Financial Review

November Wrap

…..A November to remember as stocks hit records and bonds bleed. OPEC agrees to production cuts – oil soars. ADP says 216k new jobs. Consumer spending rose, inflation not so much. Beige Book confirms Fed rate hike. Mnuchin and Ross picked for Treasury and Commerce. Carrier keeps half of workers in Indiana. Lucid has big plans for Casa Grande.

Financial Review by Sinclair Noe for 11-30-2016.

DOW + 1 = 19,123
SPX – 5 = 2198
NAS – 56 = 5323
RUT – 5 = 1322
10Y + .07 = 2.37%
OIL + 3.76 = 48.99 (8.31%)
GOLD – 14.90 = 1174.00

 

The Dow and the S&P 500 hit intraday highs but could not hold on for the close. For the month, the Dow was up 5.4%, the S&P 500 was up 3.4% and the Nasdaq was up 2.6%. All three indexes hit record highs this month

 

The Russell 2000 index of small cap stocks also hit record highs, up 11%, the best month for small caps since October 2011. US Financial Stocks +14% – best since April 2009. US Energy Stocks +9% – best since October 2015.  FANG Stocks -6.2% – worst since March 2014. “Most Shorted” Stocks +11% – best since September 2010.

 

US Treasury Bonds -8% – worst since January 2009. The yield on the 10-year Treasury note jumped 54 basis points on the month. Emerging Market Bonds -4.7% – worst since May 2013.

 

The strong dollar got stronger and remains the cleanest shirt in the dirty clothes hamper. The US Dollar Index +3.8% – best since September 2014. Mexican Peso -8.6% – worst since May 2012. Japanese Yen -8.9% – worst since August 1995.

 

Gold -8% – worst since June 2013. Silver -8% – worst since May 2016. Doctor Copper +19% – best since March 2009

 

OPEC has agreed to its first oil output cuts since 2008. Saudi Arabia accepted “a big hit” on its production and dropped its demand on arch-rival Iran to slash output. Non-OPEC Russia will also join output reductions for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices. The cartel is proposing to set a new production ceiling at 32.5 million barrels per day, down from current levels of 33.6 million. Oil prices jumped 10% intraday, topping $50 a barrel on the news. The proof is in the putting but for now; OPEC has tried to control prices in the past only to see one country or another violate quotas. Iran and Russia are effectively fighting two proxy wars against Saudi Arabia, in Yemen and Syria. Saudi Arabia will take the lion’s share of cuts by reducing output by almost 0.5 million bpd to 10.06 million bpd. Its Gulf OPEC allies – the United Arab Emirates, Kuwait and Qatar – would cut by a total 0.3 million bpd. Iraq, which had insisted on higher output quotas to fund its fight against Islamic State militants, unexpectedly agreed to reduce production – by 0.2 million bpd. Non-OPEC Russia will gradually cut output in the first half of 2017 by up to 300,000 barrels per day.

 

Private employers hired far more workers than expected in November. Payroll processor ADP said that 216,000 net new jobs were added in the month. October’s original tally of 147,000 was revised down substantially, to 119,000. November’s tally was strong across the board. Small businesses added 37,000 jobs, medium businesses added 89,000, and large businesses hired 90,000 workers. But all the gains were concentrated in services: goods-producing categories like mining and manufacturing were negative. The government’s nonfarm payroll report will be published Friday morning.  Mark Zandi, chief economist of Moody’s Analytics says, “We are now at full employment.”

 

Consistent job growth and a firming up of wages are allowing households to spend a little bit more freely. Consumer spending rose 0.3% in October after a 0.7% September advance that was stronger than first estimated. Wages rose 0.5% in October for a second month. The price index tied to consumer purchases increased 0.2% for a third month in October. The PCE inflation index, the Fed’s preferred measure of inflation, rose 1.4% from a year earlier. Disposable income, or the money remaining after taxes, rose 0.4% in October from the prior month after adjusting for inflation, the strongest advance this year. The saving rate increased to 6% from 5.7% in September.

 

Inflation may look like it’s on the rise, but it may again fail to reach the central bank’s 2% target, according to a research paper from the Cleveland Fed. Inflation has been running at low levels for most of the past five years, defying forecasts from the central bank and the private sector. In the study, the regional Fed bank used six different models that have performed well in the past to assess the likelihood of inflation hitting the 2% target over the next 36 months. Five out of six models suggest there is a less than 50% probability that PCE inflation will be hit 2% or higher over the next three years.

 

Two weeks before a Federal Open Market Committee policy meeting, the Federal Reserve publishes the Beige Book, an anecdotal collection of economic insights and observations from the 12 Fed districts. Here are some of the key points from the Beige Book: the economy continued to expand from early-October through mid-November with little inflation; retail sales, real estate markets and business service firms saw rising activity; the labor market is getting tighter in 7 of the 12 districts; some employers report difficulty finding skilled workers; outlooks were generally positive, although the strong dollar continued to depress exports of manufactured goods in some Districts.

 

Steve Mnuchin (pronounced mah-NEW-chin) and Wilbur Ross have been picked as Treasury secretary and commerce secretary for the Trump administration. Mnuchin outlined an economic agenda aimed at almost doubling the growth rate of the current expansion, saying he will boost jobs by making tax reform his overriding priority. Mnuchin said his plan involves reducing the corporate tax rate to 15% — from the current 35% — echoing an idea Trump pledged to deliver during the campaign. Mnuchin said he wanted to bring “a lot of cash back to the U.S.,” proposing a one-time 10% repatriation tax to return corporate tax revenue held abroad, another key promise by Trump. He also said Fannie Mae and Freddie Mac need to be restructured and moved “out of government control,” comments that sent shares of the mortgage-finance giants soaring. Fannie shares were up 32% at $4.08, while Freddie rose 31% to $3.99.

 

What Mnuchin described today doesn’t match the tax plan unveiled in September. This statement could be a legitimate pivot, or it could be hand waving. Mnuchin and Ross suggested that the plans would not widen the budget deficit thanks to “dynamic scoring,” or forecasts that assume tax cuts will release much faster economic growth and therefore pay for themselves. But the Trump tax cuts would need to unleash far faster growth than the historical record suggests is likely to avoid rapidly increasing the budget deficit. To achieve the economic strength that the Trump administration is aiming for, either something will need to change existing demographic trends, such as higher immigration levels or would-be retirees working longer, or American businesses will need to find ways to become sharply more productive than they have been in recent years. Time will tell if the economic math adds up. And we know that Washington moves slowly. And it won’t be so easy to execute.

 

Trump also chose Georgia Rep. Tom Price to oversee the nation’s health care system; plus, Elaine Chao, a former labor secretary and the wife of Senate Majority Leader Mitch McConnell, to lead the Department of Transportation.

 

President-elect Trump and Carrier, the air conditioning manufacturer, have reached an agreement to keep 1,000 jobs in the US. The company’s plans to move some 2,000 jobs to Mexico from Indiana was a major campaign issue for Trump. Now, along with Vice President-elect Mike Pence, the current Indiana governor, reports say they will preserve about half of those jobs. The New York Times reports the two will appear at the Indiana plant tomorrow to announce the deal.

 

Lucid Motors has announced plans to build a $700 million car plant in Casa Grande that would have parts supplied by firms in Sonora, Mexico. Construction on the facility and hiring of employees will begin next year. Pinal County will reportedly buy $250 million in land that the company will later purchase for the deal, and the Arizona Commerce Authority will give Lucid $5 million grants in return for bringing jobs to the state. And Lucid still needs another round of financing to build the facility. Lucid anticipates rolling out its first model, a four-door sedan with 1,000 horsepower that would compete with Tesla electric cars, by 2018.

 

France says the US must comply with the WTO ruling against Washington state’s tax break for the Boeing 777X jetliner, which it called a prohibited subsidy. “If not, the European Union will have the legal grounds to adopt retaliatory measures concerning goods coming in from the United States.”

 

The Bank of England’s stress tests found 3 banks had ‘capital inadequacies.’ Barclays, RBS, and Standard Chartered were required to submit plans detailing how they would raise capital and boost their resilience to financial shocks. RBS or Royal Bank of Scotland failed multiple hurdles. Eight years after its $56 billion bailout from taxpayers, the Edinburgh-based lender still has work to do to bolster its financial strength and the bank has agreed to deepen cost cuts and sell additional assets to improve its resilience.

 

Italian banks are holding nearly a third of the €1-trillion-euros of unpaid loans at top Eurozone lenders, according to the ECB, raising concerns especially if the current government is ousted following Sunday’s referendum on changes to the constitution. Central bank sources say the ECB is ready to temporarily boost purchases of Italian government bonds if the result of the vote sharply drives up borrowing costs.

 

Video streaming pioneer Netflix said its subscribers would now be able to download shows on their mobile devices at no extra cost. The new feature is included in all plans and available for phones and tablets on Alphabet’s Android and Apple’s iOS platforms. More content will be available for offline viewing later.

 

 

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