Dow slumped 514, decliners over advancers 3-1 & NAZ declined 89. The MLP index dropped 3+ to the 196s & the REIT index fell 4 to the 447s. Junk bond funds crawled higher & Treasuries saw heaving buying. Oil climbed in the 71s & gold inched up 1 to 1776,
AMJ (Alerian MLP index tracking fund)
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20 senators joined together in bipartisan support for a $950B infrastructure bill that would be paid out over a 5-year period. 10 Reps & 10 Dems crafted a plan they said would work as a "framework" to address the nation's biggest infrastructure goals without raising taxes. "We support this bipartisan framework that provides an historic investment in our nation’s core infrastructure needs without raising taxes," the group said in a joint statement. "We look forward to working with our Republican and Democratic colleagues to develop legislation based on this framework to address America’s critical infrastructure challenges." The latest plan is a cut from Pres Biden’s original $2T plan that sought to bolster infrastructure, address climate change-based initiatives & expand employment. The plan agreed would include $580B in new spending above a $394B baseline. Biden asked for about $600B in new money. It would also include unused funds set aside for coronavirus relief that Biden agreed to repurpose, along with rejected unemployment insurance funds from the more than 20 states that no longer accept enhanced federal unemployment. The bipartisan plan will need to still win over Reps who refused to agree to a plan that includes anything but basic infrastructure costs. But Biden & progressives in Congress could prove to be the bigger hurdle in finding a bipartisan infrastructure plan.
$950 billion infrastructure bill gets bipartisan Senate support
St Louis Federal Reserve Pres James Bullard said that he sees an initial interest rate increase happening in late-2022 as inflation picks up faster than previous forecasts had anticipated. That estimate is even quicker than the outlook the broader Federal Open Market Committee released that caused a hit to financial markets. The committee’s median outlook was for up to 2 hikes in 2023, after indicating in Mar that saw no increases on the horizon. Bullard at several points described the Fed's moves this week as “hawkish,” or in favor of tighter monetary policy than what has prevailed since the onset of the Covid-19 pandemic. “We’re expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting,” he said. “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.” The FOMC's revised forecasts reflect that sentiment. For 2021, the committee raised its expectations for core inflation as measured by the personal consumption expenditures price index to 3% from the Mar estimate of 2.2%. It also brought its median estimate for inflation including food & energy prices up to 3.4%, a full percentage point jump from the prior outlook. Along with that, the committee hiked its outlook for GDP growth to 7% from 6.5%. As recently as Dec the committee had been looking for growth of just 4.2%. “Overall, it’s very good news,” Bullard said of the economic trajectory during the reopening. “You love to have an economy growing as fast as this one, you love to have a labor market improving the way this one has improved.” However, he cautioned that the growth is bringing faster-than-expected inflation, adding that “you could even see some upside risks” to price pressures that by some measures are running at their highest levels since the early 1980s. That's why he thinks it would be prudent to start raising interest rates as soon as next year. The Fed dropped its key overnight lending rate to near zero at the outset of the pandemic & has kept it there since. Bullard sees inflation running at 3% this year & 2.5% in 2022 before drifting back down to the Fed's 2% target. “If that’s what you think is going to happen, then by the time you get to the end of 2022, you’d already have two years of two-and-a-half to 3% inflation,” he added. “To me, that would meet our new framework where we said we’re going to allow inflation to run above target for some time, and from there we could bring inflation down to 2% over the subsequent horizon.”
Fed’s Jim Bullard sees first interest rate hike coming as soon as 2022
The Federal Reserve, which has played a big part in confusing the markets, may be helping to clear things up. What happened to the argument that inflation would blow up bond yields? So far, it has been wrong. With
bond yields lower, not higher, the bond market is signaling it’s more
worried about weaker growth, not inflation. And the Fed is the cause of
that. A lot of apoplectic investors are twisting themselves into pretzels
these days, trying to understand what's going on in the markets. Inflation
hawks are having a tough time explaining why, now that the Fed has
finally upgraded its inflation expectations, bond yields have been
dropping. Value investors — banks, industrials, commodity stocks & other
cyclicals — who have enjoyed 5 months of outperformance after years
of lagging the market are apoplectic that the market is selling off
commodity stocks as fast as they can. It's understandable everyone is confused. The shock of Covid, the sudden
bust & subsequent boom, combined with massive liquidity from the
Federal Reserve, has confused everyone on where we are in the economic
cycle. If the economy is still in an early stage of the
economic expansion, investors would typically buy cyclical (value) &
bank stocks. If the economy is in the middle of the recovery, in
which growth & earnings are still strong but beginning to decelerate & interest rates are still low, investors would typically favor
technology stocks. If the economy is in a late-cycle phase, which
is characterized by higher rates & higher inflation & high
price-earnings ratios, investors would typically favor defensive sectors
like consumer staples. The problem is, no one is sure what part
of the economic cycle we’re in. That's why we go up & down, & in &
out, of different sectors every day. Traders call this rotation. But this is much more than rotation. This borders on schizophrenia.
The Federal Reserve is helping to clear up investors’ confusion, but many questions remain
This week has been a brutal time for financial markets, Commodities are finding buyers today after yesterday's selloff, but stocks are being hit with more selling. In all fairness, the Dow is still up 9% YTD. That's nothing to be ashamed of with all the uncertainty out there. While writing this blog, bargain hunters back nibbling. Maybe that will continue in the PM.
Dow Jones Industrials
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