FOMC leaves rates unchanged. No surprise. Brexit scares. PPI inches up. Industrial production inches down. California is #6. BofA fires. Office Depot hires. Coffee best served tepid.
Financial Review by Sinclair Noe for 06-15-2016.
DOW – 34 = 17,640
SPX – 3 = 2071
NAS – 8 = 4834
10 Y – .02 = 1.60%
OIL – 1.00 = 47.49
GOLD + 6.00 = 1292.50
It’s Fed Day. The Federal Open Market Committee (the FOMC) released a policy statement leaving the fed funds rate unchanged at 0.25 percent to 0.5 percent, in the first unanimous decision since January. The FOMC statement read: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” The Fed expressed confidence that jobs will rebound, saying that it expects “labor market indicators will strengthen.” It said that the “drag from net exports appears to have lessened” and housing has improved, while business fixed investment has been “soft.”
At the start of the year, the Fed was projecting up to 4 rate increases in 2016; they have now revised that down to 2 rate hikes. The median long-run projection for the federal funds rate fell to 3 percent from 3.3 percent in March. Most market watchers do not expect a rate hike in July, although that is subject to change between now and then, if we see a really significant pickup in economic data. The risk of the Fed prematurely raising interest rates at this point is extremely low. They are going to let this cycle lengthen and strengthen by keeping rates low. Unfortunately this means the economic data of the past few months has really been bad. Job gains and overall output have disappointed, projections of future growth have declined, and inflation expectations remain far short of targets. And if there is a Brexit next week, we may be wondering why the Fed didn’t cut rates.
The statement said the Fed continues to monitor global market risks but in a press conference following the release, Fed chair Janet Yellen said next week’s referendum in the U.K. on whether to remain in the European Union was a factor in the U.S. central bank’s decision to hold interest rates steady. The Bank of England has begun a series of extra market operations aimed at boosting bank funding around the referendum. The European Central Bank said last week the bank is prepared to offer euro liquidity.
The dollar extended losses, touching a 20-month low versus the yen. Fed Chair Janet Yellen said in a news conference, that while the currency is “certainly relevant” to Fed rate decisions, “I really would not go so far as to say it is a constraint on monetary policy.” Treasuries gained, with two-year note yields touching the lowest since February. Gold rallied again. Oil prices extended their losses for the fifth straight day, the longest losing streak since February. Goldman Sachs published a research note predicting the price recovery is likely to stall. The bank explained that the restart of Canadian production, prospects of a solution to Nigerian outages, larger-than-expected output from OPEC members, and the risk of smaller-than-expected production declines as result of higher crude prices are likely to temper price gains going forward.
With opinion polls showing momentum swinging to the “Leave” camp, British finance chief George Osborne is warning voters that he will increase taxes and cut spending if they decide to leave the bloc in next week’s referendum. Meanwhile, the world’s biggest banks are drafting senior traders to work through the night of June 23, which might be one of the most volatile 24 hours for markets since Black Wednesday of 1992. If it sounds like political fear mongering…, yea, that’s about right.
The Labor Department said its producer price index, a measure of prices at the wholesale level, increased 0.4 percent last month after rising 0.2% in April. In the 12 months through May, the PPI slipped 0.1% after being unchanged in April. The core PPI, a measure of underlying producer price pressures that excludes food, energy and trade services dipped 0.1% last month.
Industrial production fell more than expected in May on a decline in utilities output and auto manufacturing, a sign that the economy may be losing some steam in the second quarter. Industrial output declined 0.4 percent last month. American producers are still battling the fallout from the plunge in energy prices that has sapped the appetite for investment, while a strong dollar and slow global growth have weighed on exports. Manufacturers could find some relief as companies have trimmed stockpiles, leaving them with fewer goods on hand should consumer spending continue to climb.
Chinese stocks rose the most in two weeks today as investors shrugged off MSCI’s decision not to add mainland shares to its key Emerging Markets Index. This marks the third year running it has given Chinese A-shares the thumbs-down, given lingering concerns about market accessibility. MSCI noted that it would consider including the equities as part of its 2017 review, but did not rule out a potential off-cycle announcement.
California has overtaken France as the world’s sixth-largest economy, growing by 4.1% in 2015. The most-populous U.S. state, with a gross domestic product of $2.5 trillion, has also eclipsed recession-plagued Brazil. Irena Asmundson, chief economist of the California Department of Finance said, “This is the result of both good growth in California and exchange-rate movements of the dollar vs. other currencies.”
In an effort to make good on a pledge to cut its carbon output anywhere from 80 percent to 95 percent by 2050, Germany is mandating that new cars registered there will have to be emissions-free by the year 2030. The German government is planning to provide subsidies that it hopes will boost the sale of electric cars. In a plan similar to those in other countries, people who buy electric or hybrid cars would be eligible for cash incentives. The Environment Ministry is hopeful that the move will help to sell around 500,000 electric cars by the year 2020.
As many as 8,000 more jobs are set to go at Bank of America’s consumer arm as the digital banking revolution gathers pace and reduces the need for back-office staff and bank tellers. The biggest US retail bank by deposits also plans to add sales staff — including mortgage loan officers, small business bankers and personal investment advisers. Even so, the overall headcount is expected to decline by several thousand as the number of consumers who visit branches falls steadily.
Office Depot said it planned to hire 8,000 temporary and full-time workers during the busy back-to-school season. Office Depot said temporary staffing will rise by a third as it prepares for the increased customer traffic from July through September. Some of the new hires will help fulfill the “buy online, pick up in store” service that the company offers.
U.S. Senator Charles Grassley, chairman of the Senate Judiciary Committee, is urging federal antitrust officials to conduct a “careful analysis” of Dow Chemical’s proposed $130 billion merger with DuPont. Among the concerns: A decrease in farming competition, raising barriers to entry for smaller companies, hurting innovation and higher prices.
Google Fiber is looking to expand in Texas. The Alphabet unit is working with Dallas leaders to learn more about the city’s existing infrastructure, local topography and other factors that could impact the building of a fiber network. The service, which costs $70 per month, is already available in Austin and is set to roll out in San Antonio.
The U.S. and Venezuela are launching high-level diplomatic talks to ease tensions in the South American country amid deepening social and economic crises. Secretary of State John Kerry said the talks with Washington’s ideological foe would begin in Caracas “as soon as possible” and that the U.S. was looking at ways to provide assistance.
More political earthquakes in Brazil… The country’s Supreme Court has denied ex-president Lula da Silva a privileged legal protection, increasing the likelihood he will be arrested in connection with a corruption probe centered on the state run oil company, Petrobras. Meanwhile, Speaker Eduardo Cunha has lost his seat for allegedly lying about undeclared Swiss bank accounts and President Dilma Rousseff has been stripped of some perks, including her use of Air Force planes and hotel bill allowances.
A World Health Organization panel has elevated the Zika virus to a public health emergency, but spurned calls to postpone or move the 2016 Olympic Games, which are scheduled to begin in Rio de Janeiro in six weeks. Brazil is hosting the Games during its winter, when the concentration of mosquitoes that spread Zika and other viruses is low. The country is also intensifying its efforts to control mosquitoes around cities and event venues.
Twenty-five years after classifying coffee as a possible carcinogen leading to bladder cancer, the World Health Organization has reversed course, saying today that coffee is not a carcinogen, and has even been seen to reduce the risk of liver and uterine cancers. At the same time, however, they presented other scientific evidence which suggests that drinking anything very hot, over 150 degrees, including water, coffee, tea and other beverages, probably does cause cancer of the esophagus. Still, that might be the best news of the day.
Or maybe this: If you watch any NBA basketball, you are probably familiar with TBS sideline announcer Craig Sager; With his signature flamboyant suits and good-natured interviews between timeouts, Sager has become one of the most beloved figures in the NBA. Sager was diagnosed with acute myeloid leukemia in 2014, and said in March that the cancer was no longer in remission. The Turner-owned TNT broadcasts the playoffs through the conference finals, but the NBA Finals have been on ABC since 2003. For more than a decade before that, the series aired on NBC. Because he’s worked more than 30 years for Turner Sports, Sager has never worked the championship series. That will change tomorrow, when Sager joins ABC’s broadcast of game six of the NBA Finals between the Golden State Warriors and Cleveland Cavaliers.