Markets soar despite higher reading for closely watched inlation gauge

Dow surged 607, advancers over decliners nearly 2-1 & NAZ jumped 196.  The MLP index fell 2+ to the 222s & the REIT index rose 5+ to the 368s.  Junk bond funds rose along with the stock market & Treasuries saw modest selling driving higher yields.  Oil slid back 1 to the 88s following recent strength & gold tumbled 19 to 1645.

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The Federal Reserve's preferred inflation gauge accelerated again in Sep, keeping prices elevated near a 4-decade high, according to new data.  The Personal Consumption Expenditures (PCE) index showed that core prices, which strip out the more volatile measurements of food & energy, climbed 0.5% from the previous month & rose 5.1% on an annual basis, according to the Bureau of Labor Statistics.  Those figures are in line with the 0.5% monthly increase & 5.2% annual increase forecast, indicating that inflationary pressures are broadening throughout the economy.  The more encompassing headline figure rose 6.2% on an annual basis after prices rose 0.3% from the previous month, the same as Aug.  That increase came despite a sharp decline in gas prices.  While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously said that core data is actually a better indicator of inflation.  "Core inflation is a better predictor of inflation going forward," Powell said.  "Headline inflation tends to be volatile."  Both the core & headline numbers point to inflation that is running well above the Fed's preferred 2% target, a troubling sign as the central bank is already hiking interest rates at the fastest pace in decades.  Despite scorching-hot inflation, the report showed consumers continued to open their wallets in Sep when spending rose 0.6%.  Data for Aug was also revised higher to show spending climbed 0.6% instead of the initially reported 0.4%.  Inflation-adjusted spending rose just 0.3%.

Inflation gauge closely watched by the Fed surges again in September

Pending home sales, a measure of signed contracts on existing homes, dropped a much worse-than-expected 10.2% in Sep from Aug, according to the National Association of Realtors (NAR).  The forecast predicted a 4% drop.  Sales were down 31% year over year.  This marks the lowest level on the pending sales index since 2010, excluding Apr 2020, when the Covid pandemic was in its early days.  Realtors point squarely to sharply higher mortgage rates, which had sat at record lows for the first 2 years of the pandemic.  The average rate on the popular 30-year fixed mortgage was right around 3% at the start of this year, but then rose swiftly, crossing 6% in Jun, according to Mortgage News Daily.  It pulled back a bit in Jul & Aug, but then began rising again, crossing 7% in Sep, when these contracts were signed.  “Persistent inflation has proven quite harmful to the housing market,” said NAR Chief Economist Lawrence Yun.  “The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers.”

Pending home sales fell 10% in September, much worse than expected

The Biden administration says it is keeping a close watch on diesel inventories & working to boost supplies following news that reserves have been depleted & could run out in less than a month if not replenished, sparking fears of shortages and rising prices.  The Energy Information Administration (EIA) reported this week that the US had only 25 days of reserve diesel supply, a low not seen since 2008.  National Economic Council Director Brian Deese acknowledged that the level is "unacceptably low," & "all options are on the table" to address the situation.  The EIA also said that distillate fuel includes heating oil inventories & is about 20% below the 5-year average for this time of year.  But areas in the Northeast are already rationing heating oil as temperatures drop, driving concerns that energy costs will surge further.  A White House official said the administration is closely monitoring diesel inventory levels, especially on the East Coast & that it is in touch with US energy firms regarding the need to build up reserves & drive toward solutions.  The NEHHOR holds roughly 1M barrels of home heating oil & House Dems from New England are asking Pres Biden to release some of those reserves to help reduce home heating prices in the region leading into the winter months.  But experts say the developing home heating oil shortage is not going away anytime soon.

Fears spark as threat of diesel shortage looms and reserves dwindle

Today's rally is a mystery.  A key inflation indicator gave a disappointing reading & now a shortage of energy looks to be a looming crisis.  The Dow's rally of 3600 in a little over 2 weeks puts it into heavily overbought territory.

Dow Jones Industrials

 

Markets rise after GDP grows in Quarter 3

Dow advanced 197 (near session lows), advancers over decliners 3-2 but NAZ gave back 178. The MLP index rose 2+ to the 225s & the REIT index added 1+ to the 363s.  Junk bond funds were mixed & Treasuries continued in demand, lowering yields.  Oil was up 1+ to the 89s & gold declined 6 to 1662 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The average rate for a 30-year fixed mortgage topped 7% for the first time in 2 decades.  Freddie Mac reported that the average long-term US mortgage rate climbed to 7.08% from 6.94% a week ago.  A year ago, the 30-year rate averaged 3.14%.  "The 30-year fixed-rate mortgage broke seven percent for the first time since April 2002, leading to greater stagnation in the housing market," said Sam Khater, Freddie Mac's chief economist.  The 15-year fixed-rate mortgage averaged 6.36%, up from last week's average of 6.23%.  A year ago at this time, the 15-year FRM averaged 2.37%.  Finally, the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 5.96%, up from last week's 5.71% average.  A year ago at this time, the 5-year ARM averaged 2.56%.  "As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month," he continued.  "In fact, many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward."  Mortgage rates don't necessarily mirror the Fed's rate increases, but tend to track the yield on the 10-year Treasury note.  That's influenced by a variety of factors, including investors' expectations for future inflation & global demand for Treasuries.  Many potential homebuyers have moved to the sidelines as mortgage rates have more than doubled this year.  Sales of existing homes have declined for 8 straight months as borrowing costs have become too high a hurdle for many Americans already paying more for food, gas & other necessities.  Meanwhile, some homeowners have held off putting their homes on the market because they don't want to jump into a higher rate on their next mortgage.

Mortgage rates surge to highest mark in two decades

Treasury yields slid after the latest US GDP report showed some signs that inflationary pressures could be easing.  The yield on the 10-year Treasury dipped 9 basis points to 3.927%.  The benchmark note had been declining for the last 2 days.  The policy-sensitive 2-year Treasury yield was down 9 basis points at 4.33%.  Yields & prices have an inverted relationship.  One basis point equals 0.01%.  The report for US GDP showed 2.6% economic growth in Q3.  The forecast was expecting 2.3%.  In addition to showing stronger than expected growth, the GDP report provided at least some good news on inflation.  The chain-weighted price index, a cost-of-living measure that is adjusted to reflect changing consumer behavior, rose 4.1% for the qtr, well below the 5.3% estimate.  Also, headline inflation rose 4.2%, down sharply from 7.3%, according to a gauge the Federal Reserve uses.

Treasury yields fall after GDP report shows some signs of inflation easing  

Slightly more Americans applied for unemployment benefits last week as the labor market remains one of the healthiest parts of an uneven US economy.  Jobless claims for last week inched up by 3K to 217K from 214K the previous week, the Labor Dept reported.  The 4-week moving average rose to 219K from 212K the previous week.  Applications for jobless claims, considered a proxy for layoffs, have remained historically low even as the Federal Reserve has cranked up its benchmark borrowing rate in an effort to cool the economy & tame inflation.  Fed officials have warned that the unemployment rate will likely have to rise as part of their fight against rising prices & the most recent gov jobs report likely snuffed out any hope that the Fed would pause rate increases when it meets in next week.

Jobless claims edge up but still remain historically low

Gold futures declined, a day after prices posted their highest finish in nearly 2 weeks.  The precious metal saw prices drop after a better-than-expected US GDP number, with the thinking being that a more robust growth number would strengthen the Federal Reserve's resolve to keep hiking interest rates.  However, gold's price recovered some of its losses after that more bearish reaction.  Gold for Dec fell $3 to settle at $1665 an ounce after trading as low as $1658.

Gold ends lower, a day after prices settle at their highest in nearly 2 weeks

Oil futures settled higher, stretching their gains into a 3rd straight session on the back of US GDP data showing that the nation's economy grew at an annual 2.6% pace in the 3rd qtr, following 2 straight qtrs with declines.  US benchmark West Texas Intermediate crude for Dec rose $1.17 (1.3%) to settle at $89.08 a barrel.  That was the highest front-month contract finish since Oct 13.

Oil prices settle higher, supported in part by third-quarter growth in the U.S. economy

Growth in the economy for the last qtr was a welcome relief for investors.  Unfortunately that also implies the Fed has more work to do raising interest rates.  The next meeting is next week.  Meanwhile the inverted yield curves continues in effect (interest rates are higher on short Treasury debt than longer term Treasuries).  That is a classic sign a recession is coming & it might get more attention tomorrow.  Already there was a little selling into the close.

Dow Jones Industrials

Markets rise but tech shares on Nasdaq are lower

Dow jumped 406 (150 off early highs). advancers over decliners 5-2 but NAZ was off 63.  The MLP index gained 3+ to the 226s & the REIT index rose 1+ to the 363s.  Junk bond funds crawled higher & Treasuries saw more buying, reducing yields.  Oil went up 1+ to the 89s & gold was off 3 to 1666.

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The US economy rebounded over the summer after shrinking for the first 6 months of the year, but the rebound does little to allay fears that the world's largest economy is headed toward a recession as it confronts painfully high inflation and rising interest rates.  GDP, the broadest measure of goods & services produced across the economy, grew by 2.6% on an annualized basis in Q3, the Commerce Dept said in its first reading of the data.  The foecast expected the report to show the economy had expanded by 2.4%.  The turnaround stemmed in large part from a narrowing trade deficit & increased exports, volatile measurements that do not accurately capture the underlying health of the economy.  Exports climbed 14.4%, while imports dropped 6.9%.  The surge in exports could be just a one-off that masks weakening in the economy that will ultimately act as a drag on future growth.  Consumer spending – which accounts for about 2/3 of GDP – rose just 1.4% in Q3, a deceleration from the previous qtr when it climbed 2.0%.  Gross private domestic investment, meanwhile, tumbled 8.5% after falling 14.1% in the period from Apr-Jun.

US GDP grows in the third quarter, but could be downhill from here

The ECB announced a 75-basis-point interest rate hike — its 3rd consecutive increase this year — while also scaling back support for European banks.  Following much speculation by market participants, the ECB said it was now changing the terms & conditions of its targeted longer-term refinancing operations, or TLTROs.  They are a tool that provides European banks with attractive borrowing conditions, designed to incentivize lending to the real economy.  However, because the ECB has been increasing rates faster than expected in the face of soaring inflation, European lenders are benefiting from both TLTROs & higher interest rates.  The situation has been described as effectively providing a subsidy to banks.  “During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability. Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated,” the ECB said.  Therefore, it added that the interest rates applicable to the tool, known as TLTRO III, would be adjusted from Nov.23 to match the deposit facility rate, which is the main benchmark of the ECB. In addition, banks will also be offered voluntary early repayment dates.  “In order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.”  This will see the cost of lending for banks rise significantly under the scheme.  ECB Pres Christine Lagarde said that the Nov 23 date would allow banks to adjust to the new conditions.

ECB hikes rates by 75 basis points and scales back support for European banks 

McDonald’s (MCD), a Dow Stock & Dividend Aristocrat, traffic to its US restaurants is growing, helping the fast-food giant top expectations for its quarterly earnings & revenue.  Execs spoke openly about the challenges its restaurants are facing.  CEO Chris Kempczinski said there's increasing uncertainty & unease about the economic environment.  CFO Ian Borden said that inflationary pressures & interest rate hikes are putting “significant pressure” on consumers & the restaurant industry.  Q3 EPS was $2.68, down from $2.86 a year earlier.  Net sales fell 5% to $5.9B.  Excluding the impact of foreign currency, sales rose 2% in the qtr.  Worldwide, the company's same-store sales climbed 9.5%, beating estimates of 5.8% growth.  All 3 divisions topped expectations for same-store sales growth.  The stock rose 8.77.
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McDonald’s earnings beat as customers return despite higher prices

While the headline number was fairly good, the underlying data is not impressive.  The Dow has already pulled back from its early highs.  There could be more selling in the PM.

Dow Jones Industrials