Markets hesitate ahead of Fed meeting

Dow went up 123, advancers over decliners 2-1 & NAZ gained 61.  The MLP index crawled higher to the 244s & the REIT index bounced back 5+ to the 327s after recent selling.  Junk bond funds & Treasuries finished about even.  Oil retreated 1+ to the low 81s & gold dropped 10 to 1995 (more below on both).

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For the 3rd month in a row, the Conference Board's Consumer Confidence Index fell dropping to 102.6 in Oct from an upwardly revised 104.3 in Sep.  The index is at its 2nd-lowest level this year, landing a hair above May's 102.5 reading.  Oct's decline came as “consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular,” Dana Peterson, chief economist at the Conference Board, said.  “Consumers also expressed concerns about the political situation and higher interest rates,” she said, adding that the Israel-Hamas war also impacted consumers' views on the economy.  The decline in consumer confidence was not evident across all age groups & household income levels.  Consumers below the age of 35 felt slightly more optimistic about the state of the economy this month than last & people above the age of 55 exhibited the biggest monthly decline in consumer confidence.  Meanwhile, consumers with a household income $25K-35K saw the biggest decline in confidence about the economy over the past month.  In contrast, consumers with a household income between $100K-$125K saw the biggest jump in confidence over the past month.

Consumer confidence drops for third consecutive month

Pfizer (PFE) reported a narrower-than-expected adjusted loss for the 3rd qtr as the drugmaker recorded charges largely related to struggles for its Covid antiviral treatment Paxlovid & the Covid vaccine.  PFE recorded a $5.6B charge for inventory write-offs in the 3rd qtr due to lower-than-expected use of Covid products.  Of these previously announced write-offs, $4.7B is chalked up to Paxlovid & $900M is attributed to the company's vaccine.  The pharmaceutical giant also reiterated the full-year adjusted earnings & revenue guidance it announced 2 weeks ago, which is drastically lower than its initial projections due to weakening demand for its Covid products.  That decline in demand also led PFE to announce a sweeping $3.5B cost-cutting plan at the same time.  Those efforts were seen as necessary to shore up investor sentiment as its rivals struggle to navigate the rapid decline of their Covid businesses, which are transitioning to the commercial market in the US this year.  3rd-qtr revenue of $13.2B, was down 42% from the same period a year ago, due to the decline in sales of its Covid products.  The company's Covid vaccine raked in $1.3B in sales, down 70% from the year-ago qtr.  The forecast expected the shot to bring in $1.5B in sales.  Paxlovid posted $202M in revenue, a drop of 97%.  Analysts had expected $613M in sales of the drug.  Together, the products pulled in around $1.5B in revenue for the qtr.  That compares with roughly $12B in sales during the same period a year ago.  For the 3rd qtr, PFE booked a net loss of $2.38B, or 42¢ per share.  That compares to a net income of $8.61B, or $1.51 per share, during the same period a year ago.  Excluding certain items, the loss per share was 17¢ for the qtr.  The inventory write-offs of Covid products accounted for an 84¢ per share adjusted loss CFO David Denton said.  PFE reiterated the guidance it outlined in Oct.  The company expects 2023 sales of $58-61B & full-year adjusted EPS of $1.45-1.65.  The company anticipates that its Covid vaccine will rake in $11.5B in sales this year.  The stock was unchanged.
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Pfizer swings to loss due to Paxlovid, Covid vaccine write-offs

The World Bank is warning that the prices of oil & other commodities could see "large increases" if the Israel-Hamas war spreads thru the Middle East.  The institution said in its Oct 2023 Commodity Markets Outlook report that despite commodity markets responding "calmly" to the war, "historical precedent" suggests that escalating conflict in the region could substantially disrupt commodity supply.  "Although neither Israel nor Gaza is a major energy producer, an escalation of the conflict and its spread to the wider region could lead to large increases in the prices of oil and other commodities," the report says.  "Historical precedent also indicates this could have destabilizing implications for the global economy. Moreover, spillovers to food prices could exacerbate food insecurity in conflict-afflicted areas in the region and around the world."  If that happens, depending on the level of impact to the global oil supply, the World Bank says prices per barrel could rise from the 2023 Q4 baseline forecast of $90 a barrel to around $102 in a "small disruption scenario" to as much as $157 a barrel in a "large disruption scenario."  "These types of disruptions in oil supplies can have a cascading impact on the prices of other commodities – especially natural gas prices, which are even more susceptible to transportation disruptions than oil," the World Bank also says.  As many as 9400 people have been killed in the war on both sides, including at least 1400 Israeli civilians & soldiers & 33 Americans.  An Israel Defense Forces spokesperson said more troops have been pouring into Gaza to fight terrorists there.

Oil prices could see 'large increases' if conflict spreads, World Bank warns

Gold fluctuated after renewed Israeli shelling of sites in Lebanon fueled geopolitical tensions, while data from the US pointed to a hot economy.  Israel's army fired at targets near the border between the countries, according to the state-run National News Agency.  Gold futures fell as the $ strengthened.  The most active gold contract for Dec fell $11 (6%), to close at $1994 per ounce.  Conflict between Israel & Hamas continued to lend support to gold.  Investors are also waiting for results of the Federal Reserve monetary policy meeting tomorrow, as well as US monthly jobs report on Fri.  Economic data released yesterday were mixed.  The Labor Dept reported that US employment cost index climbed 1.1% in the 3rd qtr of 2023 from the 2nd qtr, slightly faster than 1% expected.  The S&P CoreLogic Case-Shiller National Home Price NSA Index, covering all 9 US census divisions, reported a 2.6% annual change in Aug, up from a 1% change in Jul.  The Chicago Business Barometer, also known as the Chicago PMI, inched down to 44 in Oct from 44.1 in Sep.  The forecast expected a 45.3 reading.

Gold Falls On Stronger U.S. Dollar

West Texas Intermediate (WTI) crude oil closed at the lowest in 2 months as worries over a spreading war fade while Europe's inflation fell to the lowest in 2 years as the Euro Zone economy slows, cutting into demand.  WTI crude for Dec closed down $1.29 to settle at $81.02 per barrel, the lowest since Aug 29.  Dec Brent crude, the global benchmark, closed down 4¢ to $87.41.  While Israel's ground invasion of the Gaza Strip continues, worries that the war will spread to other Middle East countries, disrupting oil exports, are fading & the war premium added to oil prices is fading.  The market's focus is returning to supply & demand factors, with today's drop coming as European inflation fell to the lowest in 2 years in Oct, dropping to 2.9% from 4.3% last month amid a slowing Euro Zone economy.

WTI Crude Oil Falls To A Two-Month Low As The War Premium Fades

Oct was another dreary month for stocks, although a modest rally at month's end trimmed the loss.  It seems like what is a ton of negative news, starting with 2 major wars & high inflation, is not going away soon.   Dow lost 455 in Oct, but at least it finished barely above 33K.

Dow Jones Industrials 

Markets meander as investors brace for Federal Reserve meeting

Dow slid back 16, advancers over decliners better tan 2-1& NAZ was essentially even.  The MLP index was fractionally higher to the 244s & the REIT index recovered 4+ to the 326s.  Junk bond funds were higher & Treasuries had limited buying which lowered yields already at high levels (more below).  Oil crawled higher in the 82s after recent weakness & gold rose 3 to 2008.

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While respondents to the CNBC Fed Survey expect no additional rate hikes from the Federal Reserve, they have fully embraced its “higher-for-longer” mantra to the point where no rate cuts are expected until the 3rd qtr of 2024.   The 31 respondents, including economists, strategists & analysts, believe the Fed is now on hold into Sep of next year, when 57% expect a rate cut.  As recently as the summer, respondents had forecast rate cuts in the beginning of next year.  The outlook for the fed funds rate, the central bank's benchmark for short-term lending costs forecasts to end 2024 at 4.6%, assuming about 75 basis points of rate cuts.  In Jun, the year-end 2024 funds rate was forecast at 3.8%, which assumed 125 basis points of cuts.  A basis point equals 0.01%.  The outlook for a more hawkish Fed comes with roughly equal probabilities for a recession & a soft landing.  Respondents on average see a 49% probability of a recession in the next 12 months & a 42% probability of a soft landing.  While they have driven up their 2023 GDP forecast from under 1% in Jun to 2.4% now, they have slashed the outlook for growth roughly in ½ for 2024 to 0.73%.  “The Fed is too focused on a soft landing and has relegated hitting its target on inflation to a distant ‘eventually,’” wrote Robert Brusca, chief economist at Fact and& Opinion Economics.  He calls for the Fed to push harder now to bring down inflation & boost unemployment.  60% of respondents see the Fed hitting its inflation target in 2025 or sometime after that & 19% don't believe the Fed will ever get there.  The unemployment rate is forecast to go up from the current level of 3.8% to 4.5% next year.   All respondents say they are concerned about the growth rate of the federal deficit & 87% are concerned about the size of the debt.  A plurality of 45% say the gov should both raise revenue & cut spending, while 42% advocate only spending cuts.  Respondents place a 39% probability on a gov shutdown, with 61% saying it will be “somewhat negative” for the economy.

Markets are on board with the Fed’s ‘higher for longer’ policy, CNBC survey shows

Home prices surged to a new record high in Aug as the affordability crisis continues to deepen.  Prices increased 0.4% nationally in the period from Jul to Aug on a non-seasonally adjusted basis, the S&P CoreLogic Case-Shiller index showed.  On an annual basis, prices are up 2.6% from their peak the same time last year, markeding the highest level for the index since 1987.  The 10-city composite, which encompasses Los Angeles, Miami & New York, rose 3% annually, compared with a 1% increase in Jul.  The 20-city composite, which also tracks housing prices in Dallas & Seattle, jumped 2.2% in Aug, which is also higher than the 0.2% uptick recorded the previous month.  There was a major discrepancy in the price gains in the 20 cities: Chicago saw a 5% annual gain, making it the best-performing city for the 4th straight month. New York, meanwhile, posted a 4.98% gain, followed by Detroit with an increase of 4.8%.  On the other end of the spectrum, cities in the West posted some of the biggest declines. Las Vegas home prices plummeted 4.9%, edging out Phoenix with its 3.9% decline.  "Regional differences are substantial," said Craig Lazzara, managing director at S&P DJI, in a release.  The Case-Shiller index reports with a 2-month delay, meaning it may not capture the latest ongoings in the market.  The interest-rate-sensitive housing market entered a deep freeze last year in the wake of the Federal Reserve's aggressive interest-rate hike campaign.  But prices have quickly recovered as buyers adjust to higher mortgage rates & compete for a limited supply of homes.  "Home prices remained strong through August, despite the high cost of a mortgage payment," said Nicole Bachaud, Zillow senior economist.  "But as August faded into the fall, we saw mortgage rates surpass 20-year highs. These stubbornly high mortgage rates are continuing to put pressure on affordability which is cooling the market as more buyers get pushed to the sidelines this fall."  The number of available homes on the market at the end of Jul was down by more than 9% from the same time last year & down a stunning 46% from the typical amount before the COVID-19 pandemic began in early 2020, according to a recent report from Realtor.com.

Home prices jump for seventh straight month in August

The US 10-year Treasury yield fell as traders turned their eyes to DC with the Federal Reserve set to kick off its policy meeting.  The yield on the 10-year Treasury was down by more than 2 basis points at 4.85% & the 2-year Treasury  yield was trading more than 2 basis points higher at 5.067%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  The Fed's latest monetary policy meeting begins today & end with its latest interest rate decision tomorrow.  Markets are widely expecting the Fed to keep rates unchanged & are hoping for hints about whether it's likely done raising rates from guidance released alongside the rate decision & Fed Chair Jerome Powell's post-meeting press conference.  Several policymakers have said they believe rates won't have to go any higher in recent weeks, often citing tighter financial conditions brought on by higher Treasury yields as a key factor.  Higher yields are often associated with an easing economy.  Investors also assessed the state of the economy after the Treasury shared its borrowing plans for the final 3 months of 2023.  The Treasury is aiming to borrow $776B, which is below the previously expected amount.

10-year Treasury yield falls as traders look to Fed meeting

Traders are largely twiddling their thumbs, waiting for the results from the Fed's meeting tomorrow.  Powell's comments about the future for interest rates will get a lot of attention.

Dow Jones Industrials

 

Markets surge while watching developments in the MidEast war

Dow soared 511 (still under 33K), advancers over decliners a mild 5-2 & NAZ went up 146.  The MLP index slid back fractionally to the 243s & the REIT index recovered 1+ to the 321s.  Junk bond funds crawled higher & Treasuries had modest selling, raising yields.  Oil was off almost 3 to the 82s & gold added 9 to 2008 on war fears in the Mid East (more on both below).

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Americans are more worried about the state of the US economy than they were 1 year ago, despite the resilient job market, slowing inflation & an unexpected surge in growth during the 3rd qtr.  The spike in pessimism largely stems from fears over the Federal Reserve's aggressive interest rate hike campaign, which has pushed borrowing costs to the highest level since 2001, according to a new Harris Poll.  The survey found that 57% of middle-class Americans think higher interest rates are having a negative effect on their household finances.  On top of that, about 44% said they were stressed about the economy, up from 40% one year ago & 39% in Mar.  Fed officials voted at their Sep meeting to hold interest rates steady at 5.25-5.50%.  However, policymakers also left the door open to an additional increase this year, & indicated they will hold rates at peak levels for longer than previously expected.  The Fed is scheduled to meet 2 more times this year & investors widely agree the central bank will hold rates steady at the upcoming Nov meeting.  However, some traders expect that the Fed will approve a 12th rate increase in Dec following the blowout GDP report last week, which showed the economy grew at a 4.9% annualized rate from Jul-Sep.  The pace far exceeded expectations & marked the best gain since 2021.  Hiking interest rates tends to create higher rates on consumer & business loans, which then slows the economy by forcing employers to cut back on spending.  While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, auto loans & credit cards.  Higher rates have helped push the average rate on 30-year mortgages above 8% for the first time in years.  For Americans who carry a balance from one month to the next, the steady increase in rates over the past 18 months could be costing them hundreds, even thousand, of $s.  While inflation has declined from a high of 9.1%, it remains above the Fed's 2% target.  The Labor Dep reported that the consumer price index rose 0.4% in Sep from the previous month.  Prices are up 3.7% from the same time one year ago.

Fed's fight against inflation is weighing on middle-class Americans

The United Auto Workers (UAW) & General Motors (GM) have agreed to a deal that will put an end to collective bargaining talks between the union & Detroit automakers following more than 6 weeks of targeted US labor strikes.  GM is the final Detroit automaker to reach a deal with the union following historically contentious talks.  Tens of thousands of workers across the country went on strikes after the sides failed to reach agreements by a Sep 14 deadline.  2 sources familiar with the GM-UAW talks said negotiations occurred last night & to reach an agreement.  Ford (F) was the first to reach a tentative agreement with the union, on Wed, followed by a deal with Chrysler parent Stellantis (STLA) on Sat.  The 4½-year tentative agreements must still be ratified by members at each of the automakers.  The headline economics of the deals, such as 25% wage increases, were patterned off Ford's initial deal.  The raises & benefits cumulatively boost the top wage to more than $40 an hour, including an increase of 68% for starting wages to over $28 an hour, the union said of the Ford & STLA deals.  The strikes have collectively cost GM, Ford & STLA Bs of $s in lost production.  Ford said that the union’s strike has cost it $1.3B & the deal, if ratified by members, would increase labor costs by roughly $850-900 per vehicle produced.

GM, UAW reach tentative agreement to end labor strike

With all the chaos & heartbreaking loss of life around the world today, few noticed the Treasury Dept drop a financial bomb.  The deficit for fiscal year 2023 was $1.7T, growing 23% in a single year as the Treasury used $879B just to service the federal debt.  But "Bidenomics" means the worst is yet to come, & multi-trillion-dollar deficits are the new normal.  The impetus for these massive deficits is federal gov spending, which tipped the scales at $6.1T last year.  Receipts, meanwhile, were $4.4T, woefully short of the $5T previously forecasted.  A slowing economy & counterproductive tax increases were key drivers behind the $457B drop in receipts from the prior fiscal year.  Yet, even these reduced revenues would have resulted in a balanced budget if Pres Biden had simply allowed spending to return to its pre-pandemic level.  Instead, Treasury outlays are up 38% today compared to pre-pandemic times.  That’s why it's so deceptive for the Treasury to have recently announced that the deficit is $1T lower than when Biden took office.  Elevated spending levels in 2020 should have been one-time emergency measures, but the Biden administration institutionalized $6T budgets by simply replacing pandemic-era outlays with the Biden agenda.  Even worse, the $1.7T deficit in the last fiscal year was really a $2T deficit.  It was reduced only in a technical sense by $300B when the Supreme Court blocked Biden's student loan handout scheme.  The Treasury has merely reallocated that money to be spent in fiscal year 2024 because the Biden administration is hellbent on achieving its unconstitutional student loan bailout.  In other words, the unfunded spending has merely been moved from one ledger column to another.  Of that $300B, tens of Bs have already been allocated to selective student loan bailouts, while the rest will fund a broader bailout beginning next summer, known as the SAVE repayment plan, an end-run around the Supreme Court's ruling against the Biden administration.  But just looking at the spending that is officially included in the last fiscal year is terrifying.  It has resulted in a truly unprecedented level of federal debt: now more than $33.5T.  The breakneck pace of borrowing is increasing almost daily, with the Treasury borrowing $500B just in the first 3 weeks of the current fiscal year, which began Oct 1.  As the federal debt & interest rates rise, the cost of servicing the debt has completely exploded, eclipsing all but 2 line items of the Treasury's report: the Social Security Administration & the Department of Health & Human Services.  Interest payments even surpassed all military spending in the bloated Dept of Defense budget by $103B.  Despite this being an obviously unsustainable path, the Biden administration is doubling down, promising more gov spending & multi-trillion-dollar deficits forever.  Financial markets are beginning to wake up to the fact that the Treasury eventually won't be able to pay its debts, & that day may arrive soon.

The worst is yet to come for Americans after financial bomb gets dropped

Gold futures ended higher for a 4th session in a row, with prices finishing the session above $2000 an ounce, their highest since the end of Jul.  Gold for Dec climbed $7 to settle at $2005 an ounce.  That was the first settlement for a most-active contract above $2000 & highest finish, since Jul 31.  Prices for the precious metal have have been rising largely due to a fear trade with the eruption of the chaos taking place in Israel.  Confirmation can be seen in the fact that interest rates have continued to rise right along with the $, all while inflation has remained relatively muted & directionless.  The strength in the yellow metal cannot be attributed to any of the typical drivers.  Israeli forces advanced to the outskirts of Gaza City.  Against that backdrop, gold has been supported by a safe-haven bid & the potential for a wider Middle East conflict.

Gold Prices Settle Above $2,000, at Highest Since End of July

Crude prices tumbled almost 4% as the market looked beyond the war in the Middle East to focus on what the Federal Reserve might do or say at its interest rate decision on Wed.  Concerns over how US jobs numbers for Oct will turn out on Fri also kept oil traders on the edge.  West Texas Intermediate (WTI) crude for Dec, settled at $82.31, down $3.23 (3.8%).  The US crude benchmark has been in yo-yo mode for a week now, rising or falling more than 2% in a session, as the Israel-Hamas war raging on the Palestinian territory of Gaza had markets on the tenterhooks.  Last week, WTI finished down 3.6% & is due to finish Oct down 10%.  Brent crude for Dec settled at $87.45, down $3.03 (3.4%).  Last week, the global crude benchmark fell nearly 2% & is on track to end Oct down 9%.

Oil Down Almost 4%, Surrendering War Premium Amid Fed Focus

More economic data is coming as Oct comes to an end.  In addition, the huge increase in gov spending is very worrisome.  Unfortunately, many (especially in gov) think of the long term as the day after tomorrow.  The corollary is the future will take care of itself.  Not so!!

Dow Jones Industrials