Financial Review

Makes You Want to Holler

Sinclair Noe — March 16, 2017

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DOW – 15 = 20,934
SPX – 3 = 2381
NAS + 0.71 = 5900
RUT + 3 = 1386
10 Y + .01 = 2.52%
OIL – .07 = 48.79
GOLD + 6.10 = 1226.80

President Trump will ask the Congress for cuts to many federal programs, and more money to bulk up defense spending. Trump’s budget outline is a blueprint covering just “discretionary” spending for the 2018 fiscal year starting on October 1.

It boosts spending for defense, homeland security and veterans’ affairs; the Defense Department budget would increase by $54 billion, which will raise defense spending to $639 billion for fiscal year 2018.

The Environmental Protection Agency faces cuts of 31% and the Department of Agriculture would see funding cuts more than 20; State Department 28%; Health and Human Services would be cut 16%; Education faces cuts of 14%.

Trump’s budget proposes eliminating discretionary funding altogether for at least 19 agencies and 61 other programs. Plans for new NASA missions, climate change research, aid for low-income families, funding for commercial flights to rural airports, public broadcasting, and Meals on Wheels would all be on the chopping block.

The spending cuts that Trump proposes come from those agencies that fund education programs, social services, environmental protection, health research, housing and food assistance, national parks, land management, and countless other endeavors. As it is, spending on non-defense discretionary programs is already historically low.

As a share of the economy it’s at its lowest level since 1998 and is well below where it was 50 years ago, per data from the Congressional Budget Office. The net effect is no change in the national deficit. The budget proposal is the first volley in what is expected to be an intense battle over spending in coming months in Congress.

President Trump’s second travel ban was blocked by a federal court in Hawaii hours before it was to go into effect. A federal judge in Maryland also ruled against the ban on the day it was supposed to take effect. The administration has promised to appeal the rulings.

The speaker of the House, Paul Ryan, the Senate Intelligence Committee chairman and the ranking Democrat on the committee all said that they’ve seen no evidence of President Donald Trump’s accusation that he was wiretapped last year by his predecessor.

Senate Intelligence Committee chair Richard Burr and ranking member Mark Warner issued a statement, saying “based on the information available to us, we see no indications that Trump Tower was the subject of surveillance by any element of the United States government either before or after Election Day 2016.”

House Speaker Paul Ryan said that “no such wiretap existed,” citing intelligence reports to House leaders. “We don’t have any evidence,” says the top Republican on the House Intelligence Committee. “No evidence,” says his Democratic counterpart.

The statement from the leaders of the Senate Intelligence Committee marks the clearest and strongest refutation of Trump’s allegations since the President first made them two weeks ago. The senators statement also addresses Trump’s more recent statement that he was not merely speaking about wiretapping specifically.

The leaders of the House Intelligence Committee have said they have yet to see any evidence of wiretapping, but have yet to flatly rule out all surveillance. House Intelligence Chairman Devin Nunes said Wednesday that it was possible that Trump aides were surveilled via “incidental” collection.

Dutch Prime Minister Mark Rutte defeated far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday’s election, albeit with fewer seats than before.

It’s rare for a Dutch election to attract international attention, but the performance of Wilders is being seen as a bellwether for the ascent of populism around Europe, particularly with the National Front’s Marine Le Pen set to reach the run-off in the French presidential election late next month. Germans will vote later in the year.

The Bank of Japan is sticking with its ultra-loose monetary policy even as the Federal Reserve tightens. Japan’s economy is recovering with the help of a weaker yen but growth and inflation remain low. The Bank of Japan to keep its target for 10-year Japanese government bond yields at around zero, a policy it calls “yield-curve control.” It left the short-term interest rate on some yen deposits held by commercial banks at minus 0.1%.

The Bank of England held interest rates at the record low level of 0.25 percent and maintained asset purchases at £435 billion. The UK economy has shown strength since last June’s Brexit referendum and the government revised its forecasts for domestic growth in 2017 sharply higher. That might be wishful thinking.

The UK has not yet felt the full impact of Brexit, but that doesn’t mean they won’t. The big question is whether London’s financial institutions will lose access to the single market of the Euro Union after the UK leaves the EU.

The main argument is as follows: since London plays a key financial role in Europe, any disruption would endanger the financing of the EU economy and would ultimately pose a threat to financial stability in the bloc.

My guess is that argument plays better in London than Brussels. That’s not just speculation. The number of new available jobs listed in the UK’s financial center fell 17% in February year-on-year to 6,945.  Or simply, Brexit is Brexit.

Yesterday, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation. The Fed indicated they are still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December.

In a press conference yesterday, Fed Chair Janet Yellen said, “The simple message is, the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks.”

The labor market has been a strong part of the economic recovery. In the last monthly jobs report, the unemployment rate dropped to 4.7%, but one weak spot was wages, which have flatlined. Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.

For wages to increase, workers need job mobility, the ability to take a new job for more pay. Each month the Labor Department publishes the JOLT survey, or Job Openings and Labor Turnover; and in January, the number of Americans quitting their jobs rose to a seasonally-adjusted total of 3.22 million, the highest number since February 2001. The quits rate rose in January to 2.2%.

People quitting their jobs in droves is a sign of confidence among workers, as folks are unlikely to quit a job unless they are confident they can get another one. Openings totaled 5.63 million in January, above the prior month’s reading of 5.5 million.

The Labor Department said initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 241,000 for the week ended March 11. It was the 106th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

US home-building jumped in February as unseasonably warm weather helped boost the construction of single-family houses to near a 9-1/2-year high. Housing starts increased 3% to a seasonally adjusted annual rate of 1.29 million units last month.

Home-building was up 6.2 percent compared to February 2016. Single-family home-building, which accounts for the largest share of the residential housing market, surged 6.5%. Starts for the volatile multi-family housing segment fell 3.7%.

The Arizona Supreme Court has upheld the constitutionality of Arizona’s minimum wage increase to $10 an hour. Voters approved the increase in November, and the challenge was brought by the Arizona Chamber of Commerce and Industry and other business groups.

The state Supreme Court unanimously rejected the challenge. Proposition 206 raised the state’s minimum wage to $10 an hour in January 2017. Incremental increases continue until 2020, when it will increase to $12.

Four people have been indicted in a 2014 cyber-attack on Yahoo email accounts. The indictment charges two officers of the FSB, Russia’s Federal Security Service, and two hackers who allegedly worked together with them to crack 500 million Yahoo user accounts.

Cyber security specialists have long said the Kremlin employs criminal hackers for its geostrategic purposes. They say the arrangement offers deniability to Moscow and freedom from legal troubles for the hackers.

3M said it would buy Johnson Controls’ safety gear business, Scott Safety, in deal valued at $2 billion. Scott Safety makes respiratory and protective equipment and other safety products for firefighters, industrial workers, police squads and the US military.

Oracle’s cloud business had a huge quarter. The business-software maker announced better-than-expected adjusted revenue and profit, helped by sales at its cloud business surging 62% to $1.19 billion

Adobe Systems stock jumped after the company delivered earnings and revenue that beat expectations.

Cold weather luxury apparel retailer Canada Goose’s stock rocketed 25 percent in its first day of trading. The stock trades under the ticker GOOS.

Amazon is ready to do to the local liquor store what it did to the local book store. It is rolling out free beer and wine 2-hour delivery and $7.99 1-hour delivery for Prime Now members, starting in Cincinnati and Columbus, Ohio.

Financial Review

Fed Day

Sinclair Noe — March 15, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 112 = 20,950
SPX + 19 = 2385
NAS + 43 = 5900
RUT + 20 = 1382
10 Y – .08 = 2.51%
OIL + 1.24 = 48.96
GOLD + 21.10 = 1220.70

Today is Fed Day.

Policymakers at the Federal Open Market Committee of the Federal Reserve raised interest rates, as expected. The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent marked one of the Fed’s most convincing steps yet in the effort to return monetary policy to a more normal footing.

This was the second interest rate hike in the past 3 months, and only the third rate hike in the past decade. The Fed indicated it is still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December. The Federal Reserve under Janet Yellen has been very good at communicating any changes in policy; they do nothing that could shock the markets.

The Fed issued a statement confirming their view that the “labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months.

Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective…”

The Fed added a fresh wrinkle by noting that inflation was little changed and still running below its long-term target if energy and food prices were excluded.

In a press conference following the statement, Yellen said the Fed isn’t trying to get inflation to run faster than 2% for a while to catch up from being below 2% for so long, but that doesn’t mean the Fed would stomp on the brakes as soon as the 2% target was breached. “Two percent is not a ceiling on inflation. It is a target.”

Yellen also said the Fed was not really considering any economic implications from President Trump’s proposals for tax cuts, deregulation, and infrastructure spending. Yellen said, “We haven’t tried to map out what our response would be to certain policies. We have plenty of time to see what happens.”

And Yellen added, “The simple message is, the economy is doing well.” It’s too early to react to Trump, Yellen said. Optimism is great, she said, but you have to show us actual changes in consumer or business spending, or actual changes in fiscal policies before we’re going to change our minds about the economy.

The Fed has a wait-and-see attitude about whether consumer or business optimism will translate into actual increased spending. Yellen said, “It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions, based on expectations about the future.”

Yellen said the Fed does look at stock market valuations as part of its assessment of financial conditions, but there is no sign that the Fed is particularly worried about a dangerous bubble developing.

The lack of hawkishness from the Fed apparently caught some traders out of the money. Dollar-buyers exited the trade. Stocks shot higher as Yellen spoke. Financials were the weakest sector in the S&P. A rate hike tends to be a positive for banks, because it increases how much they can charge borrowers, compared with their own short-term borrowing costs. So, the banks wanted to hear that the Fed was going to be more aggressive in raising rates.

In theory, rising interest rates are supposed to hurt the stock market because it makes interest-rate instruments relatively more attractive and reduces liquidity in the marketplace. But interest rates and the stock market usually trend in the same direction over the long term.

That is because the conditions that lead to higher rates, such as an acceleration in economic growth, also fuel bull markets for stocks, while the drivers of rate cuts, like an impending economic recession, are often behind bear markets.

Eventually, rates could get high enough to choke off economic expansion and hurt stocks, but based on current market dynamics, the market appears to be safe for quite a while, maybe even years. So, the Fed has a long way to go before damaging the market or economy.

Of course, higher rates will hit people who have debt; everything from mortgage rates to car loans to credit card debt. That increase will cost consumers an additional $1.6 billion in credit card fees alone during 2017.

For savers, a rise in Federal Reserve interest rates is good news. Savings account rates will likely increase slightly, which should help consumers, especially since interest rates on savings accounts are at historic lows. Although consumers shouldn’t expect those rates to rise much. Banks will likely have to collect extra income from borrowers before being able to pass those funds onto the savers.

The International Energy Agency says global oil inventories rose for the first time in January as the market grappled with increased production last year, but if OPEC maintains its output cuts, demand should overtake supply in the first half of this year.

OPEC also flagged rising inventory levels, but raised its estimates for production outside the group and did not see a re-balancing between supply and demand until the second half of this year.

The IEA said crude stocks in the world’s richest nations rose in January for the first time since July by 48 million barrels to 3 billion barrels, more than 300 million barrels above the five-year average.

Investors cashed out of US-based high-yield junk bond funds.  Lipper data shows high-yield bond funds posted $2.1 billion in net withdrawals during the week ended March 8, the most since November 2016. Crude oil prices fell this week to 3-1/2 month lows. Energy producers are heavily represented in junk bond indexes.

Higher interest rates could shrink bond prices and hike borrowing costs for indebted companies. Still US-based stock funds attracted their sixth straight week of net inflows, $8.5 billion, while taxable bond funds netted $2.8 billion despite the high-yield outflows

American consumers paid slightly more in February for goods and services such as groceries and rent, reflecting upward pressure on inflation that’s intensified since last summer.

The consumer price index, or cost of living, rose by a seasonally adjusted 0.1% last month. The increase in inflation over the past 12 months advanced to 2.7% in February from 2.5% in January, putting it at the highest level since early 2012.

Excluding the volatile food and energy categories, so-called core consumer prices rose 0.2% in February. Core prices have advanced 2.2% in the past year. Inflation-adjusted wages rose just 0.1% per hour in February and worker wages are unchanged in the past year.

Retail sales recorded their smallest increase in six months in February. The Commerce Department said retail sales ticked up a seasonally adjusted 0.1% in February, after a much bigger gain of 0.6% the previous month. January’s gain was revised higher.

The figures suggest that strong job gains this year, near record-high stock prices and decent pay gains haven’t yet lifted spending. But last month’s sluggish pace could prove temporary, because spending was likely held back by delays in tax refund payments.

Business inventories in the U.S. rose 0.3% in January, largely because of more new vehicles sitting in auto dealer lots. Inventories at auto dealers rose 2%, reflecting a downturn in sales at the start of the new year. Sales were pumped up in December by holiday-season discounts and a slowdown was expected in January.

The value of auto inventories is 9.3% higher compared a year ago. Millions of Americans who held onto to aging cars in the wake of the Great Recession have upgraded to newer vehicles, but much of that pent-up demand has been met.

Twitter shares were lower in early trading after many high-profile Twitter accounts were hijacked. The hacker posted tweets that supported Turkish President Erdogan in his diplomatic spat with the Netherlands and Germany.

Dutch Prime Minister Mark Rutte’s party has taken the lead in an election widely seen as an indicator of populist sentiment in Europe. Anti-immigrant, anti-European Union figure Geert Wilders had run on a “de-Islamification” platform, calling for Islamic schools to be closed and the Quran and burqa to be banned. The latest polls show that no party will come close to winning an overall majority, so the post-election period will likely come down to forming a coalition government.

MIT has created an award for rule-breakers. The university’s Media Lab announced this week it will award $250,000 to a group or individual for disobedience. Per Joi Ito, the director of MIT’s Media Lab, “You don’t change the world by doing what you’re told.”

The eligibility requirements are simple: “The recipient must have taken a personal risk to affect positive change for greater society.” The winner will be announced in July.