Financial Review

Fed Jawbones Hawkish

The Fed talks hawkish, numbers don’t add up, Argentina skates, Puerto Rico under new colonial rule.

Financial Review by Sinclair Noe for 03-24-2016

 

DOW + 13 = 17,515
SPX – 0.77 = 2035
NAS + 4 = 4773
10 Y + .02 = 1.90%
OIL – .33 = 39.46
GOLD – 3.20 = 1217.40

 

The Fed last week slashed its expectation for rate hikes this year by 50 basis points, but public comments since have taken a more hawkish tone. The latest was yesterday, with St. Louis Fed President Jim Bullard suggesting April could work for the next boost in interest rates. However, he told reporters in a Reuters article he was undecided on whether to push for a rate hike at the Fed’s April meeting partly because of the limited amount of data expected before then. The dollar moved nicely higher, and oil slipped a bit lower. The pivot for the dollar and oil put pressure on equities.

 

The major averages ended a five-week win streak, falling about half a percent over four days that saw some of the lowest trade volume of the year so far. The U.S. stock market will be closed tomorrow for the Good Friday holiday, but the government still plans to release its final revision of fourth quarter GDP.  You might not expect much from a revision to the GDP number, tomorrow’s revised numbers are widely expected to confirm what we know already – that gross domestic product grew at an annual rate of just 1% in the final three months of 2015. And if you think it might affect trading, well the initial estimate can move markets but revisions rarely have that impact, especially when released on a day when markets are closed.

Plus, markets are once again betting on the odds of a next Fed rate hike. Last week Fed came out with a dovish dot chart pointing to just two rate hikes in this year, which was a major backtracking from the December view of four rate hikes. The dollar was sold across the board; however, this week Fed policymakers have hit the wires with hawkish comments indicating the Fed may be falling behind the curve.

 

Hence, investors are considering the possibility of a rate hike in April or June. Consequently, the final Q4 GDP figure would not matter much. However, low inflation is a concern and core PCE, which is scheduled for release along with the GDP, may set the tone in the USD tomorrow. Dollar bulls need to worry about a weaker‐than‐expected core PCE, rather than the final GDP figure. GDP and core PCE release could be non‐event for the markets, unless there is a major upside/downside revision.

 

Of course, the numbers might not really matter, at least according to a new report from CNBC; they looked at each quarterly report going back to 1990 and found an average error rate of 1.3 percentage points. So an initial report of 1 percent growth on average later would be revised to 2.3 percent or negative 0.3 percent. And the error rate in the second and third estimates of GDP are the same as the first. The findings raise warning signs for investors, policymakers and business executives about reacting too strongly to the initial government reports on economic growth. They also make some wonder if government data agencies should be better funded. Granted, it is a difficult job to try to measure the output of the entire economy but this new report suggests that we really have no idea what’s going on.

 

In economic news today, the number of Americans who applied for unemployment benefits in the week ending March 19 was little changed at 265,000. Initial claims have now been below 300,000 for 55 weeks, a feat last accomplished in 1973, when the size of the labor force was much smaller.

 

New orders for long-lasting manufactured goods fell in February as the sector continues to struggle with the lingering effects of a strong dollar and lower oil prices; this marks the third drop in the past 4 months. The Commerce Department said that orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, declined 2.8 percent last month after a downwardly revised 4.2 percent increase in January. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, decreased 1.8 percent after advancing by a downwardly revised 3.1 percent in January.

 

The first quarter Home Affordability Index from data provider RealtyTrac has some other sobering realities about housing affordability – or lack of it. Home price growth outpaced wage growth in most counties. And the problem is getting worse: more metropolitan areas are growing less affordable. The top five least-affordable counties were all in New York or California. Maricopa County came in fourth place among the most populated counties that are still considered affordable compared to their historic norms.

 

Arizona added 25,300 non-farm jobs in February and that helped push the unemployment rate down to 5.5% from 5.6% in January. In the past 12 months the state unemployment rate has dropped from 6.3% but Arizona still lags the national unemployment rate of 4.9%. Meanwhile, the Office of Employment and Populations Statistics forecasts 2.8% employment growth rate for Arizona over the next 2 years. Sectors with the largest expected gains are: Professional and Business Services, Educational and Health Services, Trade, Transportation and Utilities, Leisure and Hospitality, and Construction.

 

Wall Street deal makers are having their worst quarter since the financial crisis. Investment banks have raked in $12.8 billion in equity, debt, loan, and advisory fees this year. This marks a 36% decline compared with the same period last year and is the lowest since the first quarter of 2009, according to Dealogic. Equity-capital markets revenue is down 55% year-over-year, while high-yield bond revenue is off 70% year-over-year.

 

Starboard Value LP has launched a proxy fight to remove the entire board of Yahoo, including Chief Executive Marissa Mayer who has made little progress to turn around the company in her nearly four years at the helm. The activist hedge fund, which has been pushing for changes at Yahoo since 2014 and owns about 1.7 percent of the company, said it would nominate nine candidates for the board. The proxy fight comes as Yahoo is pressing ahead with an auction of its core Internet business, which includes search, mail and news sites.

 

After word last week that a draft order was close, the FCC is not expected to act this week on Charter Communications’ bid to acquire Time Warner Cable. The agency has an informal 180-day “shot clock” expiring on Friday, but has often stated that the public interest outweighs any hewing to the informal timeline. With OKs from shareholders and most states already in place, the merger’s fate rests only with the FCC and California.

 

Virgin America, the airline backed by billionaire Richard Branson is working with an adviser to evaluate a full or partial sale after receiving takeover interest. No decision has been made, and Virgin America may choose not to pursue a sale, but if a sale happens, it would be a quick turnaround for a company that went public less than 18 months ago.

 

TiVo, the digital video recorder company that popularized the DVR and revolutionized “time shifting” and fast-forwarding through advertising, is in advanced negotiations to be sold to Rovi. The deal would merge TiVo and Rovi, which is one of the largest owners of patents for digital entertainment devices. Shareholders of TiVo would receive a combination of cash and stock, though the exact price is still subject to negotiations. It is expected that after the deal, shareholders of TiVo, which has a market value of $750 million, would probably own about 30 percent of the combined company. Rovi’s market value is about $1.7 billion.

 

Volkswagen was given four more weeks to reach an agreement with regulators for getting 600,000 diesel vehicles off U.S. roads as it faces hundreds of lawsuits for rigging pollution control systems to cheat emissions tests. District Judge Charles Breyer in San Francisco, said today that “substantial progress” has been made, but he set a new deadline, April 21, for the carmaker to come up with a concrete and detailed proposal. Volkswagen admitted last year that it had rigged diesel engines on about 11 million cars worldwide so that emission controls switched on only during testing. Those controls shut off while the car was on the road, increasing fuel efficiency and performance but producing nitrogen oxide pollution well in excess of the U.S. legal standard. VW faces lawsuits by the Justice Department and state attorneys general, and fines of as much as $46 billion, as well as hundreds of private lawsuits, for installing the defeat device.

 

Politicians in Washington are putting together a financial plan to rescue Puerto Rico, just weeks before an expected major default on bond. The plan would not allow Puerto Rico to restructure its entire $72 billion debt in bankruptcy. It would, however, create a 5-member oversight board that would audit Puerto Rico’s government, improve operations, find savings and ultimately determine how much of the $72 billion debt really has to be restructured, if any.

 

The United States government has weighed in on the legal battle between Argentina and a group of New York hedge funds, lending its support to the struggling country and dealing a setback to the investors. In a “friend of the court” — or amicus curiae — brief filed at the United States Court of Appeals for the Second Circuit in New York, the Justice Department said it supported an American federal judge’s decision to lift an injunction that had prevented Argentina from raising new money in the bond markets or paying its creditors. It is a move that will increase the pressure on a group of holdout bondholders that refused to take part in two debt restructurings by Argentina after it defaulted on $100 billion of debt in 2001.

 

 

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