April Goes Out Like a Lamb
…Stocks drop. April stock indices post small gains. Sprint and T-Mobile announce merger, maybe. Crude oil near 4-year high. PCE inflation hits 2% target. Budget deficit climbs. AZ teacher walkout continues.
Financial Review by Sinclair Noe for 04-30-2018
DOW – 148 = 24,163
SPX – 21 = 2648
NAS – 53 = 7066
RUT – 14 = 1541
10 Y – .02 = 2.94%
OIL + .47 = 68.57
GOLD – 7.70 = 1315.90
Stocks started the session strong – the Dow Industrials were up nearly 200 points in early trading but then the gains faded and faded some more. For the month, the Dow is up 0.25%, cutting its year-to-date loss to 2.3%. The S&P is up 0.27% in April, and down 1% in 2018, and the tech-heavy Nasdaq has tacked on 0.04% return this month, with a year-to-date advance of 2.4%. April’s gains have come as more than half of the S&P 500’s companies have posted first-quarter results, with 79% of those names beating Wall Street’s expectations for earnings. Companies that have beaten profit estimates have seen their shares rise by a paltry 0.2 percent on average. Lackluster at best. The strong first quarter earnings are priced in already. There’s not a whole lot of reason to buy. We’re stuck in the mud right now. And what happens in three months, when we enter another earnings reporting season? How you gonna top this? And if companies can’t continue to outperform, can the markets continue to move higher? The market is treading water right now while looking for its next cue. That cue likely comes either from inflation readings as rates are raised, or from unanticipated geopolitical events unfolding in an uncertain and recently contentious global backdrop.
Sprint shares fell about 14% action following news Sunday that the wireless carrier plans to merge with rival T-Mobile. T-Mobile’s stock dropped about 6%. The two companies struck an all-stock $26 billion offer that, if allowed by antitrust enforcers, would leave the U.S. wireless market dominated by three national players. It is the third time in recent years that the two rivals have attempted the combination. T-Mobile has a market capitalization of about $51 billion. AT&T and Verizon both have market caps of about $200 billion, and AT&T is trying to get even bigger with its $85 billion pending deal for Time Warner. Sprint’s market valuation is about $22 billion, and it’s 85 percent owned by Japanese tech giant SoftBank. Analysts on Wall Street are skeptical about whether a deal can actually get approved under the current administration due to the resistance of Trump regulators to AT&T’s proposed acquisition of Time Warner. T-Mobile claims that a merger is necessary to bring about 5G networks, which would run about 100 times faster than current 4G.
Meanwhile, the judge who will decide the fate of AT&T’s proposed takeover of Time Warner heard final pleas from a government lawyer who said the merger will leave consumers footing the bill and a defense attorney who said the U.S. utterly failed to make its case. The judge will announce his decision on the merger at a June 12 court hearing.
Crude oil prices are at the highest level in more than three years and we are headed into the summer driving season, which runs from April through September when gasoline prices typically rise due to increased demand. The daily national average for regular gasoline is now $2.81 per gallon. That’s up from about $2.39 per gallon a year ago. And across the U.S., 13 percent of gas stations are charging $3 per gallon or more. The price of U.S. crude oil has been on a mostly steady incline since last June and last week hit $68.64, the highest since December 2014. In the U.S., oil supplies were running 1.1 million barrels lower at the start of this summer’s driving season compared to one year ago according to the U.S. Energy Information Administration. That has amplified the typical increase in gas prices seen this time of year. Pump prices normally rise as demand increases from families going on vacation and taking to the highways on road trips. Already, U.S. consumer demand for gasoline hit a record high for the month of April. Halliburton rose almost 1% while Occidental Petroleum was up 0.6%. Marathon Petroleum has confirmed that it plans to buy rival refiner Andeavor in a deal valued at more than $20 billion. Andeavor’s stock jumped 13%, while those for Marathon were up by 1%.
Also today, Israeli Prime Minister Benjamin Netanyahu, in a live televised address, shared what he said was proof that Iran has a secret nuclear bomb program. The news raised the likelihood that the U.S. won’t extend sanctions waivers on Iran by the May 12 deadline, which could lead to tighter global supplies of oil. Netanyahu accused Iran of nuclear deception. His address followed his meeting over the weekend with U.S. Secretary of State Mike Pompeo regarding Iran’s nuclear deal. Netanyahu referred to the nuclear deal as “terrible” and accused Iran of having a “secret nuclear bomb program.” The loss of Iranian oil on from sanctions could be 500,000 barrels a day or perhaps less depending on European Union participation.
Logistics company Prologis has agreed to buy competitor DCT Industrial Trust for $8.4 billion including debt, as a surge in e-commerce ramps up demand for warehouses and distribution centers. DCT’s stock climbed 12%, while those for Prologis fell by 2%.
Shares in burger chain McDonald’s rose 5% after reporting better-than-expected profit and revenue for the first quarter.
Celgene fell after a Morgan Stanley report predicted a one- to three-year delay on any new attempt to file for U.S. approval of the company’s highly anticipated drug ozanimod, which is designed to treat multiple sclerosis.
The PCE index, the Federal Reserve’s preferred inflation gauge, rose to 2% year over year from a 1.7% pace in February, hitting the central bank’s target for the first time in a year. The inflation figures are included in the government’s monthly report on consumer spending. Outlays rose 0.4% last month to mark the first advance since the end of 2017. The 12-month increase in the more closely followed core rate of inflation was close behind, rising to 1.9% in March from 1.6% in the prior month. That’s the biggest yearly gain in the core rate since April 2012. Inflation has been increasing steadily for months owing to the rising cost of oil, higher home prices, the tightest labor market in decades and a strong domestic and global economy. Price pressures aren’t likely to ease up much. Consumer spending, meanwhile, rose for the first time in three months. Americans spent more on new cars and trucks in March and paid more for to heat and power their homes.
Federal Reserve policy makers are slated to start a two-day meeting on Tuesday, and they are expected on Wednesday to leave interest rates on hold and signal no change to a tightening path of two more rate increases in 2018. Still, the news that the Fed has hit its 2% inflation target will have some policymakers concerned that inflation is starting to become a concern. Fed funds futures contracts are now pricing in a 47% chance of a fourth rate hike for the year. Optimists have held onto the hope that even if the Fed moves more aggressively, it will be doing so for the right reasons. That would mean strong economic growth accompanied by just a dose of inflation that would push wages higher and increase quality of life without an outsized rise in prices. The other side is the bleak scenario, where long-dormant inflation rises and the Fed finds itself behind the curve after years of loose monetary policy. The central bank then has to move more quickly than the market anticipates, putting pressure on both stock and bond prices.
Friday brings the Labor Department’s Nonfarm Payroll report for April.
The U.S. Treasury borrowed $488 billion from January through March, about $47 billion more than previously estimated and a record high for the quarter, as the department increased its cash buffer and prepares for widening budget deficits. The budget deficit widened to $600 billion halfway through the fiscal year, as spending increased at three times the pace of revenue growth in the October-to-March period.
A report on Chicago-area manufacturing, Chicago PMI, for April came in at 57.6, compared with consensus estimates for 58. A reading of 50 or better indicates improving conditions.
Meanwhile, the pending-home sales index from the National Association of Realtors crept up 0.4% to 107.6 in March from a downwardly revised February reading. NAR’s index, which tracks real-estate transactions in which a contract has been signed but the transaction hasn’t closed, helps foreshadow sales of previously owned homes. The preview is telling the same story as the main event: not enough supply to meet demand. The result is fast sales at higher prices.
Arizona educators and #RedForEd supporters gathered at the Arizona Capitol on Monday for a third day of teacher walkouts. Participants are fighting for more education funding and teacher raises. Hundreds of schools have again announced they will be closed. The Arizona Legislature is expected to be in session, and may introduce a budget proposal that gives them raises but fall short of other demands. The budget package negotiated between Republicans who control the Legislature and Gov. Doug Ducey provides the first 10 percent of what will be a 20 percent increase by 2020. The governor is counting a 1 percent raise awarded to teachers this year as part of that raise, meaning it will be 19 percent by 2020. It also restores $100 million out of the nearly $400 million in recession-era cuts to a fund that helps schools pay for books, school buses and other capital expenses. The question for Ducey and lawmakers who control the Legislature is how long teachers will remain off the job after walking out last Thursday. Organizers have said they are making those decisions day by day and plan to continue to keep the heat on the Legislature. Look for another rally at the Capitol tomorrow, and another day of school closures.