End of Easy
…..Rate hike coming and that right soon. Prepare for the end of easy. ISM services stay strong. Sessions recusal. Pence private email. EPA budget cut. After multiple sticks, Wilbur Ross offers Mexico a carrot. Visa for Eurozone. May chastises Scots. Spotify grows. Making money in a Snap. Mercedes made a pickup truck, and you can’t have it. Banks reap record profits. Amazon’s typo crashes the internets.
Financial Review by Sinclair Noe for 03-03-2017
DOW + 2 = 21,005
SPX + 1 = 2383
NAS + 9 = 5870
RUT – 1 = 1394
10 Y + fraction = 2.49%
OIL + .58 = 53.19
GOLD + .30 = 1234.30
The S&P 500 and Nasdaq posted their sixth consecutive week of gains this week. The S&P gained 0.7% for the week. The Nasdaq ended the week with a 0.4% gain. The Dow finished the week 0.9% higher, booking a fourth consecutive weekly gain.
Janet Yellen delivered a key speech in Chicago. This was the Fed chairwoman’s last chance to shift market expectations before a mid-March Fed meeting. There will be essentially a blackout period on policymakers public appearances. Under Yellen’s leadership, the Fed has always given the markets clear guidance when it was going to raise interest rates and has not moved unless there is at least a 70% chance of a move being priced in by futures markets. Yellen was straightforward, she expects to raise rates this month, barring any unpleasant economic surprises. Rates remain at a low level by historical standards, supporting economic growth by encouraging borrowing and risk-taking. But Fed officials have increasingly concluded that the economy is nearing the end of its recovery from the 2008 financial crisis, and that maintaining low rates could increase growth to an unsustainable pace. In the past week or so, we have had a steady stream of Fed officials making hawkish calls.
Fed Vice-Chair Stanley Fischer also delivered a speech, effectively putting a cherry on top of the rate hike message. Fischer was asked about comments by other Fed officials this past week that have boosted market odds of a March rate hike. He replied: “If there has been a conscious effort (to raise expectations for a rate hike) I’m about to join it.”
Just to refresh your memory; the Fed does not raise interest rates at the beginning of a business cycle, rather it comes at the latter stages of the cycle, and you could argue that the higher rates actually hasten the end of the cycle, but that is a chicken-egg debate, the point is that the business cycle has not been repealed and the current cycle is old. We have seen recessions following tightening cycles, most recently in 2000 and 2008, but it doesn’t hold that tightening cycles cause recessions. What does follow tightening cycles is a period of market indecision and traders and investors digest the implications of higher rates – this usually plays out over about a 12-month period. The last 2 rate hikes were so small and so gradual that they barely registered, but that looks like it could change this year.
Financial stocks posted strong gains this week because rising rates tend to boost bank profits – not like they really need the help. American banks raked in record profits last year. Not only did the banking industry notch its third year of record profits in the past four, but FDIC statistics published this week showed that loan growth was strong and the number of “problem banks” fell to a seven-year low. Yellen told Congress last month that US banks are “quite profitable” and considered “quite strong relative to their counterparts.’ Yellen credited the fact that American banks quickly built up capital after the crisis, “as a result of our insistence they do so.”
The Institute for Supply Management said its non-manufacturing index rose to 57.6% last month from 56.5% in January. Any reading over 50% signals that more businesses are expanding instead of contracting.
Attorney General Jeff Sessions said he’ll recuse himself from any current or future investigations related to President Donald Trump’s election campaign amid backlash over his testimony about contacts with Russia. Sessions said he did nothing wrong by failing to disclose that last year while he was a senator and Trump’s campaign ally, he met Russia’s ambassador.
Vice President Mike Pence regularly used personal email to conduct public business while serving as governor of Indiana. The private email account was first reported by the Indianapolis Star, which also reported that the AOL account was compromised last year by hackers. The paper cited emails obtained through a public-records request. Pence used that account to discuss matters ranging from security at his residence to how the state was responding to terror incidents around the world.
The White House is proposing to cut a quarter of the EPA’s budget, targeting climate-change programs and those designed to prevent air and water pollution like lead contamination.
Mexico’s economy minister went to Detroit today. In a speech to the Detroit Economic Club, Ildefonso Guajardo said Nafta needed to be updated. He doesn’t agree, however, that the US auto industry has gotten the short end of the stick. Topics including labor and environmental standards are among those Guajardo is ready to renegotiate. However, Mexico will not accept any tariffs passed by the US regarding the exchange of goods across the border. The Mexican peso rallied after U.S. Secretary of Commerce Wilbur Ross said a new mechanism should be created to stabilize the exchange rate. Ross said the peso could recover “quite a lot” if the US can reach a sensible agreement with Mexico on the Nafta.
Visa, don’t leave home without it. The European Parliament has passed a nonbinding resolution calling for the reintroduction of visa requirements for American citizens, raising the stakes in a long-running battle over the United States’ refusal to grant visa-free access to citizens of five European Union countries. European lawmakers played tit-for-tat in their dispute with the United States, demanding restrictions on American travelers unless the Trump administration lifts travel requirements for citizens of Bulgaria, Croatia, Cyprus, Poland and Romania.
The Scottish National Party is calling for a second referendum to vote on staying in the Euro Union, a move that could potentially break up the United Kingdom, which is moving ahead with Brexit. Today, British Prime Minister Theresa May took aim at Scotland’s ruling party, accusing nationalists of sacrificing not only the United Kingdom but also Scotland with its “obsession” with securing independence. May said: “A tunnel vision nationalism, which focuses only on independence at any cost, sells Scotland short.” Remarkably, May delivered her speech in Glasgow without any sense of irony.
Samsung Group leader Jay Y. Lee will go on trial for bribery and embezzlement on Thursday, for his role in a corruption scandal that has rocked South Korea and led to the impeachment of the president. Lee, the 48-year-old third-generation leader of the country’s top conglomerate, was indicted Tuesday on charges including pledging $37 million in payments to a confidante of President Park.
Spotify hit 50 million paid subscribers. The streaming music service said it grew 25% in less than six months, extending its lead over its closest rival Apple Music, which had about 20 million subscribers in December. Stockholm-based Spotify remains unprofitable.
Snap Inc. had a monster debut. Shares of the social-media company shot up 44% in their market debut to close at $24.48 a share, giving Snapchat’s parent company a market cap of more than $33 billion. Snap is now bigger than Macy’s ($10 billion), Twitter ($11.3 billion), American Airlines ($23.6 billion), and Target ($32.9 billion).
The Snap IPO made many people very rich yesterday; the company’s two founders are now worth an estimated $5.3 billion. And a high school in Mountain View, California also had a big day. Four years ago, Saint Francis, a private Catholic school invested $15,000 in the L.A.-based tech company. That investment was sold yesterday for about $24 million.
Costco reported fiscal second-quarter net income that missed estimates, and Costco shoppers will have to pay more. Starting June 1, annual membership fees for individual, business and business add-on members in the U.S. and Canada will rise $5 to $60. Executive memberships in the U.S. and Canada will increase from $110 to $120. Overall, the fee increases will affect around 35 million members.
Boeing has accepted 1,880 voluntary layoffs from its union workers in the Seattle area, as part of the planemaker’s drive to cut costs through job reductions and other measures.
Daimler, parent of Mercedes-Benz, says it is bringing the latest concept version of its first pickup to the Geneva Motor Show later this month as a luxury midsize model. It will likely become the coolest new pickup truck that Americans won’t ever be allowed to buy – the Mercedes-Benz X-Class. When it hits showrooms later this year, X-Class will be sold in what Mercedes says are a bunch of “key markets,” and the U.S. isn’t included (for the moment).
About 308,000 Mercedes-Benz vehicles across the United States will soon be recalled because of a potential fire hazard. The problem has been linked to 35 car fires. Daimler, determined that there’s an issue with an engine part that can cause an electrical fire. The recall will include certain C- and E-Class vehicles, as well as CLA, GLA and GLC vehicles.
The Financial Stability Oversight Council met late on Thursday afternoon to review its designation of a nonbank firm as “too big to fail,” according to a statement from the Treasury Department. While it didn’t name the firm, only three nonbank companies have been labeled as SIFIs to date: American International Group, Prudential Financial and MetLife.
Earlier this week, much of the internet ground to a halt when the servers that power them suddenly vanished. The servers were part of S3, Amazon’s popular web hosting service, and when they went down they took several big services with them. Amazon said it all started with a typo. On Tuesday morning, members of the S3 team were debugging the billing system. As part of that, the team needed to take a small number of servers offline. “Unfortunately, one of the inputs to the command was entered incorrectly and a larger set of servers was removed than intended,” Amazon said. “The servers that were inadvertently removed supported two other S3 subsystems.” The subsystems were important. Amazon said that one of them “manages the metadata and location information of all S3 objects in the region,” and without it services that depend on it couldn’t perform basic data retrieval and storage tasks. And suddenly the cloud seemed very vulnerable.
It’s the first Friday of a new month which sometimes but not always brings the government employment report. Today is one of those sometimes days, and the February data won’t be out until next week.