Jitters
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DOW – 41 = 20,648
SPX – 7 = 2352
NAS – 34 = 5864
RUT – 16 = 1352
10 Y + .01 = 2.36%
OIL – .21 = 50.82
GOLD – .30 = 1256.40
Stocks started the session strong. The Dow was up triple digits early on the strength of the ADP jobs report, but sellers stepped in following the release of the minutes from the last Federal Reserve policy meeting. The Nasdaq composite slipped 0.6 percent after hitting a new all-time high earlier in the session. The Dow and S&P also posted their biggest one-day reversal since February 2016.
The first two months of 2017 saw strong job gains – 238,000 new jobs in January, followed by 235,000 new jobs in February; part of a 7-year string of steady job growth that has seen the unemployment rate drop to 4.7%.
The feeling is that the economy will not continue with the gains we saw in January and February. Most analysts say the March jobs report, due on Friday, will only show about 175,000 new jobs – good, not great. We might need to adjust those estimates. Private payroll processor ADP reports their survey shows 263,000 new private sector jobs were added in March.
The ADP report doesn’t always match the Labor Department’s report, but they are usually not too far apart. ADP reports consumer dependent industries including healthcare, leisure and hospitality, and trade had strong growth during the month. The biggest gains by industry in March came from the professional and business services sector, which added 57,000 jobs, followed by leisure and hospitality, and construction.
The Institute for Supply Management’s non-manufacturing purchasing manager’s index slowed to 55.2, lower than the forecast for 57. Readings above 50 indicate that there’s still expansion. It is not necessarily that the services side of the economy has cooled, as it just wasn’t running red-hot.
Meanwhile, Markit Economics reported the slowest growth of the US service sector in six months in March. The firm’s PMI, was 52.8, lower than the expectation for 53.1.
Also today, we saw the minutes of the Federal Reserve’s FOMC meeting in March. Policymakers struggled to come to grips with two big uncertainties facing the U.S. economy — whether it would be safe to let inflation rise faster for a while and how to assess the impact of President Trump’s economic stimulus plans.
There was near-unanimous support for the quarter-point increase in the fed funds rate, the second rate hike in three months. There was less agreement over the issues of inflation and Trump’s economic plans. The minutes also showed that Fed officials had a briefing from staff over the central bank’s massive balance sheet, which was quadrupled during the financial crisis.
The Fed has been keeping the level of the balance sheet steady at $4.5 trillion. But financial markets have been closely watching for any Fed signal on the timing of when the Fed would begin reducing the level of its bond holdings by halting its current practice of replacing any maturing bonds.
The minutes indicated that this change could be announced later this year. Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike.
The minutes also showed policymakers were concerned about stock market valuations, stating: “Some participants viewed equity prices as quite high relative to standard valuation measures.”
If jobs numbers continue to come in strong, the Fed may have more confidence in raising rates at a faster pace, regardless of market valuations. Currently, the market is pricing in two more rate increases this year, in line with the Fed’s so-called dot plot, which charts officials’ expectations for future rate increases.
The minutes showed that several Fed officials believed that Trump’s stimulus plans would likely not begin until next year. The minutes said that because of the “substantial uncertainties” about the outlines of the program that will eventually emerge from Congress, about half of the Fed officials had not included any assumptions about Trump’s efforts in their economic forecasts.
The possibility of tax reform has been one of the main drivers in the stock market’s massive post-election rally, along with deregulation and infrastructure spending. Today, House Speaker Paul Ryan said that tax reform will take longer to accomplish than repealing and replacing Obamacare would, saying Congress and the White House were initially closer to an agreement on healthcare legislation than on tax policy.
Ryan said: “The House has a (tax reform) plan but the Senate doesn’t quite have one yet. They’re working on one. The White House hasn’t nailed it down. So even the three entities aren’t on the same page yet on tax reform.”
Yesterday, the Trump administration was testing two tax proposals: a value-added tax and a carbon tax. Those trial balloons were shot down. Neither a VAT or carbon tax would have needed to be floated if the GOP’s other big possible offset – House Speaker Paul Ryan’s border adjustment tax — turned out to be politically feasible.
But with Republican opposition to a BAT threatening to drag tax reform down, something else had to be found. With these three major revenue-raisers now politically unacceptable, the Trump administration and congressional Republicans have very few other options for a revenue-neutral tax reform bill.
There will be other proposals, of course, but don’t expect much that will make the deficit hawks happy. And that begs the question: If Trump and congressional Republicans want a tax cut but can't agree on ways to pay for it, will they still cut taxes even if it means they will be held responsible for a (much) higher federal deficit? Absolutely.
The two-day summit between Trump and China’s President Xi was still in focus for investors, who are looking for clues on ramifications for trade and the dollar. Xi’s visit to Mar-a-Lago in Florida begins tomorrow. The two men are at odds on several issues. Xi has a highly-scripted style, and the Chinese are accustomed to meetings that are tightly choreographed. And right now, the script is fluid, with North Korea firing off more missiles.
The Korean Peninsula isn’t the only geopolitical hotspot. President Trump said the recent chemical attack in Syria crossed “beyond a red line” and changed his mind about Syrian president Bashar Assad, whom Trump had previously suggested could stay in power. But Trump remained vague when asked whether his calculus on taking military action in Syria had changed. Trump has previously urged against using military action in Syria.
Over the last several years, a European family business has spent more than $40 billion assembling a coffee empire. JAB Holding Company has acquired the American brands Peet’s Coffee, Caribou Coffee and Keurig Green Mountain, all since 2012.
It also combined the European coffee giant D.E. Master Blenders 1753 with the coffee business of Mondelez to create a company now known as Jacobs Douwe Egbert. Then it bought the high-end coffee retailers Stumptown Coffee Roasters and Intelligentsia. Mondelez continues to own 25 percent of Douwe Egbert and has a similar stake in Keurig.
Now JAB is adding a nice little bakery to sell all that coffee. Today, JAB said it would buy the Panera restaurant chain for $7.5 billion, including debt. In 2014, JAB bought the bagel chain Einstein Brothers, which it has been combining with Caribou is some markets. And last year, it paid $1.35 billion for Krispy Kreme, the doughnut chain. At some point, you should imagine Starbucks is getting a little nervous.
For the past few years, the housing market has been unbalanced. Strong demand and tight supply resulted in higher prices. Today, the Mortgage Bankers Association’s weekly purchase loan data showed that the average size of a home loan was the largest in the history of its survey, which goes back to 1990.
Larger mortgage sizes may reflect not just more expensive properties, but also more leveraged ones. The 20% down payment is a relic: the median down payment in 2016 was 10%. For first-time buyers, it was 6%. First-timers and other buyers of less-expensive homes are more leveraged now than they were at the height of the housing bubble a decade ago.
Home loan sizes aren’t the only things that have changed in the years since MBA started its survey. Back at the start of the survey, the median mortgage size was only about 3.3 times the median annual income. It’s now over five times as big – though buyers get bigger homes and lower interest rates.
Mortgage application activity hit a five-week low even as home borrowing costs were little changed from the prior week. The average interest rate on 30-year, fixed-rate conforming mortgages, the most widely held type of U.S. home loan, was 4.34 percent, little changed from 4.33 percent from the prior week.
Arizona lawmakers unanimously approved a bill that would make it tougher for prosecutors to seize property from people suspected of a crime. House Bill 2477 would reform rules dictating when prosecutors can seize the property of those suspected of a crime. Officers can currently seize property based on suspicion alone without the need of a conviction or a charge. Police and prosecutors acquire assets after seized property is forfeited.
The measure comes after recent inquiries into whether officials in Pinal County misused seizure profits and a guilty plea from a former top Pima County official to misusing RICO funds in February. The measure would change Arizona’s civil asset forfeiture laws to require prosecutors to prove property was involved in a crime by “clear and convicting” evidence, a step above the current standard. The bill now goes to the governor.
