Morning in Arizona

Morning in Arizona

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Wednesday, September 21, 2016

Fed Day

Financial Review

Fed Day


DOW + 163 = 18,293
SPX + 23 = 2163
NAS + 53 = 5295
10 Y – .02 = 1.67%
OIL + 1.57 = 45.62
GOLD + 20.30 = 1335.90

Today is Fed Day.  The Federal Open Market Committee left interest rates unchanged, although it was a split decision. Their statement noted that the labor market continued to strengthen and economic activity has picked up in the second half; household spending is growing but business fixed investment remains soft.

Inflation remains tame and “Near-term risks to the economic outlook appear roughly balanced.”  After a two-day session the Committee decided “that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The last time the Fed raised interest rates was December 2015; and they expected to raise rates twice in 2016. They have now held six straight policy meetings with no action. Now the focus will shift to December as the Fed’s likely last chance to raise interest rates in 2016 — a move that depends on how the economy, inflation and markets fare in the months surrounding the presidential election.

The lack of action is not due to a weak economy, rather a lack of urgency. Fed Chair Janet Yellen said at the start of her press conference, “Our decision does not reflect a lack of confidence in the economy. Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future.”

The target range for the benchmark federal funds rate remains at 0.25 percent to 0.5 percent, where it’s been since a quarter-point increase in December 2015 that ended seven years of near-zero rates.

Fed officials cut their median growth projection for 2016 to 1.8 percent from 2 percent, mirroring the drop in the longer-run forecast, based on median estimates.

Inflation is projected at 1.3 percent in the fourth quarter, down from a forecast of 1.4 percent in June. Policy makers again projected that inflation will reach the 2 percent target in 2018.

The decision to hold rates steady was not unanimous. Ester George, Loretta Mester, and Eric Rosengren wanted to hike rates. George and Mester are long-time hawks. Rosengren had been dovish until about 2 weeks ago when he announced he thought it was time for a hike, news that shook the markets.

Yellen said differences among Fed officials were easy to overstate. Board members agreed that continued growth would warrant a rate increase. In a new round of economic projections published on Wednesday, 14 of 17 Fed officials said they expected to raise the benchmark rate at least once this year.

Because November’s FOMC meeting comes within a week of the presidential election and isn’t followed by a press conference with Yellen, the Fed’s December meeting is probably the earliest realistic chance for a rate increase.

Yellen said at a news conference after the Fed’s announcement: “We’re generally pleased with how the economy is doing. The economy has a little more room to run than might have previously been thought. That’s good news.” It was certainly good news for Wall Street, which loves accommodative monetary policy, which is to say – access to cheap money.

The Bank of Japan also wrapped up its policy meeting today, before the Fed; the BOJ held rates steady at negative – 0.1%. Instead of targeting an annual increase in the nation’s monetary base of about 80 trillion yen, the bank will now target the shape of the Japanese yield curve, announcing that it will purchase Japanese government bonds, with the aim of keeping the 10-year bond rate “more or less at the current level” of about 0%.

So while the scale of asset purchases is expected to be roughly the same as it was previously, the bank is now targeting interest-rate levels, not just the size of its asset purchases. They will do this by scrapping the previous stance of purchasing securities with a set time frame to maturity of seven to 12 years.

The Japanese yen was higher (after an initial slide) on the news and the Nikkei rallied 1.3%. Japanese Bond yields, now central to BOJ monetary policy moving forward, have also lifted. The 10-year Japanese Government Bond yield sits at negative-0.022%, having briefly traded at 0%, a level that had not been seen since the middle of March.

The world economy remains in a “low-growth trap” and weaker conditions in advanced economies will persist into 2017, The Organization for Economic Co-operation and Development, or OECD predicts global growth this year will expand by only 2.9%, the lowest rate since the financial crisis.

The economic think-tank also backtracked on its warning that the U.K. would suffer instant damage from a Brexit vote and has thrown its weight behind Theresa May’s plans to provide fresh post-referendum support.

Brazil’s former president will stand trial. Lula da Silva will be tried on corruption and money laundering charges linked to the state-owned Petrobas oil company. Lula was seen as a possible presidential candidate for the 2018 election—a conviction would bar him from running.

The United Nations secretary general, Ban Ki-moon, announced that he has secured enough commitments from world leaders, enough to ensure that the 2015 Paris climate accord will enter into legal force this year, binding the next American president, whoever it is.

The accord requires all countries to devise plans to achieve the goal of keeping the rise of temperatures within two degrees Celsius (3.6 Fahrenheit) above pre-industrial levels. Scientists say that such a temperature rise still poses risks but could save the planet from the worst effects of climate change, including worsening flooding, storms and droughts that may cause food shortages, species extinction and significant human displacement.

To come into force, the Paris agreement needs ratification from 55 countries that account for at least 55 percent of the planet’s greenhouse gas emissions responsible for climate change. With Wednesday’s event, a total of 60 countries have joined the Paris accord, meeting the threshold. And 14 other countries had signaled they would ratify the accord this year, meaning the agreement is virtually certain to come into force.

Replacements for only half of the 1 million Galaxy Note 7 phones recalled in the U.S. will be available in stores today. The rest will arrive at retail outlets by the end of the month. Samsung is also pushing out two new software updates: One will show a green battery icon (instead of white) to confirm a new Note 7 device. The other will tell owners of old Note 7 phones to get a replacement.

Google released an AI-centric messaging app. The much-anticipated Allo will compete against WhatsApp, Apple’s iMessage, and Facebook Messenger. Users can strike up a conversation with Google Assistant, an artificial-intelligence helper that, while still a work in progress, can solve math problems and translate phrases.

On its official blog, Google wrote that its Allo app for Android and iOS “can help you make plans, find information, and express yourself more easily in chat” and “the more you use it, the more it improves over time.”

AT&T says it has discovered a new way to deliver high-speed broadband over electrical power lines, a method it claims would make it cheaper and easier to bring internet to hard-to-reach places. The company has filed patents for the technology and is looking for a place to conduct field trials next year. Even if it goes well, AT&T warned it would still be several years before the system is commercially available.

Tesla updated its software after hackers remote-controlled a vehicle. Researchers in China remotely manipulated the brake system of a Model S while it was on the move and also opened a car door without using a key. The hackers, from Keen Security Lab, shared their efforts on YouTube.

The U.S. IPO market is heating up… There are nine new listings on the calendar over the next three days, marking the busiest week of 2016, and if next week’s proposed calendar comes through, September will be the busiest month of the year as well.

Among them: The Trade Desk (TTD) which traded today and jumped 67% from its offer, Novan (NOVN), CapStar (CSTR), e.l.f. Beauty (ELF), AC Immune (ACIU), Apptio (APTI), Full Spectrum (FMAX), Gridsum (GSUM) and Valvoline (VVV).

The SEC has charged Leon Cooperman of insider trading. Cooperman is the longtime head of Omega Advisors, a hedge fund he founded. The SEC complaint says an executive of Atlas Pipeline Partners shared information about the sale of a nat gas facility because he believed Cooperman wouldn’t trade on it.

Cooperman was one of Atlas Pipeline’s top investors, but he had been actively selling his holdings and saying bad things about the company; until he allegedly received the inside information, then he started buying out-of-the-money call options that on one day accounted for over 90% of the day’s trading volume.

Mylan Chief Executive Heather Bresch testified before the House Oversight Committee today, trying to defend price gouging on the company’s EpiPen allergic reaction treatment. The company hiked prices 500% since 2007. At the same time Bresch saw her compensation package increase 671%.

The EpiPen treats allergic shock and can be a lifesaver. There are no other options on the market. The lawmakers called the price hikes greedy, unfair and monopolistic, and that was all pretty accurate. Now let’s see if they do anything about it.

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