Dow was off 293, decliners over advancers 5-2 & NAZ declined 83. The MLP index slid back 1 to 229 & the REIT index fell 7 to the 379s. Junk bond funds were mixed & Treasuries edged higher which lowered yields. Oil retreated 1+ to the 78s & gold tumbled 30 to 1823 on Powell's remarks.
AMJ (Alerian MLP Index tracking fund)
Federal Reserve Chair Jerome Powell cautioned that interest rates are likely to head higher than central bank policymakers had expected. Citing data earlier this year showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for 2 appearances this week. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Those remarks carry 2 implications. One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials & (2) that the switch last month to a smaller qtr-percentage point increase could be short-lived if inflation data continue to run hot. In their Dec estimate, officials pegged the terminal rate at 5.1%. Current market pricing is a bit higher than that, in the 5.25%-5.5% area. Powell did not specify how high he thinks rates ultimately will go. The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy into a ditch. However, Jan data shows that inflation as gauged by personal consumption expenditures prices, the preferred metric for policymakers, was still running at a 5.4% pace annually. That's well above the Fed's 2% long-run target and a shade above the Dec level. Powell said the current trend shows that the Fed's inflation-fighting job is not over. “We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do,” he said.
Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated
Pres Biden wants to raise taxes in an effort to boost funding for Medicare & give the program more leeway to negotiate lower costs for prescription drugs, according to details of his budget proposal. Biden announced the initiative, which will directly impact those making more than $400K. "Medicare is more than a government program," Biden said. "It’s the rock-solid guarantee that Americans have counted on to be there for them when they retire." The proposal, according to Biden, will "make the Medicare trust fund solvent beyond 2050 without cutting a penny in benefits" by increasing the Medicare tax rate from 3.8% to 5% on income exceeding $400K per year, including salaries & capital gains. "Let’s ask the wealthiest to pay just a little bit more of their fair share, to strengthen Medicare for everyone over the long term," Biden added. Referring to it as a "modest increase" for those making upwards of $400K, Biden said the plan to use funds "from those with the highest incomes will help keep the Medicare program strong for decades to come." Biden has repeatedly pledged not to raise taxes on those earning less than $400K a year, although Reps & multiple tax experts have warned that is not the case as he continues a push for additional spending. The plan is also intended to close what the White House describes as loopholes that allow some income to avoid Medicare taxes.
Biden proposes tax increase to boost Medicare funding
The American manufacturing sector is starting to show signs of weakness after 2 years of strong growth, as higher interest rates & a slowdown in exports threaten production. New orders for manufactured goods contracted for the 6th straight month thru Feb, according to surveys by the Institute for Supply Management. Manufacturing output is down 1.7% from its postpandemic peak in May 2022, according to a 3-month moving average of Federal Reserve data. And the Commerce Dept's measure of civilian capital equipment orders, excluding aircraft, the building blocks of business, was down 3.4% in Jan from its recent high in Nov 2021, after adjusting for inflation. Weaker manufacturing data suggests that consumers & businesses are starting to retrench in the face of economic uncertainty, said Jonathan Millar, senior US economist at Barclays. A manufacturing downturn could be a sign of trouble in the broader US economy. Although manufacturing accounts for a relatively small share of GDP, about 11%, it has historically been an early indicator of recession. The Fed’s aggressive pace of interest-rate increases to fight inflation has made it more expensive to borrow for big-ticket items such as consumer appliances or business machinery. Fed officials in early Feb approved raising their benchmark rate to the highest level since 2007 & have signaled they are likely to raise rates again when they convene later this month. "As the Fed continues to hike, manufacturing is going to be in the crosshairs," Millar added. "It’s hard to see this sector not suffer some sort of a downturn that is more significant than what we’ve seen already." The Fed could raise interest rates higher than previously anticipated this year to cool inflation, which recently showed signs of firming. "We cannot risk a revival of inflation," Fed governor Christopher Waller said last week.
Fed’s rate moves put manufacturing sector at risk
Thoughts about more rate hikes did not warm the hearts of traders. Higher taxes also was a minus, even though they claim it would only affect the richest who already pay a large share of the tax burden. The Dow chart below shows it keeps trending sideways near 33K.
Dow Jones Industrials
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