Markets meander as Treasury yields dip after Fed hawkish comments

Dow climbed 141, advancers over decliners better than 2-1 & NAZ was up 11.  The MLP index dipped 1+ to the 258s & the REIT index rose 4+ to the 374s.  Junk bond funds continued mixed & Treasuries remained in demand, lowering yields after the big advance this week.  Oil rose to the 73s & gold gained 9 to 2052 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Americans are increasingly turning to their credit cards to cover everyday expenses, with debt hitting a new record high at the end of Dec, according to a New York Federal Reserve report.  In the 3-month period from Oct - Dec, total credit card debt surged to $1.13T, an increase of $50B (4.6%) from the previous qtr.  It marks the highest level on record in Fed data dating back to 2003 & the 9th consecutive annual increase.  There was also an uptick in borrowers who are struggling with credit card, student & auto loan payments.  As of Dec, about 3.1% of outstanding debt was in some stage of delinquency, up from the 3% recorded the previous qtr but still down from the average 4.7% rate seen before the COVID-19 pandemic began.  "Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels," said Wilbert van der Klaauw, economic research advisor at the New York Fed.  "This signals increased financial stress, especially among younger and lower-income households."  Credit card delinquencies continued to rise from their pandemic-era lows in the 4th qtr. The flow of debt moving into delinquency hit 8.5% in the 4th qtr at an annualized rate, compared with an 8.01% uptick during the 3rd qtr & 5.87% one year ago.  The increase was most pronounced among individuals between the ages 30-39.  "It's maybe not a flashing red signal, but something that is indicative of a slight weakening in household balance sheets that is consistent with a slowdown in consumption as 2024 moves on, and a little bit of a retrenchment by the consumer," New York Fed researchers said.  There are likely several reasons to blame for the rise in delinquencies among younger Americans.  New York Fed researchers said the increase could reflect the resumption of student loan payments or indicate that this cohort overextended themselves financially when they were receiving stimulus payments during the pandemic.  "That combined with student debt and the fact that they also experienced a recession, even though it was very short," researchers said.  "It can still be disruptive for people's careers, especially early in their careers."  The rise in credit card usage & debt is particularly concerning because interest rates are astronomically high right now.  The average credit card annual percentage rate (APR) hit a new record of 20.7% last week, according to a Bankrate database that goes back to 1985.  The previous record was 19% in 1991.

Credit card debt smashed another record high at the end of 2023

Bolts appeared to have been missing from a door plug that blew out midair on Boeing 737 Max 9 operated by Alaska Airlines (ALK) last month, according to a preliminary report from the National Transportation Safety Board.  The Jan 5 blowout left a gaping hole in the side of the fuselage as the plane full of passengers climbed out of Portland, Oregon.  The accident prompted a grounding of the Max 9 by the Federal Aviation Administration for much of last month.  The preliminary report into Flight 1282 places the squarest blame on Boeing (BA), a Dow stock,& provides the most detail yet about what went wrong before the aircraft was handed over to ALK late last year.  BA CEO Dave Calhoun, under pressure to address manufacturing defects that have delayed aircraft deliveries, has said the company is responsible for what went wrong.  “We caused the problem,” Calhoun said on Jan 31.  “Over these last few weeks, I’ve had tough conversations with our customers, with our regulators, congressional leaders and more. We understand why they are angry, and we will work to earn their confidence.”  The FAA is also auditing BA's production lines & last month said it would stop BA from increasing production of the best-selling Max jet beyond the current 38 a month it is producing until regulators are satisfied with its production processes.  The accident occurred just as BA was trying to ramp up output.  BA stock rose 1.89.

Bolts appeared to be missing from Boeing 737 Max door plug .81.that blew off midflight, NTSB says

The US saw a significant rise in corp bankruptcies last year, with the health care industry hardest hit.  Debtwire's latest Restructuring Insights report found bankruptcy filings jumped 58% in 2023, climbing from 179 in 2022 to 282.  Bankruptcies in the health care sector soared 117%, representing 21% of all cases.  The analysis pointed to cases like Envision Healthcare, which sought bankruptcy protection after accumulating some $9.4B in debt & Aukumin, which owed $1.3B when it went belly-up.  Catherine Corey, Debtwire's global head of restructuring data, said those major cases "defined the restructuring landscape last year, highlighting persistent challenges in the healthcare sector."  "Declining patient numbers, inadequate reimbursement rates from Medicare and Medicaid, and staffing shortages with demands for higher wages fueled the industry’s financial struggles,"  Corey said.  After health care, the real estate industry saw the 2nd-highest number of filings, representing 11% of the total.  The largest case was Chinese real estate behemoth Evergrande, which filed for Chapter 15 bankruptcy protection in a Manhattan court last summer, its $38.8B filing dwarfed all others in the report.  Another real estate company highlighted in the report was long-suffering office-sharing giant WeWork, which also filed for bankruptcy last year in a stunning fall from grace.  It had once been valued at an estimated $47B.  "The 58% spike in bankruptcies in 2023 signaled a major shift in lenders' attitudes, unwilling to prolong support for struggling companies," Corey said.  "A convergence of challenges, including the post-pandemic withdrawal of government support, inflation, rising interest rates, supply chain disruptions, global unrest, and stricter lending requirements, created a perfect storm."

Business bankruptcies surged 58% in 2023

Gold closed with a gain as treasury yields & the $ eased.  Gold for Apr closed up $8 to settle at $2051 per ounce.  The rise comes as treasury yields move lower after rising sharply following last week's US jobs report that showed robust employment growth, renewing worries a strong economy will keep inflation above the Federal Reserve's 2% target & prevent the central bank from quickly lowering interest rates.  The yield on the 2-year note was last seen paying 4.383%, down 9.1 basis points, while the yield on the 10-year note was down 6.7 basis points to 4.094%.  The ICE dollar index was last seen down 0.27 points to 104.18.

Gold Closes Higher as the Dollar and Treasury Yields Move Lower

West Texas Intermediate (WTI) crude oil closed higher, climbing for a 2nd day as the Energy Information Administration said it sees oil inventories falling in the current qtr on OPEC+ cuts & US production will drop from record levels.  WTI crude oil for Mar closed up 53¢ to settle at $73.31 per barrel, while Apr Brent crude, the global benchmark, closed up 60¢ to $78.59.  In its influential monthly Short-Term Energy Outlook, the agency said it sees inventories dropping by 0.8M barrels per day during the current qtr, supporting prices.  As well, it sees US oil production dropping off a record.  Production is expected to return to almost 13.3M b/d in Feb but then decrease slightly thu the middle of 2024 & will not exceed the Dec 2023 record until Feb 2025.  Oil has returned to a narrow price range as demand worries led by a weakening Chinese economy are offset by geopolitical risk on violence in the Middle East.  China has yet to respond to an order issued by a Hong Kong court for the liquidation of Evergrande Group, the country's largest real-estate developer, which as failed to restructure more than $300B of debt.  Crude oil prices registered modest gains on yesterday despite a hawkish macro narrative gripping market, as geopolitical angst continued.  Oil, however, remains range-bound amid no supply disruptions seen with focus today on EIA's short-term energy outlook.

WTI Crude Oil Closes Higher as the EIA Sees Falling Inventories and Lower US Oil Production

Powell's repeated warnings that the Fed will have to move cautiously when raising rates is something investors will have to adjust to.  Unfortunately, some have gotten addicted to low rates & will find this change difficult to accept.

Dow Jones Industrials 

Markets were higher as investors digest Powell's recent comments

Dow rose 62, advancers over decliners about 3-1 & NAZ slid back 17.  The MLP index was off 1+ to 260 & the REIT index added 4+ to the 374s.  Junk bond funds were mixed & Treasuries saw buying which reduced yields after their recent strong advance (more below).  Oil edged higher to the 73s & gold gained 9 to 2052.

AMJ (Alerian MLP Index tracking fund)

Treasury yields were little changed as questions lingered over the path ahead for interest rate & when cuts may begin.  The 10-year Treasury was down 2 basis points to 4.144% & the 2-year Treasury yield also slid down 2 basis points to 4.452%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Investors have been fretting over the timeline for interest rate cuts from the Federal Reserve as concerns that elevated rates could drag the US economy into a recession persist.  Some traders had been hoping for rate cuts as soon as Mar, but recent comments from Fed Chair Jerome Powell dampened these expectations.  Strong economic data in recent days, including a hot Jan jobs report, have further contributed to those fears.  After the Fed meeting last week, Powell suggested that while rate cuts are likely to take place this year, the probability of that happening in Mar was low.  He reiterated that sentiment over the weekend, noting that the pace of rate cuts would probably be slower than markets are expecting.  Markets were last pricing in just a 16.5% chance of a rate cut taking place then, according to CME Group's FedWatch tool.

Treasury yields are little changed as uncertainty over rate cut outlook persists

Eli Lilly (LLY) reported 4th-qtr revenue & adjusted earnings that topped expectations on the strong launch of its new weight loss drug, Zepbound, & higher prices for its blockbuster diabetes treatment, Mounjaro.  Zepbound, which won approval from US regulators in early Nov, raked in $176B in sales for the 4th qtr.  The quarterly results are the first to include sales of Zepbound, which some analysts say could post more than a B $s in sales in its first year on the market & eventually, become the biggest drug of all time.  EPS was $2.42 for the 4th qtr, ahead of $2.14 a share, a year earlier.  Excluding one-time items associated with the value of intangible assets, among other adjustments, the company posted EPS of $2.49 for the 4th qtr.  The pharmaceutical giant booked 4th-qtr revenue of $9.4B, up 28% from the same period a year ago.  LLY also issued its full-year forecast for 2024, which was generally in line with expectations.  The company expects full-year adjusted EPS of $12.20 - $12.70.  LLY also forecast 2024 revenue of $40.4-41.6B.  Analysts had expected full-year adjusted EPS of $12.43 on sales of $39.4B.  Shares jumped almost 60% last year as weight loss drugs skyrocketed in popularity despite hefty price tags, mixed insurance coverage & a handful of unpleasant side effects.  Higher prices for older drugs, particularly Mounjaro, helped drive up revenue.  Mounjaro booked $2.21B in sales for the 4th qtr, up from just $279M in the same period a year ago.  The high priced stock fell 4 (0.6%).

Eli Lilly results blow past estimates on strong Zepbound launch, Mounjaro demand

As Iran-backed attacks rage on in the Red Sea, US-based retailers are raising economic red flags in anticipation of industry disruptions & looming "uncertainty."  "It's a big issue," National Retail Federation CEO Matt Shay said.  "We're helped somewhat by the fact that this is a relatively slower time of year, but what goes on here is not just the increased cost, the increased delay, but it's really the uncertainty here as we look ahead to the future."  Significantly delayed shipping times & pricing spikes could bleed into back-to-school & holiday shopping later this year as Iran-backed Houthi militants continue launching attacks in the Red Sea & Gulf of Aden.  The Houthis, stationed in Yemen, have for months been firing upon commercial vessels passing through the Red Sea.  The militants say the attacks are in support of Palestinians killed in the ongoing Israel-Hamas war in Gaza.  Last Thurs represented the 42nd, 43rd & 44th such attacks since Nov 19.  Retailers are reportedly entering the renewal season for shipping contracts & the conflict has now made it difficult "to negotiate in an environment of uncertainty," according to Shay.  "We don't need this kind of disruption and uncertainty," the CEO argued.  "We need to find a solution as quickly as possible."  Shay claimed a "broader coalition" of countries may need to band together to mitigate timing delays & price increases – & that apparently includes China.  "The Chinese need to be part of this. They need to be talking to the people in the region, in Saudi Arabia and Iran and the rest of the Middle East saying, ‘We need to fix this problem,’ because they're impacted as well," he explained.  "It's a global challenge and it's going to have implications here."

Retailers sound alarm over shipping delays, price spikes

Recent strength in Treasury yields has been sobering.  Investors remain optimistic even after learning that the Fed is going to be cautious about cutting rates this year.  More earnings are coming this week which will move markets.

Dow Jones Industrials 

Markets retreat while rates spike

Dow dropped 274 (well above early lows), decliners over advancers about 4-1 & NAZ was off 31.  The MLP index was about even in the 261s & the REIT index lost 6+ to the 371.  Junk bond funds were weak along with stocks & Treasuries continued to be heavily sold, bringing higher yields.  Oil rose in the 72s & gold retreated 11 to 2042 (more on both below).

AMJ (Alerian MLP Index tracking fund)

The average rate on the popular 30-year fixed mortgage crossed over 7% for the first time since Dec, hitting 7.04%, according to Mortgage News Daily.  It comes after the rate took the sharpest jump in more than a year Fri, after the Jan employment report came in much higher than expected.  Rates then moved up even more today after a monthly manufacturing report came in high as well.  Mortgage rates have been on a wild ride since the summer, briefly crossing to a 20-year high of 8% in Oct.  Rates then fell sharply, as investors saw more & more evidence that the Federal Reserve would end its latest phase of interest rate increases.  Mortgage rates do not follow the Fed directly, but they follow loosely the yield on the 10-year Treasury, which is heavily influenced by the central bank's impression of the economy at any given time.  “The rapid increase in rates over the past two days is actually not too surprising given the fact that the market was widely seen as overly optimistic on the Fed rate cut outlook. The Fed has repeatedly pointed to economic data having the final say in that outlook and data has been shockingly unfriendly to rates as of Friday morning’s jobs report,” said Matthew Graham, COO at Mortgage News Daily.  As mortgage rates fell over the past 2 months, buyers seemed to be returning to the market.  That coincided with a slight uptick in the number of homes for sale.  Total inventory, however, is still historically low & is keeping competition high.  It is also keeping home prices stubbornly hot.  High prices & low supply combined to make 2023 the worst for home sales since 1995.  Most predict 2024 will be better.  “The strong job market is good news for the spring buying season as higher household incomes are a necessary component, but it also means that mortgage rates are not likely to drop much further at this point,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.  Mortgage applications to purchase a home had been rising steadily, but fell back in the last few weeks, as mortgage rates edged higher.  With the all-important spring housing market closing in, rates are more important than ever, given high & still-rising home prices.  “The future of rates in 2024 is all about ifs and thens,” said Graham.  “If we see more data like last Friday’s jobs report, rates will have a hard time getting back below 7%. But inflation is even more important than the labor market. If inflation comes in cooler than expected, it could balance the outlook.”

Mortgage rates jump back over 7% as stronger economic data rolls in

Interest rates running at their highest levels in about 23 years are not hurting the economy & could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve Pres Neel Kashkari said.  In an essay, Kashkari said economic developments have shown that Fed policy is not as restrictive on growth as it appears on the surface.  That means the longer-run “neutral” rate, or the level that is neither restrictive nor stimulative, is probably higher than before the Covid-19 pandemic.  In essence, what would appear to be tight monetary policy judging by history over the past 15 years or so no longer looks that way, meaning nominal rates could hold higher for longer without harming the economy.  “This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote.  The implications are important as the Fed contemplates when to start, how much it should cut & how quickly should it do so to get back to a neutral setting.  Markets have been betting on an aggressive move lower, but recent statements from central bank officials indicate little need to hurry.  “It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” wrote Kashkari, a nonvoting member of the rate-setting Federal Open Market Committee this year.  “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”  Kashkari pointed to a variety of such data to show that the Fed hikes have not thwarted growth, leading to his conclusion that the neutral rate is likely higher than the 0.5% or so that Fed officials generally estimate.  There is no official “neutral rate,” & officials often stress that it can only be estimated but never observed.  Some policymakers like to use the fed funds rate minus inflation as neutral.  Kashkari prefers the 10-year TIPS yield , which is now around 1.82%.  He notes that it has risen since over the past year, but only modestly.  At the same time, business investment & big-ticket purchases have risen while housing numbers at least have moderated.  “These data lead me to question how much downward pressure monetary policy is currently placing on demand,” Kashkari said.  He did note that the data is not “unambiguously positive” & he will be watching items such as loan & credit card delinquencies for evidence of economic stress.

Kashkari backs sentiment that the Fed can take its time cutting interest rates

Restaurants have proved to be resilient in the face of elevated costs, shallow labor pools, uneven customer traffic levels and crime, as sales are projected to exceed $1.1T in 2024.  It marks a new milestone for the industry & it is a far cry from the $678B sales reached in 2020, when indoor dining was essentially brought to a standstill.  It is even a boost from pre-pandemic times, when the industry notched $864B, according to the National Restaurant Association's 2024 State of the Restaurant Industry report.  On top of that, US restaurants, which employ one in 10 US workers, are also expected to add 200K positions to reach 15.7M jobs by year's end, according to the report.  Yet, operators are still less bullish on the year given that the problems in the industry are persisting.  Costs are still running high in many categories & crime prevention is eating into profits.  "Profit margins are especially thin in the restaurant, running three to five percent on average, and added security costs cut into margins significantly," CEO Michelle Korsmo said.  Korsmo noted that a restaurant operator reported spending approximately $80K per year just on security to keep employees & customers safe from brazen crime.  In many areas, operators have reported seeing fewer diners due to safety concerns, "often resulting in closure of once profitable restaurants," Korsmo added.  Just last month, Denny's closed a location in Oakland, California, after 54 years due to high crime in the city.  It came after In-N-Out announced it would be closing its Oakland location in Mar due to rampant violent crime & theft, marking the first time in the chain's history that it has been forced to close one of its restaurants.  Labor & food costs also "remain the most significant challenges," with nearly every restaurant operator saying these 2 issues are prevalent, according to Korsmo.  Meanwhile, operators are also battling rising credit card swipe fees, which are one of the highest operating expenses, having more than doubled over the past decade.  In 2022, they cost businesses more than $160B, she said.  Operators are facing pressure to offer a "well-presented value proposition" to reel in customers.  This includes loyalty programs or discounts for dining on off-peak days or hours.  They are appeasing the 7 in 10 adults who say they are often looking for a daily special or discount, whether they are dining in or taking out.

Restaurants sales expected to top $1T, but theft, high costs and cautious consumers pose challenges

Gold prices fell as the $ rose to the highest in nearly 3 months, continuing to move higher following Fri's unexpectedly robust Jan jobs report that dashed hopes for a quick cut to interest rates.  Gold for Apr closed down $10 to settle at $2042 per ounce.  The US on Fri reported it added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report & continued to rise today on expectations interest rates will stay high for longer than hoped, with Fed chair Jerome Powell continuing to dash expectations for a Mar rate cuts on Sun.  The ICE dollar index was last seen up 0.48 to 104.4.  Gold fell victim to the hot US job report & Powell pushing back against a Mar rate cut, now down to 20% with the number of cuts this year below 5 from above 6 a week ago.  Treasury yields were also higher, raising the carrying cost of owning gold.  The US 2-year note was last seen paying 4.433%, up 6.7 basis points, while the yield on the 10-year note was up 13.5 basis points to 4.158%.

Gold Closes Lower as the Dollar and Yields Jump as Interest Rates Seen Staying High After January Jobs Report

West Texas Intermediate (WTI) crude oil closed higher after ending last week with a big drop, as a rising $ continued to climb following Fri's unexpectedly robust jobs report was offset by geopolitical worries following US air strikes on Iranian-backed militias in Syria, Iraq & Yemen.  WTI crude for Mar closed up 50¢ to settle at $72.78 per barrel, while Apr Brent crude, the global benchmark, was last seen up 80¢ to $78.13.  Price fell about 7% on Fri after the US added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report & continued to rise today on expectations interest rates will stay high for longer than hoped, with Fed chair Jerome Powell continuing to dash expectations for a Mar rate cuts.  The idea of a near-to-date interest rate pivot started to erode with hawkish noises from the ECB, was given a further cautionary gouge by Jerome Powell's after-FED speech & all but undermined with the stellar non-farm payrolls from the US on Fri.  It is worth noting that in an interview aired last night, the Fed chair offered that this should be a time of prudence & the data should play out. The ICE dollar index was last seen up 0.5 points to 104.42.  Still, Mideast tensions continue to run hot, with no sign of a ceasefire agreement in the Israel-Hamas war, while the US promised further retaliation after launching trikes against Iran-backed militias in response to a drone attack on a base in Jordan that killed 3 of its soldiers.

WTI Closes Higher as a Rising Dollar is Offset by Mideast Tensions

Powell put a chill on prospects for an early interest rate cut.  But buyers returned in the PM for inspiration, waiting for new earnings reports while interest rates are back on the rise.

Dow Jones Industrials 

Markets fall as Powell signals no rush to cut rates

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

Powell has reduced expectations that a rate cut is coming in Mar.  Also, the mini war in the Red Sea is is indicating to the Fed that inflation will be a nagging problems for some time.  Traders are scaling back their bets on rate cuts for Mar & May.

Dow Jones Industrials 

Markets jump on strong tech earnings while interest rates rise

Dow rose 134, surprisingly decliners over advancers about 2-1 & NAZ jumped 267.  The MLP index fell 2+ to the 262s & the REIT index was off 5 to the 377s.  Junk bond funds were weak & Treasuries continued to be heavily sold, taking yields much higher.  Oil fell 1+ to the low 72s & gold sank 16 to 2054 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Meta (META) jumped more than 20% & headed for their 3rd-best day ever after the company reported a tripling in 4th-qtr profit & issued its first-ever div.  Revenue rose 25% in the 4th qtr to $40.1B from $32.2B a year earlier.  That's the fastest rate of growth for any period since mid-2021 & offers further evidence that the online ad market is continuing to rebound.  Net income more than tripled, to $14B from $4.65B a year earlier.  The company is forecasting first-qtr sales to be $34.5-37B & analysts were expecting revenue of $33.8B.  META said it would pay investors its first quarterly div, 50¢ on Mar 26.  That comes after cash & equivalents swelled to $65.4B at the end of 2023, from $40.7B a year earlier.  META also announced a $50B share buyback.  The stock rallied today, added more than $200B to its market cap & pushed the total valuation past $1.2T.  Investors praised the div announcement as a sign of the company's maturity.  The stock is up a staggering 80 (20%).

Meta shares surge 20% on soaring profit, better-than-expected guidance and first-ever dividend

The 10-year Treasury yield topped 4% after a surprisingly strong jobs report that showed continued strength in the economy, but raised questions on when the Federal Reserve can cut interest rates.  The yield on the 10-year Treasury was last shot up by 17 basis points to 4.03% & the 2-year Treasury  yield was last up by 19.1 basis points at 4.38%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  A stronger-than-expected jobs report adds to the likelihood that interest rate cuts will not come as soon as investors had hoped, especially after Fed Chair Jerome Powell this week noted that a Mar rate cut is unlikely.   Investors digested a hot Jan jobs report.  Nonfarm payrolls expanded by 353K last month, much stronger than the payrolls increase of 185K anticipated.  The unemployment rate was at 3.7%, compared to the 3.8% consensus estimate.  Wage growth data in the report pointed to continued inflationary pressures.  Average hourly earnings rose 0.6%, which was double what what had been expected.  On a yearly basis, wages spiked 4.5%, more than the 4.1% consensus estimate.  A stronger-than-expected jobs report adds to the likelihood that interest rate cuts will not come as soon as investors had hoped, especially after Fed Chair Jerome Powell this week noted that a Mar rate cut is unlikely.

10-year Treasury yield tops 4% after surprisingly strong jobs report

The 4th-qtr is now shaping up to be the best of 2023.  Despite ongoing macroeconomic concerns that have hampered demand & weighed on consumer sentiment, almost halfway into earnings season, profits are clearly coming in far better than anybody expected.  Helping bottom lines this round: easing input costs; more emphasis on cost controls & efficiencies; & significantly reduced expectations.  A plethora of significant earnings beats have moved the Q4 growth rate notably higher late this week.  It is now seeing a nearly 8% rise in earnings growth this season.  That’s far better than the 4.7% expected just 3 weeks ago, right before the big banks reported results.  The S&P 500 as a whole, Q4's current EPS growth rate of 7.8% exceeds the 7.5% growth seen in all of Q3 & is now tops for the year.  Currently, 80% of S&P 500 earnings results have beat estimates, slightly higher than normal trends & earnings have come in more than 6% above expectations, not quite the 7-8% upside seen in the previous 2 qtrs, but still a very strong number.  One very important caveat: These strong figures come after earnings expectations tumbled going into the reporting season.  Back on Oct 1, S&P 500 4th-qtr earnings were expected to grow 11% year over year.  Although the earnings picture has significantly improved since the start of 2024, results are still far below what had hoped for a mere 4 months ago.  And, as good as Q4 results have been, there's still no positive momentum looking forward.  Both Q1 & full-year 2024 earnings estimates have come down since Jan 1 as many companies have issued cautious guidance this earnings season.

Fourth-quarter earnings are shaping up to be the best of 2023, but there’s a catch

Gold prices fell as the $ & treasury yields surged after the US added far more new jobs than expected in Jan.  Gold for Apr closed down $17 to settle at $2053 per ounce, falling off overnight highs of $2074.  The drop comes even after the US added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report, making gold more expensive for intl buyers.  The ICE dollar index was last seen up 0.91 points to 103.96.  Treasury yields also rose sharply, bearish for gold since it offers no interest, as the robust reports cuts into expectations the Federal Reserve will be able to cut interest rates in the near-term.

Gold Prices Drop as the Dollar and Yields Surge as the US Added More New Jobs than Expected Last Month

West Texas Intermediate (WTI) crude oil on concerns over weak demand, though an unexpected surge in US hiring last month may ease some of the worries.  WTI crude for Mar closed down $1.54 to settle at $72.28 per barrel, a 3-week low, while Apr Brent crude, the global benchmark, was last seen down $1.28 to $77.42.  The drop comes after the US added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report on expectations interest rates will stay high for longer, making oil more expensive for intl buyers, though rising employment is a bullish indicator for demand.  The ICE dollar index was last seen up 0.89 points to 103.94.  Weak demand from China, the #1 importer, as its economy continues to struggle, is also checking prices, as is a lower geopolitical risk premium, as prices fell sharply yesterday after uncertain reports over a ceasefire between Israel & Hamas.  Crude oil suffered its biggest loss since Nov with the risk premium deflating amid talks for Gaza ceasefire.  The negotiations are still in the early stages with plenty of risks still around, including a US response to the Jordan attacks

WTI Crude Oil Falls on Demand Concerns and a Surging Dollar Following a Robust US Employment Report

The earnings reports this week have been quite good.  But they are only history & early indications are for limited earnings in the new year.  In addition, interest rates are on the rise again with the 10 year Treasury yields back over 4% & there are more decliners than advancers.  Once again, this is an overbought market & subject to profit taking.  In the meantime enjoy these high stock values.  This week the Dow rose 545 & is up more than 965 YTD.

Dow Jones Industrials 

Markets are mixed after earnings reports and January job data

Dow was up 14, decliners over advancers 3-1 & NAZ fell 217.  The MLP index declined 2 to the 262s & the REIT index retreated 6+ to the 375s.  Junk bond funds were sold & Treasuries had selling, raising yields.  Oil slid back 1+ to the low 72s & gold lost 19 to 2051.

AMJ (Alerian MLP Index tracking fund)

US job growth unexpectedly surged in Jan, underscoring the resilience of the labor market even in the face of high interest rates and stubborn inflation.  Employers added 353K jobs in Jan, the Labor Dept said in its monthly payroll report, easily topping the 180K gain forecast.  The unemployment rate held steady at 3.7%, against expectations for a slight increase.  Wage growth also accelerated last month, with average hourly earnings, a key measure of inflation, rising 0.6%, double what had been expected.  On an annual basis, wages rose 4.5% in Jan.  However, that coincided with a drop in average hours worked, which fell by 0.2 hour last month to 34.1 hours.  In another show of strength for the economy, the report contained sizable upward revisions to job growth during the previous 2 months.  Gains for Nov & Dec were revised up by a total of 126K jobs to a respective 182K & 333, suggesting that the labor market is stronger than it previously appeared.  The surprisingly strong report paints a picture of a job market that has gone largely unscathed despite the Federal Reserve's aggressive interest-rate hike campaign, but it also diminishes the odds of an imminent rate cut.  The Federal Reserve signaled it is closely watching the report for evidence that the labor market is finally softening after months of solid job gains as policymakers try to ensure that inflation continues to ease.  The consumer price index has cooled considerably in recent months but remains above the Fed's preferred 2% target, despite 11 rate hikes in the span of 16 months.  Faster job growth and the unexpected uptick in wage gains complicate the central bank's plans to start unwinding tighter monetary policy.  Policymakers held interest rates steady at the conclusion of their meeting & signaled that they are prepared to cut interest rates later this year.

US job growth unexpectedly jumps as economy adds 353,000 new positions

Apple (AAPL), a Dow stock, earnings beat estimates for revenue & earnings, but it showed a 13% decline in sales in China, one of its most important markets.    Quarterly EPS was $2.18 vs $2.10 expected on revenue of $119.6B vs $117.9B expected.  The product lines are compared to expectations:  

• iPhone revenue: $69.7B vs $67.8B expected 
• Mac revenue: $7.8B vs $7.7B expected 
• iPad revenue: $7.0B vs $7.3B expected 
• Other Products revenue: $11.9B vs $11.6B expected 
• Services revenue: $23.1B vs $23.3B expected 
• Gross margin: 45.9% vs 45.3% expected 

The company did not provide guidance for the current qtr ending in Mar.  CFO Luca Maestri said that AAPL expected iPhone sales in the Mar qtr would be similar to last year’s $51.3B in revenue, after taking out $5B in sales attributed to outperformance a year ago as supply recovered from Covid shutdowns & caught up to demand.  Maestri said total company revenue would be similar to last year's $94.8B after taking out the $5B in iPhone sales.  He added that services would grow the same as in the Dec qtr, which was 11%.  AAPL reported 2% sales growth in the Dec qtr, breaking a streak of 4 straight qtrs with annual revenue declines.  Gross margin continues to rise, nearly breaking 46% in the Dec qtr.  AAPL reported $33.9B in net income during the qtr, up 13% from the same period last year.  The stock fell 41¢.

Apple revenue grows for the first time in a year, but China shows weakness

Amazon (AMZN) reported 4th-qtr results that sailed past estimates & gave strong guidance for the current qtr.  AMZN said first-qtr sales will be $138-143.5B, representing growth of 8-13%.  The forecast expected revenue of $142B.  It easily topped expectations for earnings, indicating that CEO Andy Jassy's efforts to rein in costs are paying off.  EPS surged to $1.00, compared to 3¢ a year earlier.  The company laid off 27K employees from late 2022 to mid-2023 & ended some of its more unproven bets.  It has continued to look for ways to trim expenses in other areas, such as its fulfillment business.  In Jan, it announced cuts in Prime Video, MGM Studios & Twitch, among other units.  CFO Brian Olsavsky said that the company will continue to take a careful approach on new investments, but that it doesn’t see 2024 “as a year of efficiency type thing.”  “We’re going to continue to invest in new things and new areas and things that are resonating with customers,” Olsavsky added.  “Where we can find efficiencies and do more with less, we’re going to do that as well.”  The stock jumped 11.90 (7%).

Amazon reports better-than-expected results, as revenue jumps 14%

Even though jobs created data was strong, it is really more of a mixed report.  That strength will encourage the Fed to be careful with the rate cuts.  And AAPL's report is showing it is a mature company with its best days of strong growth behind it.  The rise in interest rates is another negative to consider.

Dow Jones Industrials 

Markets rally ahead of big tech earnings after the market close

Dow shot up 369, advancers over decliners better than 3-1 & NAZ jumped 197.  The MLP index was fractionally higher to the 264s & the REIT index soared 5+ to the 381s when interest rates dropped.  Junk bond funds went up along with the stock market & Treasuries were heavily bought, sharply reducing yields.  Oil slid back 1+ to the 74s & gold crawled up 4 to 2071 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Peloton (PTON) warned investors it is still months away from growing sales or turning a profit.  The retailer posted mixed results for its holiday qtr, as it lost slightly more money than expected but beat revenue estimates.  It also forecast weaker sales & a bigger loss than expected in its current qtr.  The company reported a net loss for the 3-month period that ended Dec 31 of 54¢ per share, compared with a loss of 98¢ per share a year earlier.  Sales dropped to $744M, down from $793M a year earlier.  The company issued dismal guidance for the current qtr & a tepid full-year sales outlook.  For its fiscal 3rd qtr, it expects sales of $700-725M, compared with an estimate of $754M.  The company expects its adjusted EBITDA loss of $20-30M, compared with an estimate of a loss of $2M.  “Our outlook is tempered by uncertainty surrounding our ability to efficiently grow Paid App subscribers and the performance of other new initiatives, as well as an uncertain macroeconomic outlook,” finance chief Liz Coddington wrote in a letter to shareholders.  Nearly 2 years into CEO Barry McCarthy’s tenure, PTON is showing some signs of progress, but is still falling short on his key targets.  Last Feb, McCarthy set a goal of returning the company to revenue growth within a year but PTON fell short of that.  The company now expects to reach that milestone in Jun at the end of the current fiscal year.  The stock tumbled 1.35 (24%).

Peloton shares plummet 20% as fitness company gives dismal outlook

US consumer confidence increased to a 2-year high in Jan amid slowing inflation & expectations that the Federal Reserve would start cutting interest rates soon. The Conference Board said that its consumer confidence index rose to 114.8 this month, the highest reading since Dec 2021, from a downwardly revised 108.0 in Dec.  The forecast called for the index rising to 115.0 from the previously reported 110.7.  "January's increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, chief economist at The Conference Board.  "The gain was seen across all age groups, but largest for consumers 55 and over."

US consumer confidence rise to two-year high in January

Small business owners are more optimistic to start the year, even as they face persistent inflation & lending concerns, a new poll found.  75% of small business owners are optimistic about their financial trajectory in 2024, up from 68% a year earlier, according to a survey by Goldman Sachs 10,000 Small Business Voices, a policy advocate for small business owners.  Meanwhile, 28% of respondents rated the economy as good or excellent, up 9% from a qtr ago.  More than ½ of small business owners surveyed said they expect to create jobs this year & 62% reported they anticipate profits will increase.  The survey adds to a recent string of data showing consumers & businesses have started to grow more confident about the economy after a stretch where inflation was stubborn & borrowing became tougher.  “The fact that 75% of small business owners are optimistic is a remarkably high number, considering inflation continues to plague them, they continue to face access to capital challenges and workforce-related issues ... all of those challenges have been very sticky for the last few years with no real progress,” Joe Wall, managing director of gov affairs at Goldman Sachs, said.  The survey was conducted nationally in mid-Jan among more than 1400 small business owners.  The survey also asked respondents to rank the difficulty of the last 4 years.  Interestingly, small business owners found 2023 nearly as hard as 2020, the peak of the pandemic & a time when many companies could not operate.  35% of respondents said 2020 was their most challenging year, while 33% picked 2023.  Inflation is still a major concern for business owners, even as the rate of price increases falls.  71% of those surveyed reported inflationary pressures had increased over the last 3 months.

Main Street is more optimistic this year even as inflation persists, survey says

Gold closed with a gain as the $ turned lower, giving up gains that came after Federal Reserve chair Jerome Powell said cuts to US interest rates will not be coming in Mar, dashing market hopes for a quick end to high rates.  Gold for Apr closed up $3 to settle at $2071 per ounce.  The Federal Reserve's policy committee ended its meeting yesterday leaving interest rates unchanged as expected.  However, following the meeting Jerome Powell said he does not believe the central bank will be ready to begin cutting rates in Mar, disappointing investors & boosting the $.  However the gains proved fleeting as the ICE dollar index was last seen down 0.18 points to 103.09.  The Fed left rates unchanged at 5.25-5.50% & the statement tilted hawkish with a line added that said they won't ease until they have more confidence in lower inflation.  Powell started on a less hawkish note as he said that data doesn't need to turn down for cuts but just needs to keep on doing what it's doing.  However, he said that it's unlikely they will have enough confidence on inflation to cut in Mar.  Treasury yields were mixed, with the 2-year note was last seen unchanged at 4.209%, while the yield on the 10-year note was down 4.8 basis points to 3.871%.

Gold Closes Higher as the Dollar Gives Up Early Gains

West Texas Intermediate (WTI) crude oil closed lower, giving up early gains on uncertain reports Israel & Hamas agreed to a ceasefire.  WTI crude for Mar closed down $2.03 to settle at $73.82 per barrel, while Apr Brent crude, the global benchmark, was last seen down $1.73 to $78.82.  A report said the drop came on an Al Jazeera report, later deleted, that Israel agreed to a ceasefire.  The news service's own reports concluded negotiations are in early stages & no immediate agreement is expected.  OPEC+ staged its first Joint Ministerial Monitoring Committee meeting of the year, with the cartel agreeing to review 2.2M barrels per day of voluntary cuts put in place for the first qtr in early Mar, according to reports & confirming it may take additional measures to support prices when it meets again in early Apr.  However rising US production & inventories is offering a check to prices.  The Energy Information Administration said inventories unexpectedly rose 1.2M barrels as production rebounded to 13M bpd after falling by 1M bpd as a bitter cold snap froze equipment.  It does appear that of all the areas most affected, North Dakota's return to the US oil matrix not only saw crude oil inventories rise by 1.2mb against a poll draw of 217kb expected, but national crude production increased by 700kb, thus taking it back to the record 13mbpd as seen at the back end of last year & into the beginning of this year.

WTI Crude Oil Closes With a Loss on Reports of Ceasefire Between Israel and Hamas

The bulls returned to drive stock prices higher.  Big tech companies are reporting earnings shortly & expectations are riding high.  Now those companies will have to prove that buying stocks was justified.  At the same time Treasuries are rising, bringing lower yields & gold is near its recent record under 2100.  Tomorrow, the report on monthly earnings is also due.  It should be an interesting day in the stock market!

Dow Jones Industrials 

Markets waver while yields retreat

Dow crawled up 11, advancers over decliners 3-2 & NAZ was down 8.  The MLP index added 3+ to the 266s & the REIT index fell 2 to the 373s.  Junk bond funds fluctuated & Treasuries saw heavy buying which sharply reduced yields (more below).  Oil went up to the 76s & gold inched up 1 to 2068 (close to its recent record high).

AMJ (Alerian MLP Index tracking fund)

Companies announced the highest level of job cuts in Jan since early 2023, a potential trouble spot for a labor market that will be in sharp focus this year, according to a report from Challenger, Gray & Christmas.  The job outplacement firm said planned layoffs totaled 82K for the month, a jump of 136% from Dec though still down 20% from the same period a year ago.  It was the 2nd-highest layoff total & the lowest planned hiring level for the month of Jan in data going back to 2009.  Technology & finance were the hardest-hit sectors, with high-flying Silicon Valley leaders announcing workforce cuts to start the year.  “Waves of layoff announcements hit US-based companies in January after a quiet fourth quarter,” said Andrew Challenger, senior VP of the firm.  The cuts were “driven by broader economic trends and a strategic shift towards increased automation and AI adoption in various sectors, though in most cases, companies point to cost-cutting as the main driver for layoffs,”  Financial sector layoffs totaled 23K, the worst month for the category since Sep 2018.  Tech layoffs totaled 16K, the highest since May 2023.  Food producers announced 6K, the highest since 2012.  “High costs and advancing automation technology are reshaping the food production industry. Additionally, climate change and immigration policies are influencing labor dynamics and operational challenges in this sector,” Challenger added.  Initial jobless claims totaled 224K for last week, up 9K from the previous week.  Continuing claims, which run a week behind, jumped by 70K, the Labor Dept.

January hiring was the lowest for the month on record as layoffs surged

Merck (MRK), a Dow stock, reported 4th-qtr revenue & adjusted earnings that topped estimates as it saw strong demand for its blockbuster cancer drug Keytruda & HPV vaccine Gardasil.  The pharmaceutical giant posted a net quarterly loss, however, due to previously announced charges associated with a deal the company struck in Oct with the Japanese drugmaker Daiichi Sankyo to co-develop 3 highly sought-after cancer treatments.   The company posted a net loss of 48¢ per share, for the qtr.  That compares to EPS of $1.18 during the year-earlier period.  Excluding acquisition & restructuring costs, EPS was 3¢ for the 4th qtr.  The results include a charge of $1.69 per share related to the Daiichi Sankyo deal.  The company had $14.6B in revenue, up 6% from the same period a year ago.  Those results come as MRK shows significant progress in preparing for Keytruda’s patent expiration in 2028, with a handful of new deals under its belt & key drug launches ahead.  The loss of exclusive rights to the drug will likely mean its sales will fall, forcing the company to draw revenue from elsewhere.  CEO Robert Davis said that the company “feels very good” about the progress it has made to grow its drug portfolio.  But he added “we need more” products, adding that the company remains interested in inking acquisitions or collaboration deals.  MRK also issued its full-year 2024 guidance, which was generally in line with expectations.  The company expects revenue to be $62.7-64.2B & adjusted EPS of $8.44-8.59 this year.  Analysts forecast full-year sales of $63.5B & adjusted EPS of $8.42.  That adjusted earnings outlook includes a one-time charge of roughly 26¢ per share related to its acquisition of Harpoon Therapeutics, which develops immune-based cancer drugs, earlier this month.  The stock rose 3.84.

Merck results beat estimates as top drugs Keytruda, Gardasil post strong sales

The 10-year Treasury yield slumped to a one-month low as investors digested the latest interest rate decision from the Federal Reserve & clues about the path ahead for rate cuts.  The yield on the 10-year Treasury was down by more than 10 basis points at 3.86%, remaining below the 4% mark it had fallen under yesterday & the 2-year Treasury was last 3.1 basis points lower at 4.20%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Following the interest rate decision yesterday, Fed Chair Jerome Powell said it was unlikely that rates would be cut at the next Fed meeting in Mar.  However, he said that rate cuts would likely take place this year.  The Fed's policy statement, which was released alongside the rate decision, also indicated that further rate hikes would no longer be on the table.  That marked a change from the Fed's last policy meeting in Dec.  Investors also parsed fresh ISM manufacturing index data which showed US assembling remained in contraction last month.  The index notched a reading of 49.1 in Jan, slightly above an estimate of 47.2.

10-year Treasury yield dips as investors digest Fed rate decision

The Fed is expecting rate cuts, but timing is unclear & will be based on economic data reported in the coming months.  Increased layoffs are also making investors anxious.  Today, while the stock market is overbought, new money is buying Treasuries & gold remains close to its recent record highs.

Dow Jones Industrials