…Stocks follow bonds lower. Powell seems overly optimistic. The big questions for Friday’s jobs report. China’s Super Micro hack. Autonomous cars update. Danske’s money laundering problem.
Financial Review by Sinclair Noe for 10-04-2018
DOW – 200 = 26,627
SPX – 23 = 2901
NAS – 145 = 7879
RUT – 24 = 1646
10 Y + .04 = 3.20%
OIL – 1.78 = 74.63
GOLD + 2.60 = 1200.70
If you were looking for market leadership, it was on display over the past 2 days – the bond market was leading the stock market lower. After a big drop in bond prices yesterday pushed the yield on the 10-year note to 3.16%. Today, the benchmark 10-year U.S. Treasury yield rose to near 3.2%, climbing to a seven-year high. The 30-year yield hovered above 3.3%. Equities competing for capital fell accordingly. Selling weighed heaviest on the tech-heavy Nasdaq, which saw losses in excess of 2.2% at session lows before ending down 1.8%. The Dow Jones industrial average and the S&P 500 were both lower by about 0.8%.
Bonds are falling as a result of “strong” macroeconomic data in the US, continued “hawkish” sentiment from the Federal Reserve and strong commodity prices. At the same time, Italy’s fiscal policy appears unlikely to destroy the Eurozone. As such, all those who have been betting for some type of “normalization” in the bond market may receive their validation soon. To say it’s been a tumultuous few days in the eurozone’s third-largest economy would be somewhat of an understatement. It all started last week, when Italy submitted its spending plans to the EU. The budget came as a shock: The country said it planned to spend a whopping 2.4% more than it makes over the next three years. This target risked breaching EU rules. Investors balked, sending the country’s bonds higher and the euro tumbling. After some bumpy back-and-forth, the country is reportedly backing off and cutting its budget-deficit target for 2021 to 2%. The Italian 10-year note now yields 3.41% – which does not seem like much of a spread compared to the US 10-year Treasury note. I’m not sure if that tells us something about the Italian note or the US note.
Speaking in Washington late Wednesday, Federal Reserve chair Jerome Powell said the U.S. economy is “a long way from neutral.” The neutral rate refers to the point at which interest rates neither boost nor slow the economy. The Fed has raised rates three times so far in 2018 and a fourth hike in December appears more likely as policy makers aim to normalize federal-funds rates from crisis-era levels. The good news for Powell is that the economy is chugging along nicely, with the unemployment rate at its lowest in decades, growth strong, and inflation steady. The question is whether that can last. Powell said. “Not every business cycle is going to last forever, but no reason to believe this cycle can’t go on for quite some time, effectively indefinitely.” I think I would feel more at ese if Powell was more nervous.
We saw strong wage growth in the August Jobs report. The big question for tomorrow is whether gains in wage growth will continue, and will it be enough to bring people back into the labor force? Last month, wage growth moved up to 2.9 percent from a year earlier. Yet discouraged workers did not re-enter the labor market in a meaningful manner, which is historically inconsistent with the improving picture for jobs and vacancies. Rather than increase, both the labor-force participation rate and the employment-to-population rate fell by about 0.2 percentage points, to 62.7 percent and 60.3 percent, respectively. Bond traders seem to be placing their bets that tomorrow’s jobs report will be stronger than expected.
The number of Americans filing for unemployment fell to a near 49-year low last week, according to a report Thursday from the Department of Labor. The level of seasonally adjusted jobless claims fell to 207,000 for the week ending Sept. 29, from an upwardly revised level of 215,000 for the week prior. Continuing claims fell by 13,000 to 1.65 million for the week ending Sept. 22. The increase in jobless claims triggered by Hurricane Florence was very modest, and smaller than expected. The report bolsters evidence of a tightening labor market and follows stronger-than-anticipated results in private-sector payrolls and in the non-manufacturing sector. Tomorrow morning we’ll get the monthly Labor Department Jobs Report.
The FBI has finished its probe of sexual-assault allegations against Brett Kavanaugh, and key GOP senators say they’re satisfied the investigation was thorough enough, dismissing the objections of Democrats and accusers. Those same senators may also have just enough political cover now to vote for his confirmation, although confirmation could still go down to the wire. A vote scheduled for Saturday.
New orders for U.S. manufactured goods increased 2.3%, or $11.5 billion, to $510.5 billion, the Census Bureau said Thursday. The rate marks the largest increase since Sept. 2017 and topped average analyst expectations of a 2.1% increase, according to data compiled by Bloomberg, and follows a 0.5% decrease in July. New orders for manufactured durable goods increased 4.4%, narrowly missing expectations of 4.5% increases, according to average estimates compiled by Bloomberg. Transportation equipment orders were up 13.1%, the most since June 2017, helping to drive the increase.
Heavy selling battered the technology sector, where Super Micro Computer crashed 39% after it was reported by Bloomberg that Chinese spies implanted tiny chips in server motherboards that were purchased from the company by firms including Amazon and Apple. Their stocks fell more than 1%. China’s reported goal was to access these data centers and swipe confidential information. No consumer data is known to have been stolen. Amazon reportedly spotted the microchips while doing the due diligence for its $500 million acquisition of the US video service firm Elemental in 2015. Amazon hired a third party to test Elemental’s servers, which had been put together by Supermicro. After spotting tiny chips on the servers’ motherboards that were not part of the original design, Amazon reportedly showed its findings to US authorities. A secret investigation apparently remains open three years later. Apple also discovered the malicious chips in motherboards supplied by Supermicro in 2015. A year later, Apple ended its relationship with Supermicro for what it described as unrelated reasons. Amazon, Apple, and Supermicro strongly disputed the findings.
JPMorgan is getting less optimistic about the trade conflict between the US and China. The firm lowered its rating for Chinese equities to neutral from overweight, predicting the escalating trade war between the countries will affect China’s economy next year. The JPMorgan report says: “A full-blown trade war becomes our new base case scenario for 2019. There is no clear sign of mitigating confrontation between China and the US in the near term.”
SoftBank and Toyota are working together to create a new joint venture called Monet to develop businesses that will use connected and autonomous vehicle technology for new services, including mobile convenience stores and just-in-time vehicle dispatch services. Monet will launch in April 2019 with an initial capital injection of $17.5 million. Softbank will own 50.25% of the venture, with Toyota claiming the remainder. The announcement comes on the heels of Honda’s announcement Wednesday to invest a total of $2.75 billion into General Motors’s self-driving car unit Cruise.
Cadillac outscored Tesla in a new ranking of partially automated driving systems tested by Consumer Reports. Consumer Reports said it has been testing partially automated driving systems for several years but elected to conduct a formal study intended for publication, because “we are at a tipping point where they are now going mainstream.” CR tested systems from Cadillac, Tesla, Volvo, Geely, an Nissan. Each system has limitations and Consumer Reports said the partially automated systems are “not intended to be self-driving features,” but they can help relieve driver stress and fatigue.
Tesla stock dipped 2 percent in the extended session following a tweet by CEO Elon Musk that mocked the Securities and Exchange Commission, calling the agency the Shortseller Enrichment Commission. The SEC declined to comment on the tweet.
eBay has accused Amazon of poaching its independent sellers through its messaging system. eBay sent Amazon a cease and desist letter after reportedly discovering that more than 50 Amazon sales representatives had sent more than 1,000 messages to eBay sellers to try to woo them over to Amazon Marketplace. Amazon issued a statement saying it is conducting a thorough investigation of the allegations.
Last Month, Danske Bank acknowledged failing to prevent suspected money laundering at its Estonian branch. The CEO resigned after the release of an internal report on unusual money flows coming from the bank’s Estonian branch. The 87-page report, prepared by lawyers hired by the bank, found misconduct stretching from 2007 to 2015 at the branch, and estimated that total flows of 200 billion euros, or $234 billion, could be unlawful. It said that the bank received and ignored repeated warnings from regulators and employees over its accounts from entities not living in Estonia, including a 2007 warning from the Russian central bank that “tax and custom payments evasion” was flushing through the bank. Russian authorities also said they suspected “criminal activity in its pure form, including money laundering,” estimated at “billions of rubles monthly.” The bank didn’t react to the warnings and allowed the flow of money from suspected criminals from ex-Soviet countries into the legitimate international banking system. In 2013, JPMorgan, the Estonian branch’s correspondent bank for clearing dollar transactions, ended the relationship because of the American lender’s concerns with the nonresident portfolio. That prompted Danske Bank to start a review of its clients, but the review was never concluded. And since there was already a report that explained everything, this whole mess has finally caught the attention of US regulators. In a statement on its website, the Danish lender said it was cooperating with the Department of Justice in a criminal investigation.