Financial Review by Sinclair Noe for 03-11-2016
Stocks rally to the highest close of 2016. The FOMC meets next week. Brazilians take it to the streets.
DOW + 218 = 17,213
SPX + 32 = 2022
NAS + 86 = 4748
10 Y + .05 = 1.98%
OIL + .69 = 38.53
Today’s rally pushed stocks to the highest levels of 2016. The Dow and the S&P 500 have now posted 4 straight weeks of gains. For the week, the Dow gained 207 points or 1.2%, The S&P 500 gained 23 point, or 1.1%, and the Nasdaq added 31 points since last Friday. Oil prices are up 7.5% in the past week.
Yesterday the European Central Bank announced additional stimulus measures. Next week the Fed FOMC meets to determine monetary policy. Expectations have been reduced to nearly zero for a Fed rate hike this month. This Fed has shown a tendency to err on the side of caution. How the Fed shapes expectations about its next move will be the big story when the meeting concludes on March 16.
With recent financial turmoil and inflation still low, the Fed has an incentive to wait and no real incentive to act now. Add in the ECB’s move yesterday, and the Fed is faced with questions about how far they can diverge from the accommodative policies of their central banking peers. An unqualified tilt toward further rate increases this year could power the dollar higher against major currencies, delivering a blow to exports and manufacturing jobs while also causing some disinflation through lower import prices, specifically for raw materials and energy.
In addition to the ECB’s additional new stimulus measures announced yesterday, the Bank of Japan meets on Tuesday; they recently increased stimulus and pushed interest rates into negative territory; the BOJ is not expected to announce new measures next week, but they might ease further by July. This means the Fed is alone in its call for tightening.
So, what is the Fed looking at now? The Fed’s mandate requires them to manipulate monetary policy for maximum employment and stable prices. The employment side of the mandate looks fairly good. The economy has been adding jobs at a steady pace for 6 straight years, with 242,000 new jobs created in February and the unemployment rate at 4.9%. The labor force participation rate has inched up, indicating discouraged workers are dipping a toe in the labor pool, but plenty of discouraged and under-utilized workers would take a job if they can find anything worthwhile. There is still a lot of slack in the labor market.
On the inflation front, the Commerce Department’s Personal Consumption Expenditures (PCE) index shows inflation didn’t budge last year and December’s 1.4 percent reading, the latest available, was well below the Fed’s 2 percent target. The Consumer Price Index is also up just 1.4% through January, but if you knock out energy and food, the core rate came in at 2.2% annualized rate; of course, in the real world, eating food and consuming energy are important. And if the Fed tightens monetary policy while the rest of the world is easing, the result would likely be disinflationary. Yesterday’s move by the ECB tells us that the Eurozone is having significant problems; after all, this is not the first round of QE from Draghi and so far, 60 billion euro failed to serve as a catalyst for economic growth.
So, what you will likely hear next week is that a recent string of positive economic news has dragged markets back closer to the Fed’s overall outlook, allaying recession fears and further rate hikes this year remain firmly on the table. Go figure.
The U.S. budget deficit was little changed in February, leaving the gap between government spending and revenue near a seven-and-a-half year low. The government recorded a $193 billion shortfall last month, a period in which expenditures typically exceed revenue as tax refunds are mailed. According to the Treasury Department, that was up only slightly from a $192 billion deficit last February. For the fiscal year to date, the budget deficit is down 9%.
The prices the U.S. paid for imported goods dropped 0.3% in February, and lower energy prices were once more the cause. Excluding fuel, import prices slipped 0.1%. The price of U.S.-made goods exported to other nations declined by 0.2% last month. In the past 12 months, import prices have dropped 6.1%. Lower import prices have contributed to falling U.S. inflation in the past year, though some upward pressure does appear to be building.
The IEA thinks oil prices could’ve bottomed. The International Energy Agency says there are signs energy prices might have put in their lows, as output is falling faster than expected and the supply from Iran is having a smaller impact than expected. In its latest forecast, the IEA projects that non-OPEC output will fall by 750,000 barrels a day in 2016; it previously forecast a drop of 600,000 barrels a day. The US alone will see a drop in production of 530,000 barrels a day. The agency’s view on prices is a shift from last month’s report, in which it said that crude could sink further as the market remained “awash in oil.”
An important ruling this week in the bankruptcy case of Sabine Oil & Gas; where a New York judge ruled that bankruptcy allows Sabine to cancel contracts it holds with midstream firms on the company’s petroleum licenses in Texas. Sabine held three separate contracts with pipeline firms in Texas, for the transport and sale of oil and gas that the company produced. These contracts came with clauses like “deliver or pay” features – where Sabine was obligated to send minimum volumes of production through the pipeline, or pay financial penalties to the pipeline operators. Such contracts could have been a stumbling block in bankruptcy – requiring the company to deliver production or cash at a time when its operations have slowed or stopped. And so Sabine had challenged in bankruptcy court to have the agreements nixed. And the judge agreed. The decision opens the door for Sabine to sever the contracts as it restructures in bankruptcy. With the case giving producers a greater financial incentive to declare bankruptcy, we could see such filings increase.
The political crisis in Brazil caused by the vast corruption probe known as Operation Carwash is moving closer to the country’s president. Dilma Rousseff’s government risks losing an ally in parliament this weekend as the Brazilian Democratic Movement Party seems set to declare its independence from the government at its national convention tomorrow, meaning its members could vote for impeachment proceedings. The political crisis hit a new high with former president Lula da Silva’s brief detention March 4, deteriorating even further this week as state prosecutors sought a court order for his temporary arrest. Brazilian stocks are at their highest level since August as pressure increases on Rousseff.
The corruption probe centers around Petrobras, the state run oil company in Brazil. It appears that more than $2 billion was siphoned off the books by way of kickbacks and cancelled promissory notes in exchange for contracts with Petrobras, along with outright bribes. Now, if you’ve been listening to me for any length of time, your next question should be: which banks were involved? And it looks like the ringleader was HSBC, with some assists from Deutsche Bank, Itau Unibanco, Royal Bank of Canada, Citibank, and Banco Bradesco. The Office of the Attorney General of Switzerland is investigating “over 30 banking institutions in Switzerland that were apparently used to process the bribery payments under investigation in Brazil.” The investigation is looking into the possibility of money laundering, among other possible charges. It is difficult to think about investing in Brazil these days; which might mean that it is time to pay attention. National protests are planned for Sunday, that are expected to draw massive turnout in cities across Brazil.
Germans go to the polls in three states on Sunday, in what is widely being seen as a litmus test for Chancellor Angela Merkel and her refugee policies. But regardless of the results and despite suggestions to the contrary in some media, it seems highly unlikely that Merkel will leave office before her third term as chancellor is up in 2017.
Apple is planning to “loop” the media in on its latest plans at a March 21 invitation-only event at its headquarters in Cupertino. Apple plans to unveil a 4-inch iPhone (expected to be called the SE) at the event, with specs that are much improved from those of the iPhone 5S. The company is also expected to reveal a 9.7-inch iPad Pro and new Apple Watch accessories and software.
Gatorade, the sports drink pioneer which taught the world about electrolytes, is making a major play for the Fitbit crowd. PepsiCo is developing a microchip-fitted “smart cap” bottle and sweat patch that communicate digitally and provide athletes and fitness buffs constant updates on how much they should drink. Gatorade will give an early peek of the prototypes today with a four-room interactive display at the South by Southwest festival in Austin.
Volkswagen plans to cut thousands of administrative jobs in Germany to trim costs as it reported a 4.7% drop in February brand sales to 394,000 vehicles. The cuts would come largely through attrition and early retirement schemes, but not through layoffs.
California lawmakers have voted to make the nation’s most populous state the second to raise the smoking age from 18 to 21 as part of a sweeping package of measures cracking down on tobacco products and electronic cigarettes. “With California having such a huge population, it’s going to be very impactful nationwide,” said Cathy Callaway, associate director of state and local campaigns for the American Cancer Society. Hawaii became the first state to lift the smoking age limit to 21 in January.
Daylight Saving Time rolls around again at 2 a.m. Sunday – but not for Arizona; we have enough daylight. Even so, it could affect your travel or communications with the rest of the country. It’s also a good reminder to check your smoke alarms.