Markets ease higher after key inflation data is disappointing

Dow rose 71, but decliners over advancers about 2-1 & NAZ climbed 208.  The MLP index fell 3+ to the 192s  & the REIT index traded flattish, above 450.  Junk bond funds fluctuated & Treasuries were bid higher.  Oil gained 1 to the 87s & gold was off 11 to 1783.

AMJ (Alerian MLP index tracking fund)

CL=F Crude Oil 88.28 +1.67 +1.9% GC=F Gold     1,790.10  -4.90  -0.3%

 

 

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A key measure of annual inflation that is closely watched by the Federal Reserve is running at the hottest pace in nearly 4 decades as widespread supply disruptions, extraordinarily high consumer demand & worker shortages fuel rapidly rising prices.  Prices soared by 5.8% in the year thru Dec, according to the personal consumption expenditures price index (PCE), beating out the previous month's increase of 5.7% to become the fastest inflation pace since 1982.  In the one-month period between Nov & Dec, prices jumped 0.4% (0.5% when excluding food & energy costs).  Excluding the more-volatile measurements of food & energy, prices rose 4.9% in Dec from the previous year – the highest since 1983.  That measurement is the Fed's preferred gauge to track inflation; it marks the 9th consecutive month the measure has been above the central bank's target range of 2%.  The inflation spike largely reflected surging energy costs, which rose 29.9% from a year ago & food costs, which were up 5.7% over that same time period.  Services inflation rose by 4.2% in Dec & goods inflation increased 8.8% – up from the 8.5% pace a month prior.  The PCE report was accompanied by data on household spending, which showed that consumer spending fell 0.6% last month, with purchases of cars, electronics & clothes declining.  Higher prices may have deterred some households from shopping, along with a surge of the highly contagious omicron variant, which has elicited some fresh business restrictions.  "We are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation," Fed Chair Jerome Powell said, suggesting the employment cost index had played a key role in the central bank's decision to begin tightening policy.

Key inflation gauge surges 5.8% in December, highest in four decades

The 10-year Treasury yield was little changed after the Federal Reserve's key inflation gauge rose at its fastest clip since 1983 in Dec.  The yield on the benchmark 10-year Treasury note was less than a basis point lower to 1.803% & the yield on the 30-year Treasury bond rose 1.9 basis points to 2.11%.  Yields move inversely to prices & 1 basis point is equal to 0.01%.  Dec's personal consumption expenditures index, which is the Federal Reserve's primary inflation measure, increased 4.9% from a year ago, the Commerce Dept reported,s the biggest gain going back to 1983.  The personal consumption expenditures price index excluding food & energy was slightly more than the 4.8% estimate & the monthly gain of 0.5% was in line with expectations.  Investors will be watching the data closely, given that the Fed indicated after its latest policy meeting this week that it could start raising interest rates in Mar in an attempt to help curb inflation.

10-year Treasury yield is little changed as investors digest inflation gauge, Fed update

Chevron (CVX), a Dow stock & Dividend Aristocrat, shares declined after the company reported a mixed qtr, despite surging oil & gas prices.  EPS was $2.56 excluding items during the 4th qtr, while the forecast was expecting $3.12.  Revenue, however, came in at $48.1B, topping the expected $45.6B.  For the full year, CVX saw record free cash flow of $21.1B, while reducing debt by $13B.  It earned $15.6B for the year, compared to a loss of $5.5B in 2020.  On Wed, the company hiked its quarterly div by 8¢ (6%) to $1.42 per share.  This was the 35th straight year that the company has increased its payout.  The company's cash flow from operations was $29.2B in 2021, more than double 2020's $10.6B.  Q4 results compare to a loss of a penny per share on an adjusted basis during the same qtr one year ago & $25.2B in revenue.  During the Q3-2021, EPS was $2.96 on an adjusted basis, with revenue coming in at $44.7B.  Worldwide net oil-equivalent production fell about 5% year over year during the fourth quarter to 3.12M barrels per day.  The company’s average sales price per barrel of crude oil & natural gas liquids in the US almost doubled year over year, rising to $63 during Q4, up from $33 a year earlier.  Its average sales price for natural gas in the US jumped to $4.78 per thousand cubic feet during Q4, up from $1.49 in the same qtr last year.  The stock dropped 6+ to 129.
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Chevron shares retreat from a record after fourth-quarter profit falls short of expectations

At the opening, investors' gut reaction brought on selling.  But in the last hour, buyers returned to take prices higher.  Today is shaping up as another wild trading day which will react to earnings reports.

Dow Jones Industrials

 

Markets pare gains as wild trading continues

Dow was off 7, decliners over advancers 5-2 & NAZ dropped 189.  The MLP index was flattish in the 195s & the REIT index dropped another 7+ to the 449s.  Junk bond funds were mixed & Treasuries saw more buying, but the yield on the 10 year Treasury is still at a hefty 1.81%.  Oil was off 1+ to the low 86s after yesterday's advance to a 7 year high & gold sold off 37 to 1792 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The IMF has warned of further turbulence ahead for financial markets, particularly as govs around the world shift gears into recovery mode.  Central banks' moves to tighten monetary policy & curb rising inflation could push riskier stocks deeper into the red even as policymakers pledge a smooth transition, the IMF's Tobias Adrian, financial counselor & director of monetary & capital markets, said.  “We could certainly see further tightening of financial conditions, and that means that risk assets such as equities could sell off further,” Adrian added.  The market reaction will hinge largely on central banks'’ ability to communicate their intentions, Adrian said, urging order & transparency.  Yesterday, the Federal Reserve signaled that it could halt its asset purchasing program & start raising interest rates as soon as Mar.  “This is hopefully not going to be disorderly, but it’s going to be an orderly adjustment in terms of valuations,” he said.  “We are estimating, for example, for an unexpected further tightening of 50 basis points you could see a substantial further sell-off in the equity markets,” he added, noting that some sectors would be worse affected than others.  His comments come as the IMF released its Global Financial Stability report.  It follows the release of its World Economic Outlook earlier this week, which downgraded global growth to 4.4% in 2022.  Despite downward pressure from rising interest rates, this report noted that corp earnings are forecast to surpass pre-pandemic levels in 2022 in most sectors.  Meanwhile, bond spreads —a key metric for measuring the price of a group of bonds — remain below average 2019 levels.

IMF sees potential for further market turbulence as central banks hike rates

The number of American workers filing unemployment claims declined as expected this week, suggesting the country may be recovering from disruptions to the economy caused by the Omicron variant.  Workers filed 260K initial jobless claims for last week, the Labor Dept said.  The number of claims was down 30K compared to the previous week's revised tally, when claims unexpectedly surged to 290K.  Unemployment claims, which are seen as a proxy for layoffs, declined on a weekly basis for the first time in 2022.  The foecast projected jobless claims would decline 21K to 265K for the week.  The 4-week moving average of jobless claims was 247K, an increase of 15K compared to the previous week's revised average.  The moving average smooths out volatility in the weekly claims figure.  About 1.67M Americans were claiming continuing unemployment benefits for the latest week.  The Omicron variant has renewed pressure on businesses throughout the country, with many forced to temporarily close or experiencing declines in customer traffic.  Meanwhile, many are workers calling out sick.  A record number of COVID-19 cases has contributed to the uptick in jobless claims, which had reached a 52-week low of just 188K as of Dec 4.  Last week's rise in claims marked the highest number since mid-Oct.  Jobless claims remain low compared to historic levels as companies compete for workers in a tight labor market.  The US unemployment rate dipped to 3.9% in the Dec jobs report.

US jobless claims drop to 260K as employers weather Omicron

Natural-gas prices rallied, with traders shocked by a more than 46% jump in prices at the settlement, as the front-month Feb futures contract expired at the end of the trading session.  Natural gas for Feb delivery settled at $6.265 per M British thermal units, up $1.99 (46.5%) - the largest one-day percentage move on record & highest finish since Oct.  The 219B-cubic-foot weekly fall in US supplies of the fuel reported by the Energy Information Administration leaves stockpiles more than 10% below last year's levels.  Meanwhile, oil futures posted their first loss in 3 sessions, easing back from the multiyear highs seen a day earlier.  Traders remained focused on the Russia-Ukraine situation & the possibility of a disruption to global crude supplies.  Mar West Texas Intermediate crude fell 74¢ (0.9%) to settle at $86.61 a barrel, after settling yesterday at $87.35, the highest front-month contract finish since 2014.  

Natural-gas futures jump by more than 46%; oil settles lower

Gold prices fell sharply to settle below the key $1800 mark for the first time in nearly 3 weeks, pressured by strength in the $ which followed indications from the Federal Reserve that it plans to raise interest rates as soon as Mar.  Feb gold lost a big $36 (2%) to settle at $1793 an ounce.  That was the first finish below $1800 since Jan 10 & lowest settlement since Jan 6.  Apr gold which is also among the most active, settled at $1795, down $37 (2%).

Gold futures fall to a 3-week low as dollar surges after Fed points to start of rate hikes in March

The Port of Savannah hit a container record last year, handling 5.6M container units of imports & exports, an increase of 1M container units from the year before amid continued supply chain disruptions.  The Georgia Ports Authority provided the data, noting the 20% increase in shipping containers moving thru the Port of Savannah in 2021 as seaports across the US struggled to keep up with the surge in cargo that packed container yards and forced ships to wait at sea.  Exec director of the Georgia Ports Authority Griff Lynch said that while every major port is experiencing a backup of ships, the Port of Savannah is "fortunate that we have the expansion capability," which is helping to navigate the situation.  He told said that a few months ago more space was needed "in order to get the cargo moving and once we did that, we’d be able to get those ships caught up, well more space has come."  He noted that while more capacity has been added, "we are only part of the way done."  Retailers rushed to refill inventories & kept ordering in an attempt to keep shelves stocked while online shopping also continued to grow amid the coronavirus pandemic, contributing to the record volumes at  the Port of Savannah during all 12 months of 2021.  "It literally is three to four years of growth in one year," Lynch said, stressing that "it didn’t come out without pain."  He went on to note that the port's container yard is still largely full and said the outlook for 2022 remains uncertain.

Major US port hits container record as supply chain disruptions roil US

This has not been a good time for those feint of heart.  Wild trading continued today.  Dow started with a solid gain on the GDP report.  At midday it tumbled 600 & continued at depressed levels for the rest of the session.  Dow's back to where it was at mid Apr.  The bull market can not overcome the headwinds.  REITs have had an a major rally in the last 2 years.  But this year, the REIT index, mentioned above, has dropped 10% from its peak.  REIT's are very sensitive to high interest rates which have already starting climbing.  However, energy markets remain quite strong.

Dow Jones Industrials

Markets rise on strong GDP data in the fourth quarter

Dow jumped 423, advancers over decliners a relatively modest 3-2 & NAZ gained 85.  The MLP index edged up to the 196s & the REIT index rose 2+ to 460.  Junk bond funds crawled higher & Treasuries were being sold again, bringing higher yields.  Oil was off pennies in the 87s & gold tumbled 35 to 1794.

AMJ (Alerian MLP index tracking fund)

CL=F Crude Oil 86.72    -0.63  -0.7%

GC=F Gold    1,798.30  -31.40 -1.7%

 

 

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The US economy accelerated more than expected in the final 3 months of the year, helping the nation record its best year for growth in nearly 4 decades before the highly contagious omicron variant of the coronavirus dampened consumer spending & further strained the global supply chain.  GDP, the broadest measure of goods & services produced across the economy, grew by 6.9% on an annualized basis in Q4, the Commerce Dept said in its first reading, marking the strongest quarterly growth in a year.  The forecast for the report was expected to show the economy had expanded by 5.5%.  But the headline figure often obscures the whole picture because the Commerce Dept calculates the GDP on a qtr-over-qtr basis as if that level of growth were sustained for a full year; in times of huge swings up or down, it can exaggerate both the decline in growth & the subsequent rebound.  Looking at the quarterly data, the nation's GDP grew about 1.7% from the 3rd to the 4th qtr, compared with an increase of just 0.6% between the 2nd & 3rd qtrs, marking a substantial uptick as businesses reopened & Americans spent down their savings following the delta variant surge this summer & fall.  The strong end-of-year growth boosted GDP to 5.7% in all of 2021, compared to the previous year.  It was the strongest one-year growth since 1984, when the economy expanded by 7.2% following a previous recession.  Still, the economy is expected to slow this year as it confronts the hottest inflation in nearly 4 decades & stubbornly high COVID-19 caseloads.  The dramatic rise in consumer prices over the past 12 months – in Dec, inflation hit a fresh 40-year high – has forced the Federal Reserve to dramatically shift its policy stance, including rapidly slowing its bond purchases, ending the buying program earlier than expected & setting the table for a Mar interest rate hike.

US economy surged in the fourth quarter before omicron impact

McDonald's (MCD), a Dow Stock & Dividend Aristocrat, said inflationary pressures will stick around in 2022 after profits & sales fell short of estimates.  In the US, the Golden Arches burger chain reported that same-store sales – restaurants open at least a year – rose 7.5% from Oct to Dec.  For the full year, same-store sales notched 13.8%, which marked "the highest U.S. annual comparable sales ever reported,"  Still, adjusted EPS of $2.23 were 11¢ short of expectations, while revenue rose 13% to $6B for the last 3 months of the year, which was also just shy of expectations, with sales crimped by coronavirus restrictions in Australia & China.  For the full year, revenue increased 21% to $23.2B.  MCD raised hourly pay for 36K US employees at its company-owned restaurants last year.  Franchisees own 93% of the 40K restaurants worldwide, but several thousand stores are owned by MCD.  The stock rose 39¢.
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Inflation hits McDonald's on food costs, labor

Intel (INTC), a Dow stock, earnings fell last qtr as the company ramped up spending on new facilities & products, part of CEO Pat Gelsinger's efforts to revive the semiconductor giant's fortunes.  The chip company posted $20.5B in Q4 sales, up 3% from the year-earlier period.  The company generated net income of $4.6B, down 21% year-over-year.  The forecast  expected sales of $19.2B & net income of $3.2.  INTC expects sales of roughly $18.3B for the current qtr versus an estimate of $18.1B.  The US semiconductor giant is in a period of transition after falling behind rivals in chip making, & competitors have taken market share from it in some semiconductor categories.  Gelsinger, who took over as CEO in Feb 2021, has been trying to reverse the decline & said in Dec that his turnaround plans could take 5-plus years.  He said that the chip shortage is starting to let up in some areas but still has the potential to last into 2024.  "It's still challenging," he added.  "You're just going to see incremental improvements quarter by quarter."  INTC over the past year has expanded its chip-making capabilities, both domestically & abroad.  Most recently, the company announced a $20B investment for new chip-making factories in Ohio, explaining that the semiconductor industry is expected to double from $500B in combined annual sales to $1T by the end of the decade.  "We just have a lot of catching up to do in building out the capital footprint," Gelsinger said.  The stock dropped 2.85.
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Intel earnings drop, revenue edges higher

The GDP report brought out buyers although the advance decline ratio was not impressive.  There is a lot for investors to digest.  One obvious problem is that strong data can encourage the Fed to be more aggressive in raising interest.rates which have already risen in 2022.

Dow Jones Industrials