Financial Review

Closing in on 3%

….Bond prices fall. Fed may have 4 hikes in 2018. Existing home sales pick up in March. Job openings but no raises. Alphabet beats big.

Financial Review by Sinclair Noe for 04-23-2018

 

DOW – 14 = 24,448
SPX + 0.15 = 2670
NAS – 17 = 7128
RUT – 2 = 1562
10 Y + .02 = 2.98%
OIL + .53 = 68.93
GOLD – 11.00 = 1325.20

 

Bond prices fell, with the 10-year note yield hitting its highest in over four years – topping 2.98%. The reason for the selloff? Take your pick: the growing supply of government debt, accelerating inflation, higher oil and commodity prices, trade policy concerns. Also, the Fed is raising its short-term lending rate as the U.S. economy strengthens, after holding it near-zero in the wake of the financial crisis. The three rate hikes last year pushed up two- and five-year Treasury yields in particular, but they’ve also affected 10-year yields as central bankers expect more boosts this year. Higher yields make the burden of everything from mortgages to student loans and car payments even heavier – and that slows the economy – or in the Fed’s view, it is a way to prevent the economy from overheating. The market is finally coming around to the idea that the Federal Reserve this year will be raising interest rates a total of four times. the fed funds futures market, as of this morning, gave almost a 50 percent probability that the central bank will have 3 more rate hikes this year for a total of 4. The CME’s FedWatch tool, which has been a reliable gauge of the Federal Open Market Committee’s actions, assigned a 48.2 percent chance.

 

If you’re not familiar with the bond market, let’s review the basics. A bond’s yield is a measure of the return an investor can expect from buying it. It’s determined by the bond’s interest rate and the price paid for it. For instance, buying a security that pays a fixed 2 percent (the “coupon”) at face value (known as “par”) results in a yield of 2 percent. Buying it at a cheaper price would raise the yield for the investor, while paying a premium would reduce the overall yield. (Maybe the most confusing aspect of the bond market to outsiders is the inverse relationship between price and yield.) The easy formula is price up-yield down, and price down-yield up.

 

If you’re wondering what might come next, 3.05 percent is the highest intraday level since 2011, set on Jan. 2, 2014. Once past that mark, there’s no obvious support, if you’re looking to seven years ago for guidance. That year, the 10-year yield fell from as high as 3.766 percent to as low as 1.67 percent as the U.S. credit downgrade rocked markets. Since 2011, that 3% level been touched only twice, briefly, in 2013 and early 2014, before a bond bull market drove yields to record lows. But 3 percent has also been cited as critical to determining whether the three-decade bull market in bonds is at an end. In the mind of analysts who look at market patterns, once the yield breaks much beyond the 3.05 percent, to levels last reached in 2011, that threshold could flip to a floor from a ceiling.

 

The 10-year Treasury yield is a global benchmark for borrowing costs. Corporations will have to pay more to issue debt, which they’ve done cheaply in recent years. So will state and local governments, which could jeopardize investments in public infrastructure. Homeowners will face higher mortgage rates (or lose out on refinancing at a lower cost). Taking out loans for cars or college could also become more expensive. If you invest in bond funds, things could get painful. The value of a fixed-income fund’s shares are determined by the price of the bonds it holds — and as yields rise those prices will fall. The impact on stocks is a bit more tricky. In theory, higher corporate borrowing costs would erode a key element of companies’ profitability. But they’re also getting a windfall from the Republican tax plan. The area to watch is high-dividend stocks, which have served as bond proxies for years since they offered high fixed payments. Back in February, yields moved close to 3% and that ignited a sell-off in stocks. Stocks wobbled again in March but have mostly stabilized.

 

China said Sunday it would “welcome” direct trade talks with the United States, a day after US Treasury Secretary Steven Mnuchin said he would consider a trip to China. The world’s two biggest economies have threatened each other with tariffs. Meanwhile, Mexico and the European Union agreed on a new trade deal over the weekend. The deal removes virtually all tariffs on goods, and marks a move by Mexico to reduce its reliance on trade with the United States. It also opens the door for companies in the European Union or Mexico to bid for government contracts in the other.

 

Meanwhile, the United States gave American customers of Russia’s biggest aluminum producer more time to comply with sanctions, and said it would consider lifting them if Russian tycoon Oleg Deripaska, the majority shareholder of Rusal, ceded control of the company.

 

The National Association of Realtors reports sales of previously-owned homes rose 1.1% in March, but were 1.2% lower than a year ago. Existing-home sales were at a 5.60 million seasonally adjusted annual pace in March. Such a brisk selling pace is surprising given how lean inventory is. Homes stayed on the market an average 30 days in March; at the current pace of sales, it would take 3.6 months to exhaust available inventory, down sharply from the long-time average of 6 months. The median price for homes sold in March was $250,400, up 5.8% compared to a year ago. First-time buyers made up 30% of all transactions in March, up a tick from 29% in February, but well below the 40% share they’ve historically enjoyed.

 

According to a new survey from the National Association of Business Economists, some 90% of American companies have job openings, but shortages of skilled labor are the worst in a decade. Only a little over one-third say they have increased pay. Another third say they have trained current employees so they could be promoted into new jobs. And a quarter of firms have invested in labor-saving processes such as automation. One thing most companies say has not affected hiring plans: the Trump tax cuts. Only 11% of respondents said they would hire more people because of lower corporate tax rates.

 

The flash IHS Markit U.S. manufacturing PMI climbed to 56.5 this month from 55.5 and touched a three-and-a-half-year high. Readings over 50 indicate expansion. A similar survey of service-oriented businesses that employ most Americans also rose. It edged up to 54.4 from 54.

 

Oil futures gave up earlier losses to turn higher ahead of the settlement on the New York Mercantile Exchange.

 

S&P 500 companies are expected to report their strongest first-quarter profit gains in seven years. Of the 87 companies that have reported so far, 79.3 percent have topped profit expectations, according to Thomson Reuters data.

 

Google’s parent company Alphabet reported its first quarter financial results after the closing bell, posting earnings of $13.33 per share on $31.15 billion of revenue. Those numbers beat analyst expectations of $9.30 per share on $24.75 billion in revenue, respectively. The company’s revenue reflects a 26% jump over last year’s levels, or 23% on a constant currency basis. Google’s ads business posted $26.6 billion in revenue for the first quarter and still pumps out big profits. Traffic acquisition costs were up to $6.3 billion in Q1 2018 versus $4.6 billion in Q1 2017.

 

Because of a new accounting rule, Alphabet had to report the unrealized gains and losses from its investments in companies like Uber, and reported a $3 billion gain on equity securities. Operating losses from Google’s Other Bets, which include business segments such as its health tech-focused Verily and Google Fiber, decreased from $703 million in Q1 2017 to $571 million in Q1 2018. Google’s other revenues, which include its cloud division and hardware sales such as smartphones and the Nest line of home automation technologies, rose from $3.2 billion in Q1 2017 to $4.4 billion in Q1 2018.

 

Hasbro reported revenue of $716 million, down from $849 million last year and $100 million short of estimates. Hasbro reported a loss of $112 million, or 90 cents per share. In addition to anticipated problems stemming from the Toys ‘R’ Us liquidation, Hasbro said “inventory overhang” in Europe drove down revenue in the company’s first-quarter results. HAS + 4%

 

Germany’s Fresenius is ditching its plan to buy generic drugmaker Akorn (akrx) following allegations of breaches of FDA data integrity rules. AKRX – 33%

 

Henry Schein (HSIC): Shares climbing in early trade. The health care products maker is going to spin off and merge its animal health business with startup Vets First Choice, an online platform for veterinarians. HSIC + 6.8%

 

Merck shares are rallied following a rare double-upgrade by Goldman to Conviction Buy, citing its Keytruda lung cancer breakthrough. MRK + 2.4%

 

Sears CEO Eddie Lampert has proposed a deal between the retailer and his hedge fund, ESL Investments, to raise cash for the department-store chain. In a letter dated April 20, Lampert proposed that ESL Investments purchase Sears’ Kenmore brand, its home-improvement business, its Parts Direct division, and some of the company’s real estate. So, the idea is to strip away the most high profile brands and prime real estate, leaving nothing but a shell. Sears’ shares spiked about 8%.

 

Walmart is reported close to finalizing a deal to buy a majority stake in Flipkart Online Services, India’s leading e-commerce company, for at least $12 billion. Stars Group, Toronto-based operator of PokerStars, announced the $4.7-billion purchase of Sky Betting & Gaming on Saturday.

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