Dow sank 392, decliners over advancers a massive 8-1 & NAZ was off 109. The MLP index fell 1+ to 261 & the REIT index dropped 6+ to the 371s. Junk bond funds were weak along with the stock market & Treasuries were sold, driving yields considerably higher (more below). Oil slid below 72 & gold dropped 20 to 2033.
AMJ (Alerian MLP Index tracking fund)
Federal Reserve Chair Jerome Powell vowed yesterday that the central bank will proceed carefully with interest rate cuts this year & likely will move at a considerably slower pace than the market expects. In a wide-ranging interview last week, Powell expressed confidence in the economy, promised he wouldn’t be swayed by this year's presidential election & said the pain he feared from rate hikes never really materialized. “With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully,” he said. “We want to see more evidence that inflation is moving sustainably down to 2%,” Powell added. “Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.” As he did during a Wed news conference, he said it's unlikely the FOMC will make that first move in Mar, which futures markets had been anticipating. “We’ll update [the outlook] at the March meeting. I will say, though, nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts,” he said, noting that “the time is coming” for cuts but perhaps not yet. Powell was broadly optimistic about the economy, noting that inflation, while still above the Fed's target, has moderated while the jobs market is strong. Nonfarm payrolls accelerated by 353K in Jan, the Labor Dept reported Fri. The biggest risk, he said, is likely from geopolitical events.
Powell insists Fed will move carefully on rate cuts
Elevated shipping costs as a result of ongoing
tensions in the Red Sea could impede the global fight against inflation,
the Organisation for Economic Co-operation & Development (OECD) said. The Paris-based group estimates that the recent 100% rise in seaborne freight rates could increase import price inflation across its 38 member countries by nearly 5 percentage points if they persist. That could add 0.4 percentage points to overall price rises after a year, the OECD said in its latest economic outlook. In
late 2023, major shipping firms began diverting their vessels away from
Egypt's Suez Canal, the quickest trade route between Europe & Asia,
due to a spate of attacks by Iran-backed Houthi militants based in
Yemen. Tensions remain high, with the navies of countries including the US involved in the conflict. Ships are taking the longer Cape of Good Hope
route around the southern coast of Africa, which increases journey times
30-50%, taking capacity out of the global market. However, the OECD also notes that the shipping industry had excess capacity last year, a result of new container ships being ordered, which should moderate cost pressures. Clare
Lombardelli, chief economist at the OECD, said CNBC that a
sustained increase in inflation as a result of the latest crisis is a
risk, but not the group's base case. “It’s
something we’re watching closely ... we have seen an increase in
shipping prices, if that were to continue for for an extended period,
then that would feed through into consumer price inflation. But at the
moment, we don’t anticipate that to be the case,” Lombardelli said. According
to Tiemen Meester, chief operating officer at Dubai-based logistics
firm DP World, European imports are presenting the biggest challenge &
have seen significant delays to cargo that was already en route. “Unfortunately,
there’s higher cost in the inefficiencies in the network, so
ultimately, the rates are going up. But it’s actually nowhere near to
where they were at their peaks during Covid ... How that costs will find
its way to the consumer, we’ll have to see,” Meester said,
describing it as a “short-term problem.” “I think kind of where we
are now is a steady state, because the networks have adjusted and cargo
is flowing, bookings are taking, it just takes more time,” he added. Ships are taking the longer Cape of Good Hope route around the southern coast of Africa, which increases journey times 30-50%.
Red Sea tensions risk significantly higher inflation, OECD warns
Treasury yields were higher as investors weighed the path ahead for interest rates following comments from Federal Reserve Chair Jerome Powell & assessed fresh economic data for hints about the state of the economy. The yield on the 10-year Treasury rose more than 12 basis points to 4.154% & the 2-year Treasury yield was last 10 basis points higher at 4.435%. Yields & prices have an inverted relationship & 1 basis point equals 0.01%. Fresh data out today showed the US services sector grow at a faster-than-expected clip in Jan, growing for the 13th consecutive month & signaling a strong start to the year. Investors also assessed the path ahead for interest rates, with Powell saying that the central bank would be careful when it comes to interest rate cuts & that policymakers were still looking for additional evidence of inflation returning to the Fed's 2% target range. He also indicated that the pace of rate cuts would likely be slower than markets are expecting & reiterated comments he made after the Fed's meeting last week saying that rate cuts are unlikely to begin in Mar.
Treasury yields climb after Powell once again dashes hope for a March rate cut
Dow Jones Industrials
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