….Record highs for Dow, S&P, Nasdaq, and Russell 2K. Fed minutes. Manufacturing win-win. Construction spending up. Car sales. Crude hits $61. Bombogenesis….
Financial Review by Sinclair Noe for 01-03-2018
DOW + 98 = 24,922
SPX + 17 = 2713
NAS + 58 = 7065
RUT + 17 = 1552
10 Y – .02 = 2.45%
OIL + 1.56 = 61.93
GOLD – 4.60 = 1313.50
Record highs for the Dow, S&P, Nasdaq, and Russell 2000. The Dow looks to be taking a bead 25k. The S&P cruises past 2700, while the Nasdaq popped through 7,000 and just kept running. Forget about the drama and dysfunction in Washington. Forget about geopolitical uncertainty. Forget about the cyclone bomb – the incredible cold weather blasting much of the country. Stocks just keep rolling higher without a worry – the Vix dropped below 9. Today marks only the fifth time in history that the Vix has dropped below 9. When the markets stop being fearful, it is usually time to be afraid.
The holidays provided a respite from economic data, but today featured a slew of news. Details of the Federal Reserve FOMC meeting on December 12th and 13th were published today. The Fed raised interest rates for the fifth time since the 2008 financial crisis, and the third time in 2017. Policymakers showed worry over the fate of currently low inflation and saw recent tax changes as providing a boost to consumer spending and probably add to capital spending, although officials were uncertain how financial stimulus might affect pricing pressures. The minutes of the Fed meeting show, “Most participants reiterated their support for continuing a gradual approach to raising the target range, noting that this approach helped to balance risks to the outlook for economic activity and inflation.”
They then mulled the dual possibilities that tax cuts or easy financial conditions could cause inflation pressures to build unduly, while at the same time also considering that actual or expected inflation may fail to rise to the Fed’s 2 percent target. The inflation shortfall is set to dominate incoming Fed Chair Jerome Powell’s first few months as chief of the central bank with further rate increases more difficult to justify without an upswing. He is set to take over from Janet Yellen by the time of the next rate-setting meeting on Jan. 31-Feb. 1. Look for the next rate hike at the Fed’s March meeting. At its December meeting, the Fed kept its forecast for three rate rises this year and in 2019 unchanged even as policymakers anticipated a short-term boost in U.S. economic growth from the Trump administration’s sweeping $1.5 trillion tax overhaul signed into law on Dec. 22. Although, new Fed Chair Powell will have to marshal the troops. There was a lack of unity with the projection.
The minutes portray two camps, of roughly the same size, who are both uncomfortable with the forecast — and for completely different reasons. One camp of a “few” officials, on the dovish side, believe that three rate hikes this year might be too aggressive. These officials argued that three rate hikes might prevent a “sustained” return to the Fed’s 2% inflation target. They said they didn’t think interest rates had much further to rise before reaching the level of rates that would no longer be “accommodative” or boosting growth. The other, more hawkish, camp of a “few” officials thought the forecast of three rate hikes was too slow. These officials noted that financial conditions had not tightened since the Fed started raising rates at the end of 2015 and that continued low rates risked financial instability.
Bank of America Merrill Lynch strategists wrote in a research note that the tax plan “could be a headwind to growth in 2019.” The strategists worry that higher returns could encourage competition and hurt profit margins and the Federal Reserve could raise interest rates more aggressively in response to faster growth. Lest you think BofA has turned bearish, they are calling for a 19% increase in the S&P 500 for 2018.
Manufacturing expanded in December at the fastest pace in three months. The Institute for Supply Management reports its factory index climbed to 59.7 from 58.2 a month earlier; readings above 50 indicate expansion. A gauge of new orders advanced to 69.4, the highest in nearly 14 years. The survey-based measure of manufacturing activity brings the 2017 average to 57.6, the best in 13 years. A common refrain from companies surveyed, though, was difficulty finding highly-skilled labor, and some firms are paying higher wages to attract the workforce needed. New orders outpaced production, pushing prices higher.
Construction spending rose 0.8% in November, to a seasonally adjusted annual rate of $1.26 trillion. The monthly gain was led by the private sector, where spending was up 1.0%. Construction outlays in the public sector were up only 0.2% for the month. Overall spending was 2.4% higher than in November 2016, and spending for the year to date was 4.2% higher than the same period a year earlier. September and October spending levels were revised up to a net 0.4% increase. In November, much of the gain was driven by residential building, which was 7.9% higher than a year ago. Construction of single-family homes was 8.9% higher. Outlays on transportation projects jumped 42% compared to a year ago.
The price of crude rose above $61 a barrel on Wednesday for the first time in two and a half years. Last month the Dallas Federal Reserve surveyed oil industry executives; they said they need to see oil prices at $61 per barrel to justify more shale exploration. Voila! If crude continues to climb and tops the $66 mark, even more corporate chiefs indicated they were ready to pile in.
Most major automakers reported lower December U.S. sales. GM reported a 3.3 percent drop in sales in December, driven by a decline in lower-margin fleet sales to government agencies and rental car companies. GM’s retail sales were up 1.8 percent. Ford reported a 0.9 percent increase in sales for December, fueled by a 17 percent increase in fleet sales. The No. 2 U.S. automaker said its retail sales were down 4 percent. Fiat Chrysler posted an 11 percent sales decrease, with retail sales dropping 3 percent. Toyota said its sales fell 8.3 percent in December, with decreases across all segments. Honda posted a 7 percent drop in sales in December, driven mostly by declining passenger car sales. Nissan reported a 9.5 percent drop in sales. Analysts say the industry likely sold less than 17 million new vehicles in 2018, which will be lower than the expected tally for 2017 and more than half a million vehicles shy of the all-time U.S. record of 17.55 million units in 2016.
The most-popular car is no longer a car. Excluding perennially popular pickup trucks, the best-selling models in the U.S. last year were both crossovers: Toyota’s RAV4 in first place, followed by Nissan’s Rogue. Still, passenger cars haven’t totally disappeared, with Toyota’s Camry winning the bronze medal in 2017 deliveries. Honda’s CR-V crossover and Civic compact car rounded out the top five.
Tesla delivered just 1,550 of its Model 3 sedans in the fourth quarter, widely missing estimates; the results made worse by CEO and founder Elon Musk’s assertion back in July that Tesla could hit a monthly production target of 20,000 Model 3s per month in December. The Model 3 is Tesla’s first mass-market vehicle starting at $35,000.
And just in case you were wondering about the strength of the global synchronized economic recovery theme… Germany’s jobless rate fell to a record low 5.5 percent, reflecting a boom in Europe’s largest economy. JPMorgan lifted its 2018 economic growth forecast for China to 6.7 percent, above the consensus of 6.5 percent.
Congress ran out of time last year to tackle the spending fight, instead opting to keep the government open with a stop-gap spending bill and pushing the debate into the new year. Lawmakers returning to Washington have less than three weeks before that current spending measure expires on Jan. 19. Congressional leaders and senior White House officials were back at the negotiating table today to iron out differences over spending on the Pentagon and other government agencies, with lawmakers hoping to avoid a further series of short-term patches.
You can’t get there from here. While the southwest is enjoying mild, near perfect weather, the rest of the country – not so much. The worst winter storm of the season has already knocked out power and canceled more than 1,600 flights. Next it threatens to bring more snow, ice and cold from Florida to Nova Scotia, including New York and Boston. Airlines have scrapped more than 1,600 Thursday flights so far. A blizzard warning has been issued for Boston, which could get 13 inches of snow. The city has closed schools Thursday. Snow has already fallen in Tallahassee, Florida. Snow was reported in Savannah, Georgia, while freezing rain and ice covered wide areas of the southern states. This storm may end up being worse than your average nor’easter. It could turn into a bomb, short for bombogenesis, a phenomenon that occurs when a system’s central pressure drops steeply — 24 millibars or more — in 24 hours. Only 3 days into the new year, and we have a new word to remember – bombogenesis.