Financial Review

Before the Deluge

…Stocks trade in range. Apple’s big yawn. Beige book slightly dovish, but hawks will rule the FOMC. PPI slips. Middle class claws back to 1999. Businesses fight tariffs. Dimon is not running (wink, wink). Flo in the wings.

Financial Review by Sinclair Noe for 09-12-2018

DOW + 27 = 25,998
SPX + 1 = 2888
NAS – 18 = 7954
RUT – 2 = 1715
10 Y – .01 = 2.96%
OIL + 1.05 = 70.30
GOLD + 8.00 = 1207.10

 

So far in September, the Dow is up a fraction, the S&P 500 is down a fraction, but the Nasdaq Composite is down about 2.25%. For a long time, the Nasdaq, or more specifically tech stocks, or more specifically, the FAANG stocks, provided market leadership. The recent pullback is not a catastrophe, but it raises the question about where the market is going and which stocks are leading the way, if any. Right now, it is difficult to see any sector that looks like it could challenge the recent performance of the FAANGs. Without leadership, the broader market is like to trade in a range, at least for a while.

 

Apple just wrapped up its iPhone launch event, introducing three new phones and updating the Apple Watch line. Apple shares fell 1% in afternoon trade and were trading 3% below the Sept. 4 record close of $228.36. The shares have still run up 31% year to date. Fitbit shares dropped nearly 7% today. The newest version of the Apple watch supports the ability to take an electrocardiogram from the wrist.

 

Six major Web companies and internet-service providers, including AT&T, Twitter and Alphabet’s Google, will detail their consumer data privacy practices to a U.S. Senate panel on Sept. 26. Data privacy has become an increasingly important issue, fueled by massive breaches that have compromised the personal information of millions of U.S. internet and social media users, as well as breaches involving large retailers and credit reporting agency Equifax

 

Two weeks before a Federal Open Market Committee meeting by Federal Reserve policy makers, the Fed publishes the Beige Book, a collection of informal observations of the economy from across the country. While the overall U.S. economy expanded at a “moderate pace,” trade concerns and a lack of workers delayed projects. There were also “some signs of a deceleration” in prices of final goods and services. Three of the Fed’s 12 districts — St. Louis, Philadelphia and Kansas City — reported weaker growth in August.

 

Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers. Still, wage growth remained “modest to moderate” as firms tried to use benefits to attract employees. Concerns about trade seen over the summer have now morphed into some businesses deciding to “scale back or postpone capital investment.” While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations, but it doesn’t look like inflation is a big problem and the economy is certainly not overheating. Still, look for the Fed to hike interest rates at the next FOMC meeting in 2 weeks, and look for a few more Fed officials to make the case for holding off on further tightening.

 

With economic growth strong, unemployment at 3.9 percent and inflation near the Fed’s 2-percent goal and looking likely to stay there, further gradual interest rate hikes are likely to be appropriate over the next year or two, Fed Governor Lael Brainard told the Detroit Economic Club, echoing recent comments from Fed Chair Jerome Powell and others. But she went further, arguing that the ceiling for interest rate hikes may be higher than commonly thought. In her view, made clear in the speech, stimulus from tax cuts and government spending under Trump are lifting the neutral level of interest rates. This is the level that allows investment and hiring to continue unimpeded, and a rise in it gives more headroom for the central bank to lift rates without slowing growth.

 

Earlier today, the Labor Department reported the producer price index declined by 0.1% last month. The drop in wholesale prices was the first since February 2017. One big caveat: The decline was tied to lower margins for services such as retail and transportation. Still, the increase in wholesale inflation over the past year also fell to 2.8% from 3.3%, perhaps a better indication that upward pressure on prices may be leveling off. Today’s results will not raise any concerns over tomorrow’s consumer price report…. Risks over inflation appear to be concentrated in the labor market and not the general economy, at least for now.

 

The Trump administration has stepped up its communications with China over trade. The invitation from senior U.S. officials led by Treasury Secretary Steven Mnuchin was sent to Chinese counterparts. The outreach comes as the Trump administration prepares to activate tariffs on $200 billion worth of Chinese goods, hitting a broad array of internet technology products and consumer goods from handbags to bicycles to furniture. So far, the United States and China have hit $50 billion worth of each others’ goods with tariffs in a dispute over U.S. demands that China make sweeping economic policy changes, including ending joint venture and technology transfer policies, rolling back industrial subsidy programs and better protecting American intellectual property.

 

Trump last week said that in addition to preparing tariffs on another $200 billion worth of goods, he had tariffs on another $267 billion worth of goods “ready to on short notice if I want.” U.S. business groups are escalating their fight against Trump’s tariffs, with over 60 industry groups launching a coalition to put political pressure on the Trump administration to seek alternatives to tariffs.

 

The US Census reports middle-class income rose to the highest recorded levels in 2017 and the national poverty rate declined. The median U.S. household earned $61,372 last year, meaning half of the families in the country brought in more income than this and half earned less. Crossing the $61,000 mark signals the American middle-class may have finally earned more than it did in 1999, although the Census Bureau cautions that median income last year was not statistically different from 1999 or 2007, the last year before the recession. A change in methodology in 2013 makes precise comparisons difficult. All the income figures have been adjusted for inflation and are reported in 2017 dollars.

 

The Census Bureau also reported that the U.S. poverty rate declined modestly to 12.3 percent, the lowest level in more than a decade and a sign the economic devastation from the Great Recession is subsiding. But by other measures, the economy is still not working as well as it could for everyone. Inequality remains near the highest levels in the modern era, according to various metrics the Census Bureau tracks, and the share of Americans without health insurance stalled last year after several years of progress to extend coverage. Much of the income growth in recent years is from people getting jobs again, but wage growth has been disappointing.

 

New York is now the top financial center in the world, according to a new survey from the Z/Yen global financial centers index, which ranks 100 financial centers on factors such as infrastructure and access to quality staff. New York took first place because of the quality of their subway system I suppose, followed by London, Hong Kong and Singapore. London’s ranking fell by eight points from six months ago, the biggest decline among the top contenders. The survey’s authors said the drop reflected the uncertainty around Brexit.

 

During an event at JPMorgan headquarters in New York today, Dimon said: “I think I could beat Trump, because I’m as tough as he is, I’m smarter than he is. I would be fine.” All right, it is not a stretch to think that Dimon (or a log) is smarter than Trump, and it is pretty clear that humility is not a prerequisite for the job. Dimon says he is tough enough: “He could punch me all he wants, it wouldn’t work with me. I’d fight right back.” Dimon went on to say that he is not running for president, but he would win if he did, but he isn’t running. Even though it sounds like he is running. Which might be a sign of the apocalypse.

 

Goldman Sachs broke a record today. The stock fell for the 11th day in a row, its longest consecutive-day losing streak dating back to the company’s initial public offering in May 1999. Goldman’s second longest losing streak was a nine-day slide in May of 2008. The stock is down about 10 percent this year.

 

Hurricane Florence is now bigger than the entire state of North Carolina. Florence’s winds on Wednesday covered an area more than 73,000 square miles — greater than North Carolina’s size of 53,819 square miles. Tomorrow morning, the hurricane will start hitting the state. The hurricane is predicted to bring up to 40 inches of rain and 13 feet of storm surge, levels deemed “catastrophic” by experts. Florence’s storm surge — seawater forced inland by the power of the storm — could prove “life-threatening” and lead to “catastrophic” flash flooding far inland. Mandatory evacuation orders are in place in coastal areas of North Carolina, South Carolina, and Virginia. Florence is now about 350 miles from the Carolina coast. The hurricane is slowing down as it approaches land. The eye of the hurricane is expected to make land Friday evening or maybe Saturday morning. In one model, Florence edges right up to the coast and then crawls along the coastline south to Georgia before moving inland. This scenario would do maximum storm surge damage, producing catastrophic inland rainfall flooding. Florence’s remnant may linger in parts of the East into early next week.

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