Dow went up 72, advances modestly ahead of decliners & NAZ added 28. The MLP index was up 1+ to the 193s (helped by strength in oil) & the REIT index crawled up 1+ to the 444s (for another record). Junk bond funds were flattish & Treasuries remained in demand. Oil rose to the 68s & gold inched up 1 to 1906,
AMJ (Alerian MLP index tracking fund)
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The recent spike in US inflation is likely transitory for now — but it could become more persistent in the coming years as more people return to work, said former New York Fed Pres William Dudley. “I think that the scare right now is probably going to abate a bit as we go through the next year, but I think in the long run, are we going to see inflation ... above 2%? I think the Fed is going to succeed in doing that,” he said. Inflation has been a major focus in recent weeks. Investors are worried that a quicker rise in consumer prices would prompt the Federal Reserve to hike interest rates earlier than expected. The US consumer price index rose 4.2% in Apr from a year ago — the sharpest increase since 2008. The Fed had previously indicated that it’s willing to let inflation run above the 2% target for some time before raising rates. Dudley said the latest spike in inflation was driven by factors that will resolve over time, such as disruptions in supply chains & a comparison against lower numbers last year as the economy was badly hit by the pandemic. In addition, more people must gain employment before the US faces a labor constraint that feeds thru to inflation more persistently in the coming years, he added. Still, Dudley said he thinks the Fed will discuss tapering its asset purchases — & start winding down its buying — by year end. Several Fed officials have said it’s time to at least start talking about easing off asset purchases, a monetary policy tool referred to as quantitative easing (QE). QE is used by central banks to spur economic activity by buying financial assets such as long-term securities. Selling off those assets will reduce money supply & could ease inflation. Dallas Fed Pres Robert Kaplan said last week that potential excesses in the housing market & other inflation signs are indications that the central bank should start tapering slowly. Overall, the US economy is recovering from the Covid-19 slump & that adds to the attractiveness of the $, said Dudley. The greenback is the world's dominant reserve currency, but the share of US $ reserves held by central banks fell to 59% in Q4-2020 — the lowest level in 25 years, the IMF said.
U.S. inflation is transitory but could become more persistent, says ex-Fed official Dudley
A one-2 punch of rising prices & a shortage of homes is impacting demand for home mortgages. Mortgage application requests fell 4% in the past week, according to the latest weekly survey from the Mortgage Bankers Association (MBA). Even interest in purchasing finally cooled with the seasonally adjusted Purchase Index decreasing 3% from one week earlier. "Mortgage applications decreased for the second week in a row, with the overall index reaching its lowest level since February 2020," said Joel Kan, MBA’s associate VP of economic & industry forecasting. "Tight housing inventory, obstacles to a faster rate of new construction, and rapidly rising home prices continue to hold back purchase activity." Refinancing also took a hit as that index fell 5% from a week ago. "Refinance activity dropped for the second straight week, even as the 30-year fixed rate decreased slightly to 3.17 percent. Even though rates have been below 3.20 percent over the past month, they are still around 20-30 basis points higher than the record lows in late 2020," added Kan. The survey covers more than 75% of all US retail residential mortgage applications & has been conducted weekly since 1990.
Housing shortage, rising prices push mortgage applications to February low
Booze drinkers along with restaurant & bar owners face steep prices as a trade war continues between the US & EU. But it’s not as bad as it could have been. It's a trade battle with an ally. US tariffs on US alcohol were scheduled to double Jun 1 to 50%. The tariffs remain high. But the EU backpedaled on a promise to jack up tariffs even further. This trade battle started a couple of years ago. The US upped tariffs on aluminum and steel from the EU. The EU retaliated by hitting US products like Kentucky bourbon with a 25% tariff. "I don't think people realize the economic spin-off that that has in Kentucky," said Rep James Comer. "It's not just the distilleries themselves and the bourbon trail and all the travel that comes with it. You've got a lot of farmers that grow the grain for the bourbon in Kentucky and also in my district. All the barrel makers." "You want to have a free flow of goods and markets to meet consumer demand. And when you throw big tariffs on it, it distorts it and makes it not fair," said Rep Don Beyer, a member of the House Ways & Means Committee's trade panel. This was tit for tat. So, the US tagged Irish & Scotch whisky with a 25% tariff due to a trade dispute with Airbus, the European aerospace consortium. With a 25% on Scotch, it was like paying for 5 bottles instead of 4. The EU is America's largest trading partner. American bourbon exports plunged 41% to the EU. American imports of Scotch whisky dropped 39%. People looked for alternatives during the pandemic. So they imbibed liquor not affected by the tariffs — like tequila. "It's certainly not good for our domestic manufacturers. It’s certainly not good for those overseas making Scotch whisky," said Beyer. The tariffs are a double whammy for a hospitality industry already waylaid by the pandemic. Restaurants are now struggling to find workers as customers trickle back in. But restaurants & bars may have only one alternative: pass along higher liquor & alcohol costs to patrons. "A typical restaurant collects 30 to 40 percent of their profit selling alcoholic beverages," said Rep Earl Blumenauer, chair of the Ways & Means trade subcommittee. "This is one of the reasons why we fought so hard to have some support for restaurants to keep them alive so that we don't have a permanent detrimental" to restaurants. The spirits industry enjoyed duty-free status from 1997 until 2018. That's why they want to roll back the tariffs to zero.
Trade war continues, but it’s not as bad as it could have been
Today's rise barely qualifies as a rally with a limited advance/decline ratio. Stocks are only crawling higher while gold & Treasuries are getting investor attention. May economic data highlighted by the jobs report on Fri will drive the stock market this week.
Dow Jones Industrials
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