to achieve inflation that averages 2% over time & has recognized that the appropriate policy will likely aim to achieve inflation “moderately above” 2% for some time.  It likely will take years to get average inflation up to 2%, which means monetary policy will be accommodative for a long time, Evans said.  “This translates into low-for-long policy rates and indicates the Fed likely will be continuing our current asset purchase program for a while as well,” Evans continued.  The Fed is currently purchasing $80B of Treasuries per month as well as $40B in mortgage-related securities.  If core inflation reaches 2.5% in 2024 & stays there, “average” core inflation would not reach 2% until late 2025 or early 2026, Evans said.  For the Fed's plan to be successful, financial market participants will have to find it credible, Evans said.  “To meet our objectives & manage risks, the Fed’s policy stance will have to be accommodative for quite a while,” Evans added.  “Economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives,” he said.

Fed’s Evans wants to get inflation rate up to 2.5%

Activity in China's factory sector rose in Dec as the world's 2nd-largest economy sustained its recovery to pre-pandemic levels, a business survey showed, however, increasing cost pressures slowed the pace of expansion.  The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 53.0 from Nov's 54.9, with the gauge staying well above the 50-level that separates growth from contraction but missing expectations & easing to the softest pace in 3 months.  The forecast called for the reading to slip to 54.8.  China's vast industrial sector has staged an impressive recovery from the coronavirus shock thanks to surprisingly strong exports.  The economy is expected to expand around 2% for the whole of 2020 - the weakest pace in over 3 decades but much stronger than other major economies still struggling to contain infections.  However, tougher coronavirus control measures in many of its key trading partners in the west could dent industrial demand, weighing on the recovery.  The Caixin PMI reading comes after an official gauge of factory activity, focusing more on larger & state-owned firms, also moderated but remained strong.  The private sector survey also showed input prices rose sharply, at the fastest pace since 2017, with pricier raw materials, especially metals, blamed for the increase.  Chinese factories also laid off more workers than they hired for the first time in 4 months, although the decline was modest.  Gauges of both total new orders & factory output slipped from Nov but remained strong.  Growth in new export orders also slowed.

China's factory sector rose in December, sustained pre-Covid levels

The bulls attempted to begin the year with an advance, but that did not last long.  Sellers returned & have been driving the markets lower.  Meanwhile, there is strong demand for safe haven gold.  It looks like Dec economic data will be drab which would not encourage buying stocks.  The goings on DC is another solid negative for buying stocks.

Dow Jones Industrials

 






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