Markets rise led by tech stocks

Dow fell 117, advancers over declines better than 3-1 & NAZ rose a very big 348.  The MLP index added 1+ to 231 & the REIT index soared 11+ to 421.  Junk bond funds were in demand again & Treasuries had more buying, taking yields lower (more on Treasuries below).  Oil slid below 76 & gold was off 4 to1938.

AMJ (Alerian MLP Index tracking fund)

 

 

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US manufacturing contracted further in Jan as higher interest rates stifled demand for goods, but factories did not appear to be laying off workers in large numbers.  The Institute for Supply Management (ISM) said that its manufacturing PMI dropped to 47.4 last month from 48.4 in Dec.  The 3rd straight monthly contraction pushed the index to the lowest level since May 2020 & below the 48.7 mark viewed as consistent with a recession in the broader economy.   The forecast called for the index falling to 48.0.  A PMI reading below 50 indicates contraction in manufacturing, which accounts for 11.3% of the US economy.  The Federal Reserve's fastest interest rate-hiking cycle since the 1980s as it fights inflation is undercutting demand for goods, which are mostly bought on credit.  The $'s past appreciation against the currencies of the US'S main trade partners & a softening in global demand are also hurting manufacturing.  Spending is shifting back to services.  The weakness in the ISM mirrored a deterioration in the so-called hard manufacturing data.  Manufacturing production declined at a 2.5% annualized rate in Q4, data from the Fed showed last month.  The ISM survey's forward-looking new orders sub-index plunged to 42.5 in Jan from 45.1 in Dec.  It was the 5th straight month that this measure has contracted.  Weakening demand & improved raw material supplies have reduced the backlog of unfinished work at factories.  The survey's measure of supplier deliveries edged up to 45.6 from 45.1 in Dec.  A reading below 50 indicates faster deliveries to factories.  Stretched supply chains early in the COVID-19 pandemic as ms of Americans worked from home was one of the major drivers of inflation last year.  The combination of better supply & ebbing demand has resulted in a significant slowdown in consumer & wholesale inflation, with outright declines in monthly goods prices.  The ISM survey's measure of prices paid by manufacturers rose to 44.5 from 39.4 in Dec.

US manufacturing sector sinks further in January

Labor Dept data shows initial unemployment claims for last week fell to 183K from the unrevised 186K recorded a week earlier.  That is below the 2019 pre-pandemic average of 218K claims& the lowest since Apr 2022.  Continuing claims, filed by Americans who are consecutively receiving unemployment benefits, fell slightly to 1.6M, a decrease of 11K from the previous week.  One year ago, nearly 1.9M Americans were collecting unemployment benefits.  The labor market remains a bright spot in the economy, but there are some early signs that it is beginning to soften.  The economy added just 223K jobs in Dec, the smallest gain in 2 years.  A plethora of big tech companies have also announced thousands of job cuts in recent weeks as they brace for a possible recession.  Policymakers have already approved 8 consecutive rate increases & signaled at the conclusion of their meeting yesterday that additional hikes are on the table this year as they try to cool the economy & the labor market.  Fed officials have made it clear that they expect unemployment to climb as a result of higher rates, which could force consumers & businesses to pull back on spending.  "I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market,"  Chair Jerome Powell said yesterday.  "But I would also say that the disinflationary process that you now see underway is really at an early stage."  Projections from the central bank's Dec meeting show that officials expect unemployment to rise to 4.5% by the end of next year, up from the current rate of 3.5%.

Jobless claims unexpectedly drop to lowest level in 9 months

Treasury yields held steady as investors digested the Federal Reserve's interest rate decision & assessed the outlook for monetary policy.  The yield on the 10-year Treasury was flat at 3.398% & the 2-year Treasury yield was little changed at 4.108%.  Yields & prices have an inverted relationship & one basis point is equivalent to 0.01%.  Yesterday, the Fed concluded its first meeting of the year with a 25 basis point rate hike.  That marked a slowdown of the pace of rate hikes compared to previous increases.  The central bank had hiked rates by 50 basis points at its last meeting in Dec & implemented 75 basis point increases at each of its previous 4 meetings.  The central bank also indicated that rates would rise further, reigniting concerns about whether the pace of rate increases & keeping rates elevated for longer could drag the US economy into a recession.  The Fed has been hiking interest rates in an effort to curb persistently high inflation, which it said yesterday was cooling slightly.

Treasury yields hold steady as investors digest Fed rate decision

There is sort of a tech stock rally today, but Dow is not participating.  Investors are still assessing post meeting comments while the  inverted curve (shown above), which signals a coming recession, is in effect.  And gold remains popular with nervous investors.

Dow Jones Industrials

 

Markets rise after Fed raises its interest rate 25 basis points

Dow finished up 6 after wild trading in the PM, advancers over decliners over 3-1 & NAZ went up 231.  The MLP index was fractionally higher to 231 & the REIT index was up 4+ to the 411s.  Junk bond funds were in demand & Treasuries saw buying which reduced yields.  Oil dropped 2+ to the 76s & gold was off 4 to 1941 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The Federal Reserve raised its benchmark interest rate by a qtr percentage point & gave little indication that it is nearing the end of this hiking cycle.  Aligning with market expectations, the rate-setting Federal Open Market Committee (FOMC) boosted the federal funds rate by 0.25 percentage point.  That takes it to 4.5-4.75%, the highest since 2007.  The move marked the 8th increase in a process that began in Mar 2022.  By itself, the funds rate sets what banks charge each other for overnight borrowing, but it also spills thru to many consumer debt products.  The Fed is targeting the hikes to bring down inflation that, despite recent signs of slowing, is still running near its highest level since the early 1980s.  The post-meeting statement noted that inflation "has eased somewhat but remains elevated," a tweak on previous language.  Markets, however, were looking to this meeting for signs that the Fed would be ending the rate increases soon.  But the statement provided no such signals.  The document included language noting that the FOMC still sees the need for "ongoing increases in the target range."  Market participants had been hoping for some softening of the phrase, but the statement, approved unanimously, kept it intact.  The statement did alter one part when describing what will determine the future policy path.  Officials said they would determine the "extent" of future rate increases based on factors such as the effects so far of the rate hikes, the lags in which policy has an impact & developments in financial conditions & the economy.  Previously, the statement said it would use those factors to determine the "pace" of future hikes, a possible nod that the committee sees an end to the increases somewhere, or at least a continuation of smaller moves ahead.  Otherwise, the statement remained intact from previous messages as the Fed continues its efforts to arrest inflation.

Fed raises rates a quarter point, expects ‘ongoing’ increases

Hiring by US companies slowed sharply in Jan, the latest sign that the historically tight labor market is finally starting to cool off, according to the ADP National Employment Report.  Companies added 106K jobs last month, missing the 178K gain that was predicted.  It marked a major drop from the 235K gain recorded in Dec & is the worst month for job creation since Jan 2021.  The weaker-than-expected report comes as the Federal Reserve wages the most aggressive fight since the 1980s to crush inflation & slow the labor market with a series of rapid interest rate increases.  Still, the slowdown in hiring may not be indicative of the labor market softening, but rather a one-off due to disruptions from extreme weather.  "In January, we saw the impact of weather-related disruptions on employment during our reference week," said Nela Richardson, the chief economist of ADP.  "Hiring was stronger during other weeks of the month, in line with the strength we saw late last year."  The bulk of the gains in Jan stemmed from the leisure & hospitality industry, which added 95K new workers.  Other industries that saw payroll growth last month included financial activities (30K), manufacturing (23K) & education & health services (12K).  The biggest losses, meanwhile, were in the trade, transportation & utilities sector, which saw payrolls decline by 41K.  Construction lost 24K jobs, & natural resources & mining declined by 2K.  By size, only large & medium businesses saw job gains last month, with a combined increase of 192K.  Small businesses, which have struggled the most with the inflation crisis, lost 75K workers.  The losses were most pronounced in small businesses that employ 1-19 workers.  With job growth relatively lackluster in Jan, so were the pay increases that workers received, according to the report, which is now conducted alongside Stanford Digital Economy Lab.  Wages were unchanged in Jan from the previous month, although they are still up 7.3% from one year ago.

Job creation by US companies tumbles to lowest level since January 2021

US job openings unexpectedly surged at the end of 2022 as demand for workers increased, despite an aggressive campaign by the Federal Reserve to raise interest rates & cool the labor market.  The Labor Dept said that there were more than 11M job openings in Dec, a marked increase from the 10.5M reported the previous month.  The forecast expected openings to fall to 10.3M.  The number of available jobs has now topped 10M for 14 consecutive months; before the pandemic began in Feb 2020, the highest on record was 7.7M.  There are roughly 1.7 jobs per unemployed American.  The Federal Reserve closely watches these figures as it tries to gauge labor market tightness & wrestle inflation under control.  The stronger-than-expected figure indicates that demand for employees still far outpaces the supply of available workers.  The number of Americans quitting their jobs, meanwhile, was largely unchanged at 4.1M, roughly 2.7% of the workforce, indicating that workers remain confident they can leave their jobs & find employment elsewhere.  Switching jobs has been a windfall for many workers over the past year, with employees seeing an average 7.7% annual wage growth rate in Nov from the previous year – up from the 5.5% received by workers who do not switch jobs, according to the Atlanta Fed.

Job openings unexpectedly surge to 11 million in December

Gold futures settled lower, then extended their losses into the electronic trading after the Federal Reserve announced a hike in the fed funds rate of 25 basis points to the 4.5% to 4.75% range, as expected.  Apr gold was at $1939 an ounce in electronic trading shortly after the announcement.  That follows a settlement at $1942 an ounce, down $2, for today's session.

Gold prices end lower, extend losses after the Fed rate decision

Oil futures fell sharply, with US benchmark prices settling at their lowest in about 3 weeks.  The Energy Information Administration reported a 4.1M-barrel climb in US crude supplies, marking a 6th straight week of increases, along with weekly gains in gasoline & distillate stockpiles. Oil prices continued to trade lower after the Federal Reserve announced a qtr-percentage-point interest-rate hike, as expected.  US benchmark West Texas Intermediate crude for Mar fell $2.46 (3.1%) to settle at $76.41 a barrel.  Based on the front-month contract, prices settled at their lowest since Jan 10.

U.S. oil futures settle at their lowest in 3 weeks

The stock market rallied from a steep loss after the rate hike was announced.  Then Powell said that we’re talking about a couple more rate increases.  That comment brought out the bulls.  But selling into the close erased the gain, bringing Dow to finish near breakeven.  The stock market is volatile.  Meanwhile safe haven gold continued flattish.

Dow Jones Industrials 

Markets drift lower ahead of Fed's rate decision

Dow dropped 356, decliners over advancers 4-3 & NAZ slid back 53.  The MLP index stayed near 230 & the REIT index fell 3 to 404.  Junk bond funds edged higher & Treasuries had a little buying, slightly lowering yields.  Oil was off slightly in the 78s & gold inched up 1 to 1946.

AMJ (Alerian MLP Index tracking fund)

 

 

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Caterpillar (CAT), a Dow stock, in Q4 quarterly sales increased by 20%, aided by higher prices on its equipment that helped offset rising expenses for manufacturing & the strengthening $.  Demand for its construction & mining machinery & engines remained strong, especially in North America, as sales for the qtr were higher than expected.  CAT has raised prices in response to higher costs.  Higher prices boosted quarterly sales by $1.74B from the same period last year, while higher sales volumes of equipment added $1.56B.  Unfavorable exchange rates when sales in foreign currencies were converted into $s chopped $523M from sales in the qtr.  CAT reported some supply chain improvement during the qtr that allowed higher shipments from its plants.  But elevated costs for materials & freight shipping & constricted supplies of key components, including semiconductor chips, persisted.  "We certainly did still experience inefficiencies with supply-chain challenges" said CEO Jim Umpleby said.  "It’s not anywhere as smooth as it needs to be."  Quarterly sales increased by 20%, aided by higher prices on its equipment that helped offset rising expenses for manufacturing & the strengthening of the $.  For the 3 months ended Dec 31 EPS was $2.79, down from $3.91 in the same period a year earlier.  Stripping out one-time items, adjusted EPS came to $3.86, missing the estimate of $4.02.  Revenue from the qtr, including the company's equipment financing arm, was $16.6B.  The stock fell 3.44.
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Caterpillar earnings show sales up 20% on strong demand

Wages & benefits for workers in most major US cities grew at a slower pace in the final 3 months of 2022, with inflation still outstripping pay for many workers.  The employment cost index, a quarterly measurement of labor costs, climbed 1% in the Oct-Dec period, the Labor Dept reported.  That is below both the 1.2% reading in Q3 & the 1.1% forecast, the lowest quarterly gain in a year.  Annually, wages & salaries rose 5.1% in the 12 months thru Dec.  That compares to a final year-end inflation rate of 6.5%, meaning that Ms of Americans saw their pay increase wiped out by steep consumer prices last year.  "The core private wages and salaries advance slowed for the second consecutive quarter, which is consistent with the deceleration in other wage measures, including average hourly earnings," said Kathy Bostjancic, the chief economist at Nationwide.  "Benefit costs also increased at the slowest in over a year, which allowed the year-on-year rate to slip to below 5% to 4.9%."  While wage growth is moderating across most of the country, there is still some divergence in compensation.  Miami, which has been a hotbed for inflation, saw wages grow by 6.8%, well above the national trend.  However, that is still lower than the local inflation rate of 9.9%.

Inflation still outstripping wages in most US cities

After a stronger start to the year, mortgage demand plunged last week, despite another drop in interest rates.  Total mortgage application volume fell 9% last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) decreased to 6.19% from 6.20%, with points falling to 0.65 from 0.69 (including the origination fee) for loans with a 20% down payment.  The rate was 3.78% the same week one year ago.  Even with rates well off their recent highs, applications to refinance a home loan fell 7% for the week & were 80% lower than the same week one year ago.  Homeowners may have jumped back briefly after the holiday lull, causing demand to rise over much of Jan, but overall there are still very few borrowers who can benefit from a refinance at today’s rates, so demand is now falling again.  Mortgage applications to buy a home fell 10% for the week & were 41% lower year over year.  While both home prices & mortgage rates are coming down steadily, the supply of homes for sale is still quite low, & that may be keeping mortgage demand under pressure.  “Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth,” said Joel Kan, an MBA economist.  “Both trends will help some buyers regain purchasing power.”  Mortgage rates have been moving in a narrow range for the last few days, but that could all change depending on commentary expected from the chair of the Federal Reserve today.  The central bank is expected to hike its interest rate, but that doesn't necessarily raise mortgage rates.  The monthly employment report Fri could also move rates decidedly, depending on what it says about the state of the economy, recession and inflation.

Mortgage demand took a big step back last week, even after interest rates fell further

Everybody is waiting for the Fed to speak, & also to hear from OPEC+ on production levels.

Dow Jones Industrials