Dow shot up 431, advancers over decliners better than 3-1 & NAZ jumped 321. The MLP index gained 3+ to the 213s & the REIT index rose 3+ to 431. Junk bond funds continued weak & Treasuries were heavily sold bringing higher yields (more below). Oil slid back 1+ to the 112s & gold edge up 2 to 1816 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher & building material costs showed no relief. Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index (NAHB). Readings above 50 are considered positive, but this is the 5th straight month that builder sentiment has declined. It's the lowest reading since Jun 2020, when builders had a brief, quick negative reaction to the beginning of the Covid pandemic before rapidly bouncing back. As the economy shut down, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builder sentiment hit a record high of 90 by Nov 2020. Taking out that pandemic effect, this month's reading is the lowest since Sep 2019, when the US trade dispute with China was taking a hard toll on building material supply chains. “Housing leads the business cycle, and housing is slowing,” said NAHB Chair Jerry Konter. Of the index's 3 components, current sales conditions fell 8 points to 78 & sales expectations in the next 6 months dropped 10 points to 63. Buyer traffic fell 9 points to 52. “The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.” Entry-level buyers are being hardest hit by rising rates, but the drop in demand is showing up across all levels. Some surveys are also showing an increase in cancellation rates for new construction.
Homebuilder sentiment falls to 2-year low on declining demand and rising costs
The yield on the benchmark 10-year Treasury note rose above 2.9% as US retail sales came in about as expected & investors digested comments from Federal Reserve Chair Jerome Powell. The yield on the 10-year Treasury note last traded up 9 basis points to 2.966%, while the yield on the 30-year Treasury bond rose about 8 basis points to 3.153%. Yields move inversely to prices & 1 basis point is equal to 0.01%. Those moves followed shortly after US retail sales numbers came in about as expected. Consumer spending on retail rose 0.9% in Apr, according to the Census Bureau. Excluding autos, retail sales rose 0.6% in Apr. Powell said at a conference that “no one should doubt our resolve” in getting inflation under control. The Fed chief added that the central banks wants to see “clear and convincing” evidence of inflation coming down before finishing its tightening program, even if that means moving past the range for interest rates. “If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” Powell said. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down. We’ll go to that point. There won’t be any hesitation about that.” Yields added slightly to their gains during Powell's remarks. Yesterday, former Federal Reserve Chair Ben Bernanke said the central bank had made a mistake in waiting to address an inflation problem that has turned into the worst episode in US financial history since the early 1980s.
10-year Treasury yield climbs above 2.9%
US natural gas prices more than doubled since the start of the year & this summer's air conditioning season could send them soaring by at least another 25%. In the futures market, gas prices surged 4% today as hot spring weather in the southern US pressured a market that has already been concerned about tight supplies. The forecast points to warmer weather across the south to continue. “In the last month, there has not been a meaningful uptick in U.S. lower 48 states production,” said Matt Palmer, senior director North American natural gas at S&P Global Commodity Insights. “You’re seeing exports running full out on LNG; power burn from the power sector is really strong and layer in the heat we’re seeing and the expectation that the southern tier of the continent in May and June will see well above normal temperatures. That’s a recipe for higher prices.” Natural gas futures were trading at about $8.30 per M British thermal units [mBtu], up 137% for the year. A heat wave is expanding in the South, with temperatures above 100 degrees in some places. According to the National Weather Service, high temperature records are forecast to be tied or broken this week in Texas, Oklahoma & Louisiana. The higher natural gas prices are hitting US businesses & consumers at a time when other energy prices are surging with gasoline & record diesel fuel at records. Palmer said utilities that normally switch to coal for power when natural gas prices rise are finding that coal is even more expensive — the equivalent of $9-10 gas. “The likelihood of prices in the double digits this summer is getting stronger by the day,” Palmer added. While Russia's invasion of Ukraine has sent Europe's gas prices sharply higher, US prices have edged up as well. Russia was supplying about a 3rd of Europe's gas. US prices, however, are not directly linked to the global market, even as the country sends about 15% of its gas production overseas in the form of liquified natural gas (LNG). European prices are about 4 times higher for LNG. US production fell sharply during the pandemic, & while it has restarted, it's been growing slowly. In Feb, monthly production was 115B cubic feet (BCF) per day, down from 118 BCF in Dec, according to the latest gov monthly data. Supply is tight in the US market. The amount of gas in storage has been at an unusually low level & cold spring weather followed by the heat wave has created more demand than normal at this time of year. That has made it more difficult to build inventories. Some of the gas that would be set aside for next winter is being used.
Natural gas prices have already doubled this year. A hot summer could push them even higher
Federal Reserve Chair Jerome Powell emphasized his resolve to get
inflation down, saying he will back interest rate increases
until prices start falling back toward a healthy level. “If that
involves moving past broadly understood levels of neutral we won’t
hesitate to do that,” he said.
“We will go until we feel we're at a place where we can say financial
conditions are in an appropriate place, we see inflation coming down. “We’ll go to that point. There won’t be any hesitation about that,” he added. Earlier
this month, the Fed raised benchmark borrowing rates by ½ a
percentage point, the 2nd increase of 2022 as inflation runs around a
40-year high. Powell said following that increase that similar 50
basis point moves were likely to come at ensuing meetings so long as
economic conditions remained similar to where they are now. Today, he repeated his commitment to getting inflation closer to the
Fed's 2% target & cautioned that it might not be easy & could come
at the expense of a 3.6% unemployment that is just above the lowest
level since the late 1960s. “You’d still have a strong labor
market if unemployment were to move up a few ticks,” he continued. “I would
say there are a number of plausible paths to have a soft as I said
softish landing. Our job isn’t to handicap the odds, it’s to try to
achieve that.”
Powell says the Fed will not hesitate to keep raising rates until inflation comes down
Gold futures finished higher, extending a bounce from a 3-month low as the $ backed off from a nearly 2-decade high. Gold for Jun rose $5 to settle at $1818 an ounce, after rising 0.3% in the previous session & trading below the $1800-an-ounce threshold. The $ has been calling the tune for gold in recent weeks. The ICE US Dollar Index has pushed to its highest in around 20 years as the Federal Reserve has kicked off an aggressive interest rate-hiking cycle in a bid to get inflation under control. A stronger $ is seen as a negative for commodities priced in the currency, making them more expensive to users of other currencies. After gold prices settled for the day, Fed Chair Jerome Powell said he wants to see “clear and convincing evidence” that inflation has slowed before the central bank slows down its pace of planned interest rate hikes
Gold ends higher Tuesday, extending bounce from 3-month low
Oil futures ended lower, pulling back from their highest levels since late Mar as the US moved to ease some sanctions against Venezuela. West Texas Intermediate crude for Jun fell $1.80 (1.6%) to close at $112.40 a barrel after trading at the highest intraday level for a most actively traded contract since Mar 24. Jul Brent, the global benchmark, fell $2.31 (2%) to settle at $111.93 a barrel, after hitting its highest intraday price since Mar 28. Gains for crude were cooled after news reports said the Biden administration was easing some sanctions in order to encourage resumed talks between the US-backed opposition & the gov of Nicolas Maduro. The limited changes will allow Chevron (CVX), a Dow stock, to negotiate its license with the state-owned oil company, PDVSA, but not to drill or export any petroleum of Venezuelan origin. Crude prices have gained ground as gasoline, buoyed by falling inventories over the past several weeks, continued its rally. While implied demand for gasoline has fallen, the US summer driving season, which begins Memorial Day weekend, is around the corner. Tight supplies of distillates, which have also led to soaring diesel prices, have also moved to underpin crude. Meanwhile, the easing yesterday of some lockdown restrictions in Shanghai, China's largest city, had also helped boost crude. Upside for oil was seen limited by uncertainty over the EU's effort to impose a ban on imports of Russian crude in the face of continued resistance from Hungary. The ban requires unanimous approval of the EU's 27 members.
Oil ends lower, pulling back from 7-week high on Venezuelan supply prospects
Investors are still weighing Powell's comments although so far they are getting a warm reception. But the Dow chart below still looks ugly as there are numerous dark clouds that still worry investors.
Dow Jones Industrials
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