Financial Review

Doves Fly

Sinclair Noe — July 12, 2017

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DOW + 123 = 21,532
SPX + 17 = 2443
NAS + 67 = 6261
RUT + 11 = 1424
10 Y – .03 = 2.33%
OIL – .10 = 45.39
GOLD + 2.80 = 1221.00
BITCOIN + 0.57% = 2437.00 USD
ETHEREUM + 2.91% = 225.51

The Dow Industrials took out the record high of 21,528 from June 19, also hitting an intraday high of 21,580 today. The Dow Transportation Average closed up 116 at a record high 9716.

Treasuries rallied and the dollar retreated after Janet Yellen signaled the Federal Reserve won’t rush to tighten monetary policy as inflation remains persistently below target. The Fed chair made no mention of asset prices just a week after her comment that some looked “somewhat rich”. Yellen expressed confidence in the American economy while suggesting inflation rates won’t force the Fed’s hand.

Yellen said the Fed was paying close attention to the recent weakness in inflation. While emphasizing that she expected prices to start rising more quickly, she said persistent weakness could lead the Fed to raise interest rates more slowly. Yellen declined to specify when the Fed intended to start reducing its bond holdings.

Yellen’s term as Fed chairwoman ends in February, and she avoided several questions about her plans. The Trump administration is in the early stages of its selection process and has not ruled out Yellen’s reappointment, although the choice of a new Fed chief is regarded as the more likely outcome.

The key takeaway from the testimony today, Yellen said interest rates are rising, and “would not have to rise all that much further” to reach what the Fed considers a neutral rate, or the level at which rates are neither expansionary nor contractionary – everything is just on an even keel. Wall Street loves a dovish tone.

Besides stocks, the most visible beneficiary of Yellen’s remarks was the bond market. Yields on benchmark 10-year Treasuries fell the most in almost a month as bond prices jumped. The rally was a bit of a relief for a market that has been under siege in recent weeks. Besides the potential for a slower pace of rate hikes, bonds also benefit from a slower pace of inflation, which preserves the value of fixed payments over time.

Another big winner was emerging-markets. The MSCI Emerging Markets Index of stocks and the MSCI EM Currency Index both jumped the most since mid-March. The thinking here is that a slower pace of Fed rate hikes will weigh on the dollar and preserve the relatively wide gap between U.S. and developing-nation bond yields, further boosting the appeal of emerging-market currencies.

The weakening greenback combined with higher interest rates in developing nations has triggered record inflows to emerging-market funds in the first half of 2017.

While the Fed’s Beige Book is routinely ignored by the market, especially on blockbuster days like today when Janet Yellen turns dovish again, this time there were several notable highlights in the just released July edition, not least of all the apparent downgrade of the low end of overall economic activity, which for the first time described the pace of growth as “slight to moderate” versus its staple “modest to moderate.”

Of note, while the Fed described consumer spending as “rising across many Districts, led by increases in non-auto retail sales and tourism” it did caution that there appears to be “some softening in consumer spending, particularly in auto sales which declined in half of the Districts.” On the topic of employment and wages, the Beige Book noted that “most of the nation maintained a modest to moderate pace of expansion, although the Atlanta and St. Louis Districts noted flat employment levels.”

Overall, however, labor markets tightened further, particularly in the construction and IT sectors. The Fed also observed that there were reports of a shortage of qualified workers across a broad range of industries “which had limited hiring.” Apparently, it has still not dawned on anyone that one can overcome such shortages by raising wages.

Several Districts reported higher construction materials costs and freight prices. It also warned that “low agricultural prices were causing stress for some farmers, although some food retailers reported improved margins due to lower commodity prices.” Meanwhile, not surprisingly, “home prices continued to increase in most Districts” while “retail prices held steady or slightly increased.”

The Bank of Canada boosted its benchmark rate to 0.75 percent from 0.5 percent. Canada is amid one of its strongest growth spurts since the 2008-2009 recession, with the expansion accelerating to an above-3 percent pace over the past four quarters. That’s the fastest among G-7 countries and double what the central bank considers Canada’s capacity to grow without fueling inflation.

Mortgage application activity recorded its steepest drop since December as interest rates on 30-year fixed-rate home loans climbed to their highest level in nearly two months. The Mortgage Bankers Association index for mortgage applications fell to 391.9 in the week ended July 7, down 7.4 percent from the prior week. Interest rates on conforming 30-year fixed-rate mortgages climbed to 4.22 percent, its highest since the May 12 week and up from the prior week’s 4.20 percent.

A French court says Google does not have to pay $1.3 billion in back taxes. At issue was whether Google had avoided taxes in France by routing sales in the country through an Irish-based subsidiary over a five-year period ending in 2010. An administrative court in Paris ruled that the Irish unit was not taxable in France.

Google has faced a series of legal challenges across Europe, with many of them focused on the company’s tax and competitive practices. Last month, European regulators levied a record $2.7 billion fine against Google for favoring its products over those of its competitors on its powerful search engine.

European Union officials also brought charges against Android, Google’s mobile operating system, saying the company had forced cellphone manufacturers to install Google services, like mobile search, on the phones.

Google, Facebook, Netflix, Amazon and hundreds of smaller tech companies coordinated a huge online protest today against the Federal Communications Commission’s plan to scrap net neutrality rules, which guarantee that broadband service providers treat all internet traffic equally. The tech companies want the rules to remain to protect them from unfair treatment by broadband providers like Comcast or AT&T, which could create faster delivery lanes for some websites and not others.

Silicon Valley approached this fight against the Trump administration’s plans its own way — by taking to the internet. Some of the biggest users of internet lanes were at the forefront. Netflix, which depends on free and open internet lanes to transmit its streaming video, had a small banner ad on its home page reading “Protect Internet Freedom. Defend Net Neutrality. Take Action,” which linked to the net neutrality information page of its trade group, the Internet Association.

The former president of Brazil, Lula da Silva, was found guilty of corruption and money laundering on Wednesday and sentenced to nearly 10 years in prison. The case against Lula, who served as president from 2003 to 2010, stemmed from charges that he and his wife illegally received about $1.1 million in improvements and expenses from a construction company for a beachfront apartment. In exchange, prosecutors said, the company was able to obtain lucrative contracts from Petrobras, the state-controlled oil giant.

Lula’s Workers’ Party lost the presidency last year when the Senate impeached his handpicked successor, Dilma Rousseff. Brazil’s current president, Michel Temer, was charged last month with corruption. Eduardo Cunha, the former speaker of the House, was sentenced in March to 15 years in jail for money laundering and corruption uncovered during the Petrobras investigation.A majority of the Brazilian congress has either been convicted, charged or under investigation for corruption.

Lula presided over a period of robust economic growth in Brazil and remains a widely popular figure, credited with leading a social transformation that lifted millions from poverty in a nation with one of the world’s biggest disparities between rich and poor. Despite the corruption allegations against him and his par ty, Lula has been leading in recent public opinion polls on the election. He remains free pending appeal.

A new cancer drug from Novartis won enthusiastic support from a federal advisory panel on Wednesday, paving the way for approval of the first US gene therapy. The panel unanimously recommended that the Food and Drug Administration approve the drug for patients ages 3 to 25 with relapsed B-cell acute lymphoblastic leukemia (ALL), the most common form of U.S childhood cancer.

The drug uses a new technology known as CAR-T, or chimeric antigen receptor T-cell therapy, which harnesses the body’s own immune cells to recognize and attack malignant cells. In a clinical trial, 83 percent of patients who had relapsed or failed chemotherapy achieved complete or partial remission three months post infusion. After one year, 79 percent of patients were still alive.

Financial Review

Batten Down the Bonds

Sinclair Noe — November 14, 2016

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DOW + 21 = 18,868
SPX – 0.25 = 2164
NAS – 18 = 5218
10 Y + .10 = 2.22%
OIL + .26 = 43.67
GOLD – 7.60 = 1221.00

Another record high close for the Dow.

U.S. bond yields are sharply higher across the board following a public market holiday on Friday. The yield on the benchmark 10-year Treasury note topped 2.25%; they surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation.

The 30-year Treasury bond yield is over 3% for the first time since January. The two-year yield crossed the 1.00% threshold for the first time since January.

The movement has also lit a fire under the greenback, with the U.S. dollar index up more than 1%, hitting 100 for the first time in almost a year.

The global bond rout is intensifying. Long-dated bonds are getting hit hardest in Europe. The selloff wiped a record $1.2 trillion off the value of bonds around the world last week. Investors rotated into stocks, as global developed-market shares beat investment-grade debt by the most since 2011 amid concern the stimulus will stoke inflation and lead the Fed to increase rates.

President-elect Donald Trump has made the first official appointments to his White House administration after a shake-up on Friday that saw VP-elect Mike Pence replace Chris Christie as the head of his transition team. RNC Chairman Reince Priebus has been selected as Chief of Staff, while Trump’s campaign Chairman and former head of news outlet Breitbart, Steve Bannon, will lead as Chief Strategist and Senior Counsel.

The common view is that the inflation trade has been reignited by the election results. If this were so, the two major inflation markers in the commodity market, gold and oil, would have rallied strongly. Instead, gold sold off approximately $70 or over 3% from its level a week before the election, while the price of oil has been slightly weaker. Industrial metals, especially copper, did see major rallies.

This was not across the board, however. Aluminum, which has almost as widespread commercial use as copper, fell about 3%, while copper was up 17% in the days immediately following the election. Tin was up around 6% and nickel 9% from a week earlier. The inflation argument came mostly from action in the global bond markets.

While it is true yields soared, they have been at unsustainably low rates for years now. Still, it looks like the bond market is sending a message about a fiscally expansive, deficit spending growth agenda – there will be price to pay.

And while the Dow and the S&P rallied following the election, the big winner was the Russell 2000 index of smaller stocks. And while small-cap stocks can outperform in inflationary environments, this rally is probably provoked by the idea that small-cap companies are less likely to do business internationally and more likely to get most of their sales domestically. The companies that tend to have most of their sales overseas are tech companies, and the tech-heavy Nasdaq hasn’t rallied at all. So, the stock rally has been selective and not broad-based.

Next, consider that the Federal Reserve will probably raise rates sooner and later. Fed funds futures rates are pricing in an 84% probability of an interest rate increase at the Fed’s meeting in December. PIMCO said the central bank may move three times by the end of 2017. Those rate hikes will hit the markets much sooner than any legislative action, which tends to move very slowly.

Japan’s economic growth handily beat expectations in the July-September period, expanding for a third straight quarter as exports recovered, but weak domestic activity cast doubt on hopes for a sustainable recovery. While GDP grew at an annualized 2.2% pace, household spending and capital investment were flat on quarter.

Mixed Chinese economic data for October came out overnight, released by the National Bureau of Statistics. Retail sales rose a weaker-than-expected 10%, slowing from the previous month’s 10.7% growth, while industrial output expanded 6.1%, matching September’s pace but remaining a hair below expectations.

After gathering in Brussels to discuss the future of Europe-U.S. relations, EU foreign ministers said the bloc would stand by its key foreign-policy positions on issues including the Iran deal, Russia’s annexation of Crimea and climate change, but vowed to work with the Trump administration. Not everyone attended the emergency meeting. Britain’s Boris Johnson called it “unnecessary.”

Colombia’s government and Marxist FARC rebels have agreed on a new peace pact to end a 52-year war, six weeks after the original was narrowly rejected in a referendum amid objections it was too favorable to the rebels. The new accord, which will be presented to Congress for a vote, includes several new provisions – from requiring FARC to surrender money and holdings to infrastructure development for the countryside.

Just one day after the IEA warned the world could drown in oil if production does not fall beneath demand sometime soon, OPEC released a new market whammy, offering up the cartel’s production figures, which largely jive with figures reported by the IEA yesterday: OPEC has increased its oil production. OPEC’s Monthly Oil Market Report revealed daily oil production for the cartel of 33.64 million barrels for October—up by 240,000 barrels per day in September—largely confirming the IEA’s report.

A little over 90% of S&P 500 companies have reported their quarterly results, and it’s become clear that the recession in corporate profits has come to an end. Since the second quarter of 2015, S&P 500 earnings reports have shown a decline in profits – year-over-year. A decline for two consecutive quarters indicates an earnings recession.

Based on the companies that have reported so far this quarter, S&P earnings will be up 2.75% from the prior year’s third quarter. Leading the comeback is the financial sector, which posted growth of 13.1% in profits from the third quarter of last year. According to FactSet, 71% of companies that have reported beat their estimates, higher than the five-year trailing average of 67%.

Samsung Electronics is buying Harman Industries for $112 a share in cash, or a total equity value of about $8 billion, placing the company in the vanguard of the auto industry. The deal – Samsung’s largest acquisition in its history – will reshape the pecking order in the global automotive supply chain.  Samsung could combine its display and semiconductor operations with a business that already provides sound, electronics, and other smart components for a new generation of digitally connected cars.

In Europe, Novartis AG is said to be in talks to acquire U.S. generic-drugs maker Amneal Pharmaceuticals in a deal which could value the closely-held company at as much as $8 billion. Siemens, meanwhile, agreed to buy software company Mentor Graphics for $4.5 billion, a premium of 21 percent on Friday’s closing price.

American Apparel files for bankruptcy. The retailer filed for Chapter 11 bankruptcy protection for the second time in just over a year, (so maybe we should call it Chapter 22) listing assets and liabilities in the range of $100 million to $500 million. The company exited court protection in early 2016 but quickly encountered trouble again.

Toyota will pay up to $3.4 billion to settle claims that some of its trucks and SUVs lacked proper rust protection, leading to premature corrosion of vehicle frames. The proposed settlement covers about 1.5 million Tacoma compact pickups, Tundra full-size pickups and Sequoia SUVs and estimates the value of frame replacements at around $15,000 per vehicle. However, Toyota admitted no liability or wrongdoing in the proposed settlement.

Hedge fund filings will give investors a chance to see what they were betting on when the third quarter ended. Hedge funds have had a tough time of it recently with some $50 billion flowing out of the industry this year. Hedge fund managers are required to disclose their holdings to the SEC in a Form 13F. Filed four times a year, the reports show which sectors these traders were betting on when the quarter ended, roughly 45 days ago.

Out of 13 western states, California and Texas have the highest number of single-family residential homes in extreme risk wildfire areas, per a new report from CoreLogic. CoreLogic’s scale has four categories: low, moderate, high and extreme risk, and 1.8 million homes across 13 western states fall into the high and extreme risk category.

While only a small percentage of the millions of homes that fall somewhere on the scale, these 1.8 million homes represent a combined total reconstruction value of nearly $500 billion. The other 27 million homes on the scale — those at low and moderate risk — have an estimated reconstruction cost value of $6.7 trillion.

Congress Reaches Tentative Budget Deal, CB Consumer Confidence Falls

Financial Review

Barn Cleaning

Sinclair Noe — October 27, 2015

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DOW – 41 = 17,581
SPX – 5 = 2065
NAS – 4 = 5030
10 YR YLD – .03 = 2.03%
OIL – .78 = 43.20
GOLD + 4.10 = 1168.00
SILV + .03 = 15.97

Congressional leaders have reached a tentative budget deal with the White House in a breakthrough that would set government funding levels for the next two years and extend the nation’s debt limit through 2017. The bill would raise the spending caps set in place in 2011 that would result in deep cuts to both defense and non-defense spending, called sequestration.  This deal would provide $80 billion in sequester relief.

The bipartisan agreement would include long-term entitlement reforms to the Social Security Disability Insurance (SSDI) program, the first major reform to Social Security since 1983.  The Social Security Disability Insurance program would be amended, in part to tighten and standardize eligibility requirements that now vary by state. That change was projected to save the government $5 billion. It also prevents a spike in Medicare B premiums for millions of seniors. The increases would have been caused by the rare absence of a cost-of-living increase in Social Security benefits, because of unusually low inflation.

The deal still needs Congressional approval, but for outgoing House Speaker John Boehner this was a matter of wrapping up unfinished business before his departure, or as Boehner described it “cleaning the barn.” Representative Paul Ryan, the likely successor to House Speaker said he would likely vote for the deal but he said “the whole process stinks.”

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 to pay for spending in that budget bill. The proposed sale equates to more than 8% of the 695 million barrels of reserves. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period.

Also, the two-year budget deal produces savings from one of the most popular programs in farm country, federally subsidized crop insurance, and farm state lawmakers are furious. Senators and House members said they weren’t notified of the cut before the deal was struck. Budget-writers in Washington have long eyed the crop insurance program, which costs more than $9 billion annually, as a pot of available money. But farm-state lawmakers have fought to protect it, saying it makes more sense than other farm subsidies since it pays out when farmers suffer losses.

Meanwhile, 62 Republicans have joined 184 Democrats to pass a “discharge petition” to renew the Export-Import Bank’s charter. Monday’s vote means that, barring any other last-minute obstacles, a vote on reauthorizing the bank should pass the House shortly. The bill would then go to the Senate, where it awaits an uncertain fate.

The U.S. Federal Reserve kicks off its two day monetary policy meeting today, with their decision to be announced at 11 AM tomorrow. There’s virtually no chance that the Fed will hike interest rates this week, certainly not if they want to claim they are data dependent. Figures on U.S. jobs, retail sales, manufacturing, inventories and exports all disappointed, while new jobless claims and housing data — for the most part — have showed continued strength. The challenge for policy makers will be to keep their options open for a move this year, while acknowledging weak data that could tilt the tone of the statement toward liftoff in 2016.We had another batch of tepid data today.

Orders for long-lasting or durable goods fell a seasonally adjusted 1.2% in September; a sign of widespread softness in the manufacturing sector. The auto industry was one of the few bright spots again, with orders snapping back 1.8% after a decline in August. Orders for core capital goods – a proxy for business investment – declined 0.3% to mark the second straight drop.

The Conference Board said that consumer confidence in October fell to a reading of 97.6, down from a revised 102.6 in September.

Service sector output growth fell to a nine-month low in October. The Markit Flash U.S. services purchasing managers index fell to 54.4 in October from 55.1 in September, which means it’s still above the 50 mark indicating growth. Markit attributed the slowdown to slowing new business growth and more cautious spending patterns.

Home prices rose 0.4% in August to stretch year-on-year gains to 5.1%, according to the S&P/Case-Shiller 20-city composite. Eighteen out of 20 cities reported monthly gains. That’s not unusual for the summer, and after seasonal adjustment, five were down, 11 were up, and four were unchanged. Portland and Denver had the strongest monthly gains, while only fast-growing San Francisco saw a decline, of 0.1%. Phoenix posted a monthly gain of 0.6%, and a 4.9% gain for the past 12 months.

After the closing bell, Apple reported higher-than-expected quarterly revenue and profit as sales of iPhones increased 35%, driven by the launch of the 6S and 6S Plus models last month. Apple’s sales in China nearly doubled to $12.52 billion, accounting for nearly a quarter of its total revenue. Apple’s net income for the quarter rose to $11.1 billion, or $1.96 per share, from $8.4 billion, or $1.42 per share, a year earlier. Net sales rose about 22% to $51.50 billion.

Apple offered holiday guidance that is a little light of expectations, about 4% growth at the high end of the range, but remember that Apple never seems to miss guidance. Apple shares were up about 2.5% in after-hours trade.

Meanwhile, Chase is launching its own competitor to Apple Pay that will allow consumers to pay retailers using their smartphones in stores, and it has already won the endorsement of a major group of companies. For merchants, it’s promising fixed pricing and no additional fees for network, processing or fraud liability, and will work not via NFP (tap-and-pay) but by using existing gift-card scanners. Chase Pay will be available mid-2016.

Also, after the closing bell, Twitter reported earnings. Revenue was up 58% to $569 million, beating estimates. Earnings per share were 10 cents, twice as good as estimates.  Twitter missed estimates on the number of users they added over the quarter, only 4 million new Twitterers. Shares down 11%.

Despite a slowdown in China, Alibaba, the Internet giant, experienced a surge in revenue in the latest quarter, driven by strong growth in mobile. Alibaba reported that sales rose 32 percent in the latest quarter to $3.5 billion. Earnings per share increased 30 percent.

Ford Motor reports third-quarter profit that rose sharply but still fell short of estimates as higher taxes reduced the payoff from its aluminum-bodied F-Series pickups. Earnings excluding some items were 45 cents a share, compared with the 47-cent average of estimates. Net income more than doubled to $1.9 billion from $835 million a year earlier when Ford was changing over to the new F-150 pickup. Shares were down 5% today. Go figure.

Novartis has agreed to pay $390 million to resolve a lawsuit claiming the company paid kickbacks to increase sales of several prescription medicines. Novartis reported that third quarter net income fell 42% to $1.8 billion.

Pfizer reported better-than-expected third-quarter results and raised its full-year outlook. Earnings fell to $2.13 billion, or 34 cents a share, from $2.67 billion, or 42 cents a share, in the same period a year ago.

BP’s earnings in the third quarter were nearly cut in half compared to a year earlier, as low crude prices and charges related to its 2010 Gulf of Mexico spill weighed on its financial performance.

United Parcel Service beat third-quarter profit expectations, but missed on sales. A decline in international package revenue offset increases in domestic and supply chain and freight revenue.

IBM fell to its lowest price in five years after disclosing that the Securities and Exchange Commission is conducting an investigation related to the technology seller’s revenue recognition. IBM last week cut its full-year profit forecast and reported its 14th straight quarter of shrinking sales. No doubt another stock buyback announcement is in the offing.

Walgreens Boots Alliance will acquire Rite Aid; at least that was the rumor floating about today. That was enough to send Rite Aid share prices up 39%, which would value the company at about $8.9 billion. The actual announcement came after the close of trade, and it values the company at $9.4 billion. Still, it sounds like somebody leaked some important news.

Starwood Hotels & Resorts Worldwide jumped the most in six years after the Wall Street Journal reported that at least three big Chinese companies are competing to buy the company. Chinese investors have been pretty aggressive in the hotel market over the last year or so. Starwood has some pretty powerful brands, and they announced in April that it was exploring
strategic options including a possible sale.

Walmart has applied to the FAA for permission to test drones for home delivery, curbside pickup and checking warehouse inventories, a sign it seeks to compete with Amazon in using drones to fill and deliver online orders. A Walmart spokesperson said: “There is a Walmart within five miles of 70% of the U.S. population, which creates some unique and interesting possibilities for serving customers with drones.”

In about one month, Black Friday will descend on American retailers and shoppers will be whipped into a frenzy. One retailer thinks there are better ways to spend the day after Thanksgiving. Outdoor sporting goods company REI will shut its stores on Black Friday, no online sales either, and it is paying employees to take the day off.

The CEO of REI issued a statement: “Black Friday is the perfect time to remind ourselves of the essential truth that life is richer, more connected and complete when you choose to spend it outside. We’re closing our doors, paying our employees to get out there, and inviting America to OptOutside with us because we love great gear, but we are even more passionate about the experiences it unlocks.”

Financial Review

Sliding Into the Close

Sinclair Noe — September 3, 2015

Podcast: Play in new window | Download (Duration: 13:14 — 12.1MB)

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DOW + 23 = 16,374
SPX + 2 = 1951
NAS – 16 = 4733
10 YR YLD – .03 = 2.17%
OIL – .12 = 46.63
GOLD – 8.70 = 1126.00
SILV + .03 = 14.83

Wall Street started the session on a high note, but could not hold it. Stocks slipped into the close and the Nasdaq turned red for the day. The stakes couldn’t be higher for the tomorrow morning’s August employment report, even though the month has typically been cursed by disappointment. The consensus guesstimate calls for about 215,000 to 220,000 new jobs created in August, with the unemployment rate holding at 5.3%, but August is notorious for misses. From 2005 to 2014, forecasters have over-estimated the initial August payrolls print seven times, including in each of the past four years.

What’s more, the Labor Department (excluding annual and benchmark revisions) has marked up its first estimate in subsequent months in eight of the past 10 years. Part of the puzzle of forecasting August payrolls is the difficulty in adjusting for annual changes in the school-year calendar. Financial-market turmoil, at least, probably did little to impact hiring decisions in August. The government surveys households and businesses in the week that contains the 12th of the month, so the data will reflect responses covering the Aug. 9-15 period; that was a few days before the market rollercoaster ride began.

Short-dated Treasury debt yields, which are tied most closely to monetary policy forecasts, rose in August, with the two-year note yield logging its fifth straight monthly increase. That was its longest winning streak since 2006 when the Fed last raised interest rates. Long-dated Treasury yields, often seen as a safe haven from stock market volatility, are virtually unchanged on the year, suggesting that bond investors are brushing off the panic about slowing global growth. This would suggest that bond traders are bracing for an imminent rate hike.

The European Central Bank will continue its 60 billion-euro a month asset purchase plan; that’s the Euro version of QE. The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. ECB President Mario Draghi today said it could go negative in the coming months following recent oil price falls. Draghi said: “The risks to the euro area growth outlook remain on the downside…” And if things actually do get worse, Draghi emphasized he is willing to do even more. The euro dropped against the dollar and Eurozone stock markets enjoyed a nice bounce.

Chinese markets are closed today and tomorrow to mark the 70th anniversary of the end of World War II. The holiday is officially called “The 70^th Anniversary of Victories in the Chinese people’s War of Resistance Against Japanese Aggression and the World Against Fascism”; and right there we have a glimpse into the problems in China. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300,000 troops from the country’s 2.3 million strong military. The announcement came before a huge military parade. At the same time, the U.S. government reported that five Chinese Navy ships were sailing in international waters off Alaska for the first time.

Treasury Secretary Jack Lew criticized China’s handling of its currency devaluation. In a CNBC interview, Lew said, “there’s an economic and a political reality to things like exchange rates,” and “how they manage their exchange rate is a matter of great concern to us and that they need to be willing to let market forces drive the value up, not just drive it down.” Lew, will be participating in a meeting of G-20 financial ministers and central bankers Friday in Turkey. The treasury secretary’s remarks come ahead of the Chinese premier’s visit to the U.S. later this month.

Tomorrow brings the big monthly jobs report for August.  This will be the data that the Fed will use at their FOMC meeting September 16 & 17; the question is whether the report will be weak enough to keep the Fed from hiking rates or strong enough to allow a hike.

Also tomorrow, the G-20 will be meeting in Turkey. The International Monetary Fund has prepared a report for G20 finance chiefs, and the IMF says the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world. It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China’s troubles do not stall economic activity in the rest of the world.

The report expressed continued confidence that growth is picking up “modestly” in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil. But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China’s yuan devaluation and the strong dollar. The dollar’s strength, the Fund warned, could take a toll on companies with dollar liabilities. The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

Of course, writing a report doesn’t make it so. The reality on the ground is that gauging China’s economy is a guessing game; the Chinese simply don’t measure their economy in familiar ways and they certainly run their economy a bit differently. And most analysis overlooks the fact that China’s economy is changing; the service sector is now the driver of growth, so it makes sense that industrial growth is slowing down, but it doesn’t necessarily mean the economy has gone over a cliff. Beijing’s economic policy makers know that even though structural overhauls will moderate growth in the near-term, they’ll also bolster long-term growth and help stave off a major deceleration.

The U.S. trade deficit fell in July to its lowest level in five months as exports rose. The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter.

The Institute for Supply Management said its services index slipped in August, to 59% from 60.3% in July, but still a very strong reading indicating growth in the sector.  Ahead of Friday’s payrolls report, the ISM services employment index fell 3.6 points to 56%.

The Commerce Department reported today on the gross domestic product broken out for each state for 2014. Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states, Alaska and Mississippi, contracted last year. Among those 16 were the four largest state economies: California, Texas, New York and Florida. The fastest growing state was North Dakota, thanks to a booming oil patch; it is unlikely to repeat in 2015. Arizona came in at #37, with anemic 1.4% growth in GDP.

Jobless claims increased by 12,000 to 282,000 in the week ended Aug. 29. Since the beginning of March claims have held below 300,000, indicating employers in the U.S. are confident in their outlook.

Sony Pictures has reached a settlement with former employees in a lawsuit related to the massive data breach it suffered almost a year ago. The federal lawsuit, which is still pending class-action status, is a combination of seven different cases brought by nearly 50,000 current and former employees whose personal, financial and medical information were posted online. Additional details about Sony’s settlement are expected to be filed by mid-October.

Novartis said it will begin selling the first biosimilar drug in the U.S. after an appeals court in Washington rejected a request to block the Swiss drug maker’s sale of its copycat version of Amgen’s blockbuster remedy, Neupogen. Zarxio was the first biosimilar–a copy of a biotechnology drug–approved by the FDA. In Europe, where biosimilars have been available for several years, they typically cost 15% to 30% less than the original brands.

Royal Dutch Shell’s proposed $58 billion merger with BG Group has received unconditional clearance from the European Commission, the third of five key markets needed to clear the deal. The EU’s top antitrust regulator concluded that the acquisition would not allow Shell to influence prices for oil and natural gas, and that the markets would remain competitive after the transaction.

Pimco Total Return saw another $1.8 billion in net outflows in August, down from $2.5 billion in July and $3 billion in June. Total assets under management at the former giant of mutual funds have now fallen below $100 billion for the first time since 2007 (the fund neared $300 billion at its peak). As for the performance scorecard, Pimco Total Return’s year-to-date gain is 0.72% vs. the benchmark of 0.45%. It’s also outperformed the benchmark over 3-year, 5-year, and 10-year periods, as well as since its inception.

Meanwhile, Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.