The Mark Inside
DOW – 7 = 20,093
SPX – 1 = 2294
NAS + 5 = 5660
RUT – 5 = 1370
10 Y – .02 = 2.48%
OIL – .64 = 53.14
GOLD + 2.90 = 1192.20
Major market indices traded in a tight range today. The Nasdaq pulled out another record high close. Meanwhile the VIX, the volatility index closed at 10.52, a multi-year low, indicating a certain complacency among investors, not in all sectors for sure, but with regards to overall market risk.
Gross domestic product, the value of all goods and services produced, rose at a 1.9 percent annualized rate in the fourth quarter, following the prior quarter’s 3.5 percent rate of growth.
For the full year, the U.S. grew just 1.6%, down from a 2.6% clip in 2015; still, even if growth was a bit sluggish, it marks 7 straight years of growth. A wider trade deficit — a negative for GDP — was by far the biggest anchor in the fourth quarter. The economy would have topped 3% growth if the trade gap has basically been unchanged.
Consumers increased spending by a solid 2.5%, with strong purchases of big-ticket items such as new cars or computers. Businesses also ratcheted up overall spending, including the first increase in equipment purchases in five quarters.
Home builders boosted investment in new housing by just over 10%, marking the first advance in three quarters. Companies also stocked up more: the value of inventories jumped by $48.7 billion after barely any change in the spring and fall. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.
Today’s GDP report shows that there is still plenty of room for economic growth, and President Trump’s proposals for tax cuts and infrastructure spending could certainly bolster the economy in the short-term. But in economics, things tend to cut both ways. Expansionary fiscal policy would likely lead to a stronger dollar, which would harm US manufacturing.
We could also see a higher federal deficit. And then remember the Federal Reserve is standing by to make sure we maintain price stability; and even though the Fed is not expected to hike rates at their FOMC policy meeting next week, they anticipate 3 hikes this year, which would be much more likely in the face of fiscal accommodation.
Orders for long-lasting goods made in the U.S. fell in December for the second month in a row, largely because of a cutback in demand from the Pentagon. New orders for durable goods dropped 0.4% last month. Bookings for defense-related equipment, including jets and other major hardware, accounted for the unexpected decline. Orders were also weak for primary metals, fabricated parts and computers. One strong area: orders for new cars rose 2%.
Mexican President Enrique Pena Nieto scrapped a planned trip to meet with President Trump, who has repeatedly demanded that Mexico pay for a wall on the U.S. border. And then today, it was announced that Pena and Trump talked on the phone for about one hour but nothing new on a wall or how to pay for it.
White House spokesman Sean Spicer, in a not so internal monologue, told reporters Trump was considering a 20% tax on Mexican imports to pay for the wall’s construction; that was later corrected to be just one of a “buffet of options” on the table. Just a reminder, the US has a $68 billion trade deficit with Mexico and is our third largest trading partner.
Mexican billionaire Carlos Slim, who once opposed a Donald Trump presidency and later said it would be “very good for Mexico,” held a press conference today in Mexico City. Slim offered his services to help Pena negotiate with Trump and called on Mexicans from all political parties to unite behind President Pena in his discussions with Trump.
Slim says Trump’s plans to bring manufacturing jobs to the US would only result in higher prices for consumers. Slim is Mexico’s wealthiest man and one of the world’s richest people, with an empire that encompasses telecoms, mining, banking and construction.
Theresa May last night offered to help President Trump to prevent the West from being “eclipsed” by China as she urged him not to shirk his “obligation” to lead the world. The U.K. Prime Minister also hopes he can be an economic ally – after Britain’s divorce from Europe, she’ll need a trade deal with the US.
The pair met face-to-face today, making her the first foreign leader to step into Trump’s Oval Office, and then they held a very brief joint press conference. May said Trump had committed 100% to NATO. May said the UK was opposed to lifting sanctions on Russia. Trump said he believes in torture. They both said they thought they could have a friendly relationship.
The US is Britain’s biggest export destination after the EU, accounting for over 15% of the country’s exports. Last week, May confirmed that Britain would leave the EU’s single market and customs union, allowing it to sign trade agreements of its own after the process of exit is complete.
The process includes the “Brexit bill,” which Parliament must approve to empower the prime minister to start the two-year negotiation period for Britain to leave the 28-nation bloc. The EU is hanging tough on not starting any sort of Brexit talks until Britain pulls the Article 50 trigger. The EU treaty stipulates that departure happens in 24 months irrespective of whether an exodus includes neat and clean trade bills.
Pretty much everyone agrees that a Brexit by default rather than a negotiated Brexit would be worse for the UK. And while there is a mechanism for extension, it requires unanimous approval of the 27 remaining states. The UK is so widely disliked in the EU that no one expects an extension to be granted.
So, the importance of a UK-US trade deal becomes even more important, even though it can’t technically be negotiated just yet. At the very least, it means Prime Minister May is negotiating from a position of weakness.
Trump has scheduled a phone conversation with Russian President Vladimir Putin and German Chancellor Angela Merkel on Saturday – not a three-way call. Trump’s PR team has been laying the groundwork for possibly removing sanctions against Russia, imposed after Russia invaded Ukraine and annexed Crimea. Today, Arizona Senator John McCain said easing sanctions was a “reckless course.”
Alphabet’s revenue beat analysts’ estimates, but its profits per share missed expectations due to the company paying a much larger tax rate than anticipated. Alphabet, along with Microsoft and Intel, which also reported results yesterday, continue to show that cloud services remain the biggest growth area in tech. Microsoft shares hit an all-time high in trading today, and market cap topped $500 billion for the first time in 17 years. Apple, Amazon, and Facebook report earnings next week.
Starbucks slashed its 2017 revenue forecast. Starbucks’ first-quarter results were mostly in line with estimates but said it saw 2017 revenue growth of 8% to 10%, down from its previous estimate of a double-digit rise.
Chevron missed profit and revenue estimates for the fourth quarter. CEO John Watson said the earnings reflect the low oil and gas prices during the past year. The company cut capital and operating costs by $14 billion in 2016.
In Europe, UBS Group kicked off a run of bank earnings releases this morning saying all its money-management units saw net redemptions in the last quarter. UBS investors pulled out $15.2 billion in the fourth quarter and margins at its wealth management business declined for a third straight quarter, even as rising stock markets and higher interest rates in the U.S. lifted earnings.
Sears tumbled more than 9% to under $8 per share on Thursday, sending the company’s stock to its lowest price since its merger with Kmart back in 2004. The decline piled on to a 7% drop in Sears’ shares a day earlier, when Fitch Ratings called attention to the chain’s “significant” cash burn. The company also ended up at the top of a Bloomberg Intelligence list of retailers with the highest risk of bankruptcy.
Iranian supertankers are sailing to Europe for the first time since sanctions were eased last year as one of the world’s biggest crude shippers moves to step up deliveries. While European refiners have been taking small cargoes of Iranian oil, these are the first vessels operated by the National Iranian Tanker Company rather than independent shippers. Each of the very large crude carriers can carry more than 2 million barrels.
Lunar New Year celebrations are underway. Markets in China and across much of Asia will be shuttered over the next week in celebration of the Lunar New Year.