…..Dow record high. Yellen says rates won’t have to rise all that much further. Bonds also move higher. Emerging markets also move higher. Beige Book sounds more upbeat. Bank of Canada boosts rates. Mortgage apps fall. Google wins case in France. Lula guilty in Brazil.
Financial Review by Sinclair Noe for 07-12-2017
DOW + 123 = 21,532
SPX + 17 = 2443
NAS + 67 = 6261
RUT + 11 = 1424
10 Y – .03 = 2.33%
OIL – .10 = 45.39
GOLD + 2.80 = 1221.00
The Dow Industrials took out the record high of 21,528 from June 19, also hitting an intraday high of 21,580 today. The Dow Transportation Average closed up 116 at a record high 9716. Treasuries rallied and the dollar retreated after Janet Yellen signaled the Federal Reserve won’t rush to tighten monetary policy as inflation remains persistently below target. The Fed chair made no mention of asset prices just a week after her comment that some looked “somewhat rich”. Yellen expressed confidence in the American economy while suggesting inflation rates won’t force the Fed’s hand. Yellen said the Fed was paying close attention to the recent weakness in inflation. While emphasizing that she expected prices to start rising more quickly, she said persistent weakness could lead the Fed to raise interest rates more slowly. Yellen declined to specify when the Fed intended to start reducing its bond holdings. Yellen’s term as Fed chairwoman ends in February, and she avoided several questions about her plans. The Trump administration is in the early stages of its selection process and has not ruled out Yellen’s reappointment, although the choice of a new Fed chief is regarded as the more likely outcome. The key takeaway from the testimony today, Yellen said interest rates are rising, and “would not have to rise all that much further” to reach what the Fed considers a neutral rate, or the level at which rates are neither expansionary nor contractionary – everything is just on an even keel. Wall Street loves a dovish tone.
Besides stocks, the most visible beneficiary of Yellen’s remarks was the bond market. Yields on benchmark 10-year Treasuries fell the most in almost a month as bond prices jumped. The rally was a bit of a relief for a market that has been under siege in recent weeks. Besides the potential for a slower pace of rate hikes, bonds also benefit from a slower pace of inflation, which preserves the value of fixed payments over time.
Another big winner was emerging-markets. The MSCI Emerging Markets Index of stocks and the MSCI EM Currency Index both jumped the most since mid-March. The thinking here is that a slower pace of Fed rate hikes will weigh on the dollar and preserve the relatively wide gap between U.S. and developing-nation bond yields, further boosting the appeal of emerging-market currencies. The weakening greenback combined with higher interest rates in developing nations has triggered record inflows to emerging-market funds in the first half of 2017.
While the Fed’s Beige Book is routinely ignored by the market, especially on blockbuster days like today when Janet Yellen turns dovish again, this time there were several notable highlights in the just released July edition, not least of all the apparent downgrade of the low end of overall economic activity, which for the first time described the pace of growth as “slight to moderate” versus its staple “modest to moderate.” Of note, while the Fed described consumer spending as “rising across a majority of Districts, led by increases in non-auto retail sales and tourism” it did caution that there appears to be “some softening in consumer spending, particularly in auto sales which declined in half of the Districts.” On the topic of employment and wages, the Beige Book noted that “most of the nation maintained a modest to moderate pace of expansion, although the Atlanta and St. Louis Districts noted flat employment levels.” On the whole, however, labor markets tightened further, particularly in the construction and IT sectors. The Fed also observed that there were reports of a shortage of qualified workers across a broad range of industries “which had limited hiring.” Apparently, it has still not dawned on anyone that one can overcome such shortages by raising wages. Several Districts reported higher construction materials costs and freight prices. It also warned that “low agricultural prices were causing stress for some farmers, although some food retailers reported improved margins due to lower commodity prices.” Meanwhile, not surprisingly, “home prices continued to increase in most Districts” while “retail prices held steady or slightly increased.”
The Bank of Canada boosted its benchmark rate to 0.75 percent from 0.5 percent. Canada is in the midst of one of its strongest growth spurts since the 2008-2009 recession, with the expansion accelerating to an above-3 percent pace over the past four quarters. That’s the fastest among G-7 countries and double what the central bank considers Canada’s capacity to grow without fueling inflation.
Mortgage application activity recorded its steepest drop since December as interest rates on 30-year fixed-rate home loans climbed to their highest level in nearly two months. The Mortgage Bankers Association index for mortgage applications fell to 391.9 in the week ended July 7, down 7.4 percent from the prior week. Interest rates on conforming 30-year fixed-rate mortgages climbed to 4.22 percent, its highest since the May 12 week and up from the prior week’s 4.20 percent.
A French court says Google does not have to pay $1.3 billion in back taxes. At issue was whether Google had avoided taxes in France by routing sales in the country through an Irish-based subsidiary over a five-year period ending in 2010. An administrative court in Paris ruled that the Irish unit was not taxable in France. Google has faced a series of legal challenges across Europe, with many of them focused on the company’s tax and competitive practices. Last month, European regulators levied a record $2.7 billion fine against Google for favoring its products over those of its competitors on its powerful search engine. European Union officials also brought charges against Android, Google’s mobile operating system, saying the company had forced cellphone manufacturers to install Google services, like mobile search, on the phones.
Google, Facebook, Netflix, Amazon and hundreds of smaller tech companies coordinated a huge online protest today against the Federal Communications Commission’s plan to scrap net neutrality rules, which guarantee that broadband service providers treat all internet traffic equally. The tech companies want the rules to remain to protect them from unfair treatment by broadband providers like Comcast or AT&T, which could create faster delivery lanes for some websites and not others. Silicon Valley approached this fight against the Trump administration’s plans its own way — by taking to the internet. Some of the biggest users of internet lanes were at the forefront. Netflix, which depends on free and open internet lanes to transmit its streaming video, had a small banner ad on its home page reading “Protect Internet Freedom. Defend Net Neutrality. Take Action,” which linked to the net neutrality information page of its trade group, the Internet Association.
The former president of Brazil, Lula da Silva, was found guilty of corruption and money laundering on Wednesday and sentenced to nearly 10 years in prison. The case against Lula, who served as president from 2003 to 2010, stemmed from charges that he and his wife illegally received about $1.1 million in improvements and expenses from a construction company for a beachfront apartment. In exchange, prosecutors said, the company was able to obtain lucrative contracts from Petrobras, the state-controlled oil giant. Lula’s Workers’ Party lost the presidency last year when the Senate impeached his handpicked successor, Dilma Rousseff. Brazil’s current president, Michel Temer, was charged last month with corruption. Eduardo Cunha, the former speaker of the House, was sentenced in March to 15 years in jail for money laundering and corruption uncovered during the Petrobras investigation. A majority of the Brazilian congress has either been convicted, charged or under investigation for corruption. Lula presided over a period of robust economic growth in Brazil and remains a widely popular figure, credited with leading a social transformation that lifted millions from poverty in a nation with one of the world’s biggest disparities between rich and poor. Despite the corruption allegations against him and his party, Lula has been leading in recent public opinion polls on the election. He remains free pending appeal.
A new cancer drug from Novartis won enthusiastic support from a federal advisory panel on Wednesday, paving the way for approval of the first US gene therapy. The panel unanimously recommended that the Food and Drug Administration approve the drug for patients ages 3 to 25 with relapsed B-cell acute lymphoblastic leukemia (ALL), the most common form of U.S childhood cancer. The drug uses a new technology known as CAR-T, or chimeric antigen receptor T-cell therapy, which harnesses the body’s own immune cells to recognize and attack malignant cells. In a clinical trial, 83 percent of patients who had relapsed or failed chemotherapy achieved complete or partial remission three months post infusion. After one year 79 percent of patients were still alive.