Markets are mixed on renewed concerns over the economy

Dow dropped 175, advancers slightly ahead of decliners & NAZ went up 35.  The MLP index was off 1+ to the 223s & the REIT index fell 2+ to the 433s.  Junk bond funds rose in price & Treasuries were little changed today.  Oil crawled higher in the 115s (more below) & gold gained 22 to 1870.

AMJ (Alerian MLP index tracking fund)

 

 

 

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Private payroll job growth slowed markedly in May, suggesting the tightest labor market in decades has made it difficult for businesses to fill a record number of open positions, according to the ADP National Employment Report.  Companies added just 128K jobs last month, sharply missing the 300K gain that had predicted.  It marked the worst month for job creation since Apr 2020, when the pandemic shut down a broad swath of the nation's economy, triggering Ms of layoffs across the nation.  It's also a drop from last month's downwardly revised gain of 202K.  "In April, the labor market recovery showed signs of slowing as the economy approaches full employment," said Nela Richardson, chief economist at ADP.  "While hiring demand remains strong, labor supply shortages caused job gains to soften for both goods producers and services providers."  The hiring deceleration largely stemmed from small businesses, as companies with fewer than 50 workers actually saw payrolls plunge by 91K last month.  The decline was even more pronounced in businesses with fewer than 19 workers, with those employers accounting for the bulk of the losses last month, shedding 78K jobs.  That's in part because the hottest inflation in 40 years, coupled with a persisting labor shortage & the high cost of attracting new employees, has made it difficult for small business owners to maintain their bottom line & retain workers.  "Small businesses remain a source of concern as they struggle to keep up with larger firms that have been booming as of late," Richardson added.  Large businesses that employ 500 or more workers helped to offset the decline, hiring 122K new workers last month.  The bulk of the payroll increase stemmed from businesses with more than 1K employees, which saw a gain of 77K workers in May.  Medium businesses, meanwhile, saw positions jump by 122K.  The ADP release comes one day ahead of the more closely watched Labor Dept jobs report, which is expected to show that payrolls rose by 325K & the unemployment rate inched down slightly to 3.5%, the lowest level since the pandemic began in Feb  2020.

US companies added least amount of jobs in two years during May

Saudi Arabia is reportedly prepared to increase oil production if Russia's output falls substantially under the new sanctions imposed by the EU, according to people familiar with discussions.  The price of oil traded 2% lower early today.  US West Texas Intermediate (WTI) crude dropped to around $112 a barrel, after a 0.5% rise yesterday.  Brent crude was down to $113 a barrel, after rising 0.6% the previous day.  Up until now, Saudi Arabia has resisted calls by the White House to boost production, even though the price of oil has risen to its highest point in a decade.  The kingdom has said it needed to keep spare capacity in reserve.  Fears of an oil shortage increased after the EU launched another round of sanctions against Moscow, including a ban on importing seaborne cargo of Russian oil.  A deal with the UK. that bars insurance of ships carrying the oil later this year could reportedly curtail Moscow's ability to redirect oil to other regions.  The agreement to increase production could be announced at today's OPEC+ meeting.  Production increases that were scheduled for Sep would be moved up to Jul & Aug.

Oil falls as Saudi Arabia ready to pump more if Russian output sinks

The US economy showed signs of decelerating in some parts of the country during the spring as sky-high inflation, supply chain bottlenecks & a labor shortage weighed on businesses, according to a new Federal Reserve report.  In its region-by-region roundup of anecdotal information known as the Beige Book, the Fed reported that economic activity slowed in 4 of its 12 districts during the mid-Apr-May period that the report covers as firms continued to struggle with rising prices, a lack of available workers & disruptions from COVID-19.  "Four districts explicitly noted that the pace of growth had slowed since the prior period," the report said.  Although inflationary pressure remained "strong" over the past few months, the Beige Book said that 3 Fed districts reported a moderation in prices for some goods & services.  Most businesses continued to pass along higher costs to their consumers but noted growing pushback, often in the form of buying less or choosing less expensive brands.  Some areas also reported some slack in the labor market.  While most districts said employment rose "modestly or moderately," one district "explicitly" reported that job growth slowed in the spring.  "Some firms in most of the coastal districts noted hiring freezes or other signs that market tightness had begun to ease," the report continued.  "However, worker shortages continued to force many firms to operate below capacity."

Fed starts shrinking $8.9T balance sheet to combat sky-high inflation

More economic reports show the economy is doing good, but short of great.  High inflation & rising interest rates, which are expected to rise further, are being felt by many businesses.  However, the unemployment rate is low which is giving consumers the ability to buy more goods.  Tomorrow's job report & unemployment data will be helpful in forecasting future growth.

Dow Jones Industrials

 

Markets edge lower after comments by 2 Fed officials

Dow finished down 176, decliners over advancers 5-4 & NAZ declined 86.  The MLP index rose 4+ to the 224s & the REIT index fell 3+ to the 446s.  Junk bond funds were flattish & Treasuries continued with heavy selling.  Oil was fractionally higher to the 115s & gold was up 3 to 1852 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The Federal Reserve is poised to start shrinking its $8.9T balance sheet, deploying one of its lesser-known tools as it seeks to tame the hottest inflation in a generation.  In a plan outlined at the central bank's May meeting, policymakers said they will begin winding down the balance sheet on Jun 1 at an initial combined monthly pace of $47.5B, a move that will further tighten credit for US households.  They will increase the runoff rate to $95B by Sep, putting the Fed on track to reduce its balance sheet by about $3T over the next 3 years.  The Fed's balance sheet, which consists mostly of bonds & other assets that it has purchased, nearly doubled in size during the pandemic as the Fed bought up mortgage-backed securities & other Treasuries in order to keep borrowing cheap.  Policymakers say the portfolio runoff will work in tandem with interest rate increases to bring prices down by slowing growth & tightening credit.  The Fed voted to raise rates by a ½-basis point in May & has all but promised that similarly sized hikes are on the table at upcoming policy meetings in Jun & Jul.  While it's unclear how effective reducing the balance sheet will be in fighting inflation, policymakers have suggested they are optimistic it will work to bring prices down.  "Although estimates are highly uncertain, using a variety of models and assumptions, the overall reduction in the balance sheet is estimated to be equivalent to a couple of 25-basis-point rate hikes," Fed Governor Christopher Waller said.  The question now is whether the Fed can successfully engineer the elusive soft landing — the sweet spot between tamping down demand to cool inflation without sending the economy into a downturn.  Hiking interest rates tends to create higher rates on consumer & business loans, which slows the economy by forcing employers to cut back on spending.  Fed Chair Jerome Powell has acknowledged there could be some "pain associated" with reducing inflation & curbing demand but has pushed back against the notion of an impending recession, identifying the labor market & strong consumer spending as bright spots in the economy.  Still, he has warned that a soft landing is not assured.

Fed starts shrinking $8.9T balance sheet to combat sky-high inflation

San Francisco Federal Reserve Pres Mary Daly said she backs raising interest rates aggressively until inflation comes down to a reasonable level.  Those moves likely would entail multiple 50 basis point hikes at coming meetings, then a possible rest to see how the central bank policy tightening is combining with other factors to impact the massive surge in consumer prices.  “We need to that expeditiously, and I see a couple of 50 basis point hikes immediately in the next coupe of meetings to get there,” she said.  “Then we need to look around and see what else is going on.”  Daly said she sees some initial signs of a slowing economy & reduced inflation, but will need to see much more progress before the Fed can slow its efforts.  “We aren’t really there yet, so we need to see those data on a slowing economy bringing demand and supply back in balance, and I need to see some real progress on inflation,” she added.  “Otherwise, I would think we just move the rate until we find ourselves at least at neutral and then we look around to see what else needs to be done.”  So far this year, the Fed has enacted two rate increases totaling 75 basis points, including a 50 basis point increase in May.  “I don’t meet anyone, contacts, consumers, anyone, who thinks the economy needs help from the Fed right now,” Daly said.  “I certainly am comfortable to do what it takes to get inflation trending down to the level we need it to be. I really think these inflation numbers have been going on too long, and consumers, businesses and everyday Americans are depending on us to get inflation back down and bridling it.”  How far Daly & the rest of the Fed are willing to go remains to be seen & she said the data will dictate how high rates trend.  Most Fed officials estimate the “neutral” level of their benchmark borrowing rate to be around 2.5%. It currently is targeted in a range between 0.75% and 1%.  Daly said issues such as supply chain backlogs, the war in Ukraine & the China economic reopening after a Covid-related shutdown will be factors on whether inflation has peaked.  If she doesn't see progress, “we need to go into restrictive territory,” she continued.

The Fed’s Mary Daly says rate hikes should continue until inflation is tamed

US manufacturing activity picked up in May as demand for goods remains strong, which could further allay fears of an imminent recession, but a measure of factory employment contracted for the first time in nearly a year.  The Institute for Supply Management (ISM) said that its index of national factory activity rebounded to a reading of 56.1 last month from 55.4 in Apr.  A reading above 50 indicates expansion in manufacturing, which accounts for 12% of the US economy.  US manufacturing activity picked up in May as demand for goods remains strong, which could further allay fears of an imminent recession, but a measure of factory employment contracted for the first time in nearly a year.  The forecast called for the index falling to 54.5.  The survey followed a report last Fri showing consumer spending increasing strongly in Apr.  The ISM survey's forward-looking new orders sub-index increased to 55.1 from 53.5 in Apr.  Manufacturing has been constrained by snarled supply chains, which have been further entangled by Russia's unprovoked war against Ukraine & new shutdowns in China as part of Beijing's zero COVID-19 policy.  The ISM's measure of supplier deliveries slipped to 65.7 last month from 67.2 in Apr.  A reading above 50% indicates slower deliveries to factories.  The survey's gauge of order backlogs rose to a reading of 58.7 from 56.0 in Apr.  News on the inflation front was encouraging.  A measure of prices paid by manufacturers dropped to a reading of 82.2 from 84.6 in Apr, supporting views that inflation has probably peaked.

U.S. manufacturing sector regains speed in May-ISM

Inflation at levels last seen in the 1970s & early 1980s is putting the central bank's credibility at risk, St Louis Federal Reserve Bank Pres James Bullard said, reiterating his call for the Fed to follow thru on promised rate hikes to bring down inflation & inflation expectations.  "The current U.S. macroeconomic situation is straining the Fed's credibility with respect to its inflation target," Bullard said.  Inflation is at more than 3 times the Fed's 2% target, pushed up by the collision of strong consumer demand & constrained supply of labor & parts.  In response, the Fed has raised interest rates by ¾ of a percentage point this year - a pace critics say is far too timid to bring inflation under control quickly.  But today Bullard laid out the case - as he has many times previously - that the Fed has actually tightened monetary policy far more than its actual rate hikes suggest.  Fed Chair Jerome Powell's vow to keep tightening monetary policy until inflation declines in a clear & convincing manner has solidified market expectations for further rate hikes through the year & into next, including ½-point rate hikes at each of the next 3 meetings and a policy rate in a range of 2.75%-3% by Dec.  "The Fed still has to follow through to ratify the forward guidance previously given, but the effects on the economy and on inflation are already taking hold," Bullard said.  "The Fed still has to follow through to ratify the forward guidance previously given, but the effects on the economy and on inflation are already taking hold," Bullard added.

Fed's Bullard: high inflation 'straining' credibility

All told, today marked another strong session for precious metals despite rising Treasury yields & a strengthening $.  Gold futures, meanwhile, increased pennies to finish the session at $1843.  All 3 major US stock indices were down in the PM, while an aggressive selloff across Treasuries pushed yields on 2-7-year maturities up by 11 to 14 basis points each.

Platinum leads precious metals higher as stocks, bonds tumble

Oil futures ended higher as Shanghai eased its COVID-19 lockdown, signaling increased demand for crude.  Traders were also preparing for meeting tomorrow of OPEC+, after a report that the group was considering exempting Russia from its production targets.  West Texas Intermediate crude for Jul rose 59¢ (0.5%) to close at $115.26 a barrel.  Aug Brent crude, the global benchmark, gained 69¢ (0.6%) to settle at $116.29 a barrel.  Shanghai moved to restore full bus & subway service today, as well as basic rail connections with the rest of China.  Still, more than ½ a M people in the city of 25M are still under lockdown or in designated control zones because virus cases are still being detected.  China's zero-COVID policy has resulted in mass lockdowns, with the shutdown of Shanghai, its largest city & a key commercial hub, credited with keeping a lid on crude prices that remain above $100 a barrel in the wake of Russia's invasion of Ukraine in late Feb.  The EU this week agreed on a plan that imposes a partial embargo on imports of Russian crude.  But oil futures lost steam late yesterday after a report that some OPEC members were considering exempting Russia from the OPEC+ oil-production agreement as sanctions & the EU's partial import ban undercut the country's ability to meet its targets.  If agreed, that would clear the way for other producers, including Saudi Arabia & UAE, to pump more crude to make up or Russia's shortfall.

Oil ends higher as Shanghai eases COVID-19 lockdown

Investors are weighing comments (above).  When the Fed sells bonds from its portfolio, that is bearish for bond prices which drives rates higher.  That influence has been absent for several years.  Today there was heavy selling in Treasuries, raising yields sharply.  In addition, more rate hikes from the Fed are coming in the coming months.  While Treasury yields are not high by historical standards, they are new to many investors who have depended on low interest rates.  The REIT index above has been weak for the last 6 weeks on worries about rising interest rates.  Higher interest rates will pinch the economy.

Dow Jones Industrials 

Markets slide lower as concerns mount about economic growth

Dow dropped 249, decliners over advancers better than 2-1 & NAZ was off 55.  The MLP index remained close to 221 & the REIT index fell 6+ to the 433s on higher interest rates.  Junk bond funds were purchased today & Treasuries ran into more selling, bringing higher Treasury yields.  Oil went up 1+ to the 116s & gold slid 2 to 1845.

AMJ (Alerian MLP index tracking fund)

 

 

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Americans continued to quit their jobs at a rapid pace in Apr, emphasizing how persistent turmoil in the labor market has made it difficult for employers to fill open positions.  The Labor Dept said that 4.4M Americans, about 2.9% of the workforce, quit their jobs in Apr.  That's down slightly from the high of 4.5M recorded in Mar, but well above the pre-pandemic level of about 3.6M.  Meanwhile, the number of job openings fell slightly to 11.4M by the end of Apr – the 2nd-highest level on record.  The data emphasizes how newly empowered workers are quitting their jobs in favor of better wages, working conditions & hours as businesses lure new workers with higher salaries – a new trend dubbed the "Great Resignation."  As a result, Americans' incomes are rising across the board as employers have ramped up hiring to offset the losses.

Job openings hold near record high as more Americans quit their jobs in April

Mortgage demand slipped to the lowest level since Dec 2018, even after rates declined slightly last week.  Applications for a mortgage to purchase a home fell 1% last week compared with the previous week, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index.  Volume was 14% lower than the same week one year ago.  Despite a slight decline, mortgage rates are significantly higher than they were at the start of this year.  This as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647K or less) decreased to 5.33% from 5.46% with points dropping to 0.51 from 0.60 (including the origination fee) for loans with a 20% down payment.  “Mortgage rates fell for the fourth time in five weeks, as concerns of weaker economic growth and the recent stock market sell-off drove Treasury yields lower,” said Joel Kan, an MBA economist.  Rising interest rates & steep gains in home prices are hitting affordability hard.  Prices continue to rise because there is still so little supply on the market, but different tiers of buyers are seeing different pictures.  “Demand is high at the upper end of the market, and the supply and affordability challenges are not as detrimental to these borrowers as they are to first-time buyers,” Kan added.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $647K) decreased to 4.93% from 5.02%.  Jumbo loans are mostly held in investor & bank portfolios, as opposed to being sold to Fannie Mae or Freddie Mac.  Lenders see them as less risky given the higher credit quality of the borrower to whom they generally go.  Applications to refinance a home loan, which are more sensitive to rate moves than purchase applications, fell 5% for the week & were 75% lower than the same week one year ago.  Even as rates moved off their highs over the past few weeks, refinance demand hasn't come back because so many borrowers already went thru the process when rates were sitting at record lows last year.

Mortgage demand hits lowest level since end of 2018, even as interest rates ease

Treasury Secretary Janet Yellen said said she was wrong about the path inflation would take following months of public statements over its perceived threat.  "I think I was wrong then about the path that inflation would take," she said.  "As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn't at the time fully understand."  She cited the COVID-19 pandemic & the Russian invasion of Ukraine as added weight to the economic shock many are feeling.  "So really, the shocks to the economy have continued, but inflation is the number one concern for President Biden," Yellen added.  In Mar, Yellen appeared to contradict the White House when she said she was expecting another year of "uncomfortably high" inflation.  "I think there’s a lot of uncertainty related to what’s going on with Russia and Ukraine and I do think that it’s exacerbating inflation," Yellen said.  "I don’t want to make a prediction exactly as to what’s going to happen in the second half of the year, you know, we’re likely to see another year in which 12-month inflation numbers remain very uncomfortably high."

Biden's Treasury secretary makes big admission about inflation

There are plenty jobs available, even if many aren't high paying.  Meanwhile the housing market is struggling to some degree which is impacting the low end the hardest.  The US economy is holding up fairly well but growth data going forward will be sluggish at best.  If Q2 GDP shows negative growth (even with a small number), that would qualify as a mild recession & get headline news.

Dow Jones Industrials