December 17, 2015

Stocks opened lower this morning following a Fed rally yesterday. The Dow and SPX are currently down 89 pts & .6%, respectively. All ten market sectors are lower, led by energy (-1.5%). The dollar didn’t move much yesterday after the Fed announcement, but it is clearly strengthening this morning (+.6% vs. the Euro). Not surprisingly, gold and other commodities are getting hammered. WTI crude oil id down another 1.7% to $34.86/barrel. Bonds prices are up a bit today. The 2-year Treasury yield spiked to 1.0% yesterday (5 ½ year high) but is down to .99% at the moment. The 5-year Treasury is trading at 1.72%.

Yesterday, The Federal Reserve’s Open Market Committee did exactly what was expected of it. For the first time in nearly a decade, the Fed raised its key short term policy interest rate. The Fed-funds rate range is now .25% to .50%. In addition, the accompanying statement was interpreted as “dovish” by Wall Street. The Fed will continue to tighten monetary policy very slowly, at an uneven pace that is data dependent. That means perhaps only four rate hikes next year. This was a sort of Goldilocks move; Janet Yellen said rates were raised because the economy is clearly strong enough to support it, but not strong enough to warrant further tightening in the near term. As Jim Cramer said yesterday, “The Big Bad Event” is over. After the announcement, the prime interest rate, used by banks to set consumer loan rates, moved up .25% to 3.5%. This should modestly boost bank earnings going forward. CNBC contributor Art Cashin noted the Fed also apparently raised the interest rate it pays banks to keep their reserves, to .5%. As we know, the US banking system is now over-capitalized, and he implied this rate hike gives further incentive for banks not to boost lending.

December 9, 2014

Stocks gapped down at the open again this morning. The Dow and SPX are currently off 170 pts & .8%, respectively. Every sector except utilities is lower on the day. Commodities are mixed. Gold and copper are up over 1.50%; WTI crude oil turned around and is trading up toward $64/barrel. Yesterday oil hit a fresh 5-year low around $62/barrel. Remember, the Saudis say they are comfortable with oil at $60/barrel. It’s beginning to look like gasoline prices will hover around $2.50/gallon by the end of the year. Bonds are higher on the day. The 5-year Treasury yield ticked down to 1.62% and the 10-year edged down to 2.20%.

This morning on CNBC, Jim Cramer explained why he thinks stocks are selling off. This probably has a lot to do with the calendar. Institutional investors are likely locking in gains toward the end of the year. So it’s a temporary, orderly kind of thing and in no way implies the stock market is overvalued. He pointed out yet again that “We’re stronger than the other guys overseas,” and noted falling oil prices are a tailwind to our economy.

Wharton professor Jeremy Siegel, often a stock market bull, says 2015 will see a 10%+ correction. He advises investors not to try and time it, because it’s impossible to predict when it will come, and impossible to know what gains will be achieved between now and then. The market still looks attractive and bond rates will come up very gradually. Rate normalization won’t “tank stocks.” He thinks the Fed-funds rate will end 2015 somewhere in the range of .75% – 1.0%. My sense is that Mr. Siegel’s view is now becoming consensus on Wall Street.

The Nat’l Federation for Independent Business (NFIB) Small Business Optimism Index rose to 98.1 in November. That’s the highest since early 2007. Over 20% of small business managers said they’ve recently increased employee compensation levels and another 15% say they plan to do so in the near future. The NFIB’s chief economist had this to say about the results: “Labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation.” So that could be a very early sign of accelerating wage growth. Separately, we got the JOLTS Job Openings report this morning, and it is hovering around a 10-year high. The number of job positions waiting to be filled rose to 4.83 million. Accelerating end demand is forcing employers to look for additional workers.

September 18, 2014

Stocks opened sharply higher this morning in the wake of yesterday’s Fed meeting. The Dow and SPX are currently up 88 pts & .43%, respectively. Energy and utilities are the only sectors in the red in early trading. The VIX Index fell back to 12 and VIX October futures are trading down around 14. So the Fed meeting provided some relief to investors. European stock markets are poised to close higher, betting Scotland will vote no on the independence referendum. Commodities are broadly lower. Copper is still down about 9% year-to-date; WTI crude is trading under $94/barrel; gold is down over 5% month-to-date. Bonds are lower as yields move higher yet again. The 5-year Treasury yield is trading up to 1.85%; the 10-year Treasury yield is up to 2.63%.

The Federal Reserve’s policy-making committee decided to leave interest rates unchanged for a “considerable period” and gave investors no new guidance on when to expect rate hikes. The post-meeting statement noted moderate economic growth, and more importantly, below-target inflation. In other words, the economy isn’t yet forcing the Fed’s hand. However, the Fed did raise its year-end 2015 Fed-funds interest rate forecast, prompting investors to guess that when the Fed does begin to tightening monetary policy, rate hikes might proceed at a slightly faster pace than previously expected. Wall Street economists and strategies generally believe the Fed will begin raising rates in the June – July 2015 timeframe. And in the last half of the year the Fed-funds rate is expected to move from its current target of .25% to 1.0%.

US housing starts—ground-breaking on new construction projects—fell more than expected last month. Starts came in at an annualized pace of just 956,000 units vs. economists’ consensus forecast for over a million. The number of new building permits also disappointed. Starts have been very uneven of late. The overall trend is still modestly positive, but we have a long way to go to get back normal. A more normalized figure would be somewhere around 1.3 – 1.5 million units per year. That at least would take care of population growth.

Initial filings for unemployment insurance fell to a 2-month low last week. Weekly claims were 280,000 vs. economists’ consensus forecast for over 300,000. So yes, claims briefly dipped to 280,000 a couple of months ago, but the last time claims spent any time at all at this level was early 2006. Historically, this is a very low number and suggests improvement in the labor market. The total number of continuing claims fell to a 7+ year low.

March 20, 2014

Stocks rebounded in early trading (Dow +38 pts; SPX +.17%). Financials and telecom are leading the charge thus far. Utilities are getting punished. Commodities are mixed: copper is down again (off 17% over the last year); WTI crude oil edged back over $100/barrel; gold is trying to pick itself up off the floor after getting smashed by the Fed announcement yesterday (see notes below). The dollar is stronger and bonds are sharply lower; the 10-year Treasury jumped to 2.77% and is likely headed higher.  

Yesterday afternoon, the Federal Reserve’s policy-making committee announced the results of its 2-day meeting. Quantitative easing (“QE3”) will be decreased by another $10bil, to $55bil in bond purchases per month. This was the third consecutive decrease in QE3, made necessary by improvements in the economy. More importantly, the committee dropped its 6.5% unemployment target as a signal for withdrawing economic stimulus. The new approach is much more vague: continue to assess progress toward maximum employment and normal inflation. Traders aren’t really sure exactly what that means.

Now, we’ve known for some time that the Fed’s removal of stimulus will be a series of steps stretching out at least a couple of years. In this announcement, the Fed made a change in its approach to the next step beyond removal of QE3: future fed-funds rate hikes. If inflation remains below the 2% target, rates will not rise even after QE3 is ended. During the press conference, Fed Chair Janet Yellen projected  a “considerable period” of about 6 months after QE3 ends before it will be appropriate to raise rates. So we’re looking at the end of QE3 in the fall of 2014, and our first Fed-funds rate hike in the late spring of 2015. Jan Hatzius, chief economist at Goldman Sachs, said this represents “a bit of a pull-forward.” In other words, that’s a little sooner than Wall Street was expecting. Bottom line, the statement was bearish for bonds. The economy is improving and the Fed is serious about removing stimulus.

Existing home sales for the month of February edged down to an annualized rate of 4.60 million units (in line with expectations). That’s the lowest level since July 2012. Home prices were up about 9% y/y. There are a couple of factors working against the housing recovery. First, low sales inventories are driving up home prices and hurting affordability. Also, bad weather has really shut down homebuyer traffic across a large swath of the country. Finally, mortgage rates are rising a little as well. The weather piece will fall away pretty quickly, but the other factors will remain an issue.

US Leading Indicators jumped .5% in February vs. economists’ consensus projection of .2%. This follows a downwardly revised January (up .1%).  This is the biggest monthly gain since November, suggesting temporary weather factors were indeed the reason economic growth moderated over the winter. The report also corroborates recent acceleration in manufacturing indices, and a much better than expected read today for the Philly Fed Business Outlook Index.