…CPI in a sweet spot. Fed will still hike rates. Spending bill might avert shutdown. China-US trade talks: no guarantees. Emerging markets still warrant attention. Trump’s Maria lie. Hurricane Flo arrives. Hurricanes do not stimulate the economy.
Financial Review by Sinclair Noe for 09-13-2018
DOW + 147 = 26,145
SPX + 15 = 2904
NAS + 59 = 8013
RUT – 1 = 1714
10Y un = 2.96%
OIL – 1.56 = 68.81
GOLD – 5.20 = 1201.90
Apple climbed 2.4 percent and Microsoft added 1.1 percent. Technology companies slumped last week as investors worried about the prospect of heavier regulation for companies like Facebook and Alphabet. The sector has bounced up and down this week, and it is about 1 percent away from the all-time high it set in late August. Qualcomm rose 4 percent after it announced a $16 billion share buyback program. Other chipmakers including Skyworks and Broadcom also rose. They stumbled a day earlier. Flipping the switch, Advanced Micro Devices which jumped 7% yesterday, started today in the green but then reversed, and closed down 5.3%.
Adobe shares fell as much as 1.7 percent in after-hours trading after the company released its third-quarter earnings report. Adobe beat top and bottom line estimates. The company also gave guidance for the fourth quarter that was slightly above estimates. Kroger issued an underwhelming second-quarter earnings report. Shares in Kroger dropped 9.9%.
General Motors is recalling 1.2 million pickup trucks and sport utility vehicles worldwide due to issues with a temporary loss of power steering. Volkswagen announced it will end production of the Beetle car in the US in 2019. VW has shifted its emphasis to SUVs and a range of still-to-come new electric cars.
The Department of Labor said its consumer prices index edged up 0.2 percent in August. The CPI measures inflation at the retail level and it’s risen 2.7 percent over the past year. That’s a bit slower than the 2.9 percent it reported in July. Increases in gasoline and rents were offset by declines in healthcare and apparel costs. Excluding the volatile food and energy components, the CPI edged up 0.1 percent. In the 12 months through August, the core CPI gained 2.2 percent.
This was a very satisfying number – it means there is inflation within the target range the Fed hopes to achieve, but not overheating. So, at least some of today’s rally might be attributed to the notion that the Fed can be dovish in light of these latest inflation numbers. Fed policy makers will raise interest rates at the September 25-26 meeting, and they will also offer thoughts on how aggressive they will be moving forward. Federal Reserve policy makers are debating whether to stop tightening monetary policy when interest rates reach a neutral level that neither stimulates nor restricts growth. At this point, there is no easy answer, but central bankers should de-emphasize the level of rates at which they would pause and instead focus on the economic conditions that justify a pause.
The federal funds rate currently sits in a range of 1.75 percent to 2.0 percent. The median policy maker estimate of the neutral rate is 2.9 percent within a wide overall range of 2.25 percent to 3.5 percent. The lowest of the estimates will almost be reached with the next rate increase, widely expected to come Sept. 26. But here’s the rub – there is far too much uncertainty about the path of the economy to assume the Fed will pause when policy rates reach estimates of neutral, particularly the lower estimates. So, be cautious of reading too much into claims by central bankers that they expect a pause after three or four more rate hikes. That pause is very conditional on the state of the economy after those increases. The neutral rate is just an estimate. The Fed might hit that rate and learn that their estimates were too low or too high. We won’t know until we get there. For now, incoming data remains far too strong for the Fed to contemplate an end to rate increases. Job growth continues at a rate the Fed believes will eventually be consistent with an overheated economy. As in, someday the low unemployment rate will actually push wages higher.
House and Senate spending leaders said they have struck a deal on a massive package that would fund two-thirds of government, including some of the largest federal agencies. Party leaders also crafted the final fiscal 2019 package in a way they believe will be politically impossible for Trump to reject: The two-bill package will also be coupled with a stopgap funding bill to keep the government open through Dec. 7. If Trump vetoes it, he would force a shutdown — which would include shuttering some Pentagon operations. The final details on the measure, which pairs the Defense and Labor-HHS-Education bills, haven’t yet been released. Legislative text is expected by the end of the week. But negotiators said in a rare public meeting that the finalized package would largely strip out partisan language favored by House Republicans. That means lawmakers rejected attempts to defund Planned Parenthood or destabilize Obamacare, as well as a slew of other riders. Look for a final vote in the Senate next week, with the House to follow suit the following week, just ahead of the Sept. 30 deadline.
A new round of trade talks between the US and China is coming. Larry Kudlow, who heads the White House Economic Council, told reporters, “I guarantee nothing.” The last talks, between mid-level US and Chinese officials August 22-23, failed to reach any agreement. So far, the US and China have hit $50 billion worth of each other’s goods over US demands that China make sweeping economic policy changes. Both China and the US are facing pressure from domestic business groups to fix the trade relationship. A new survey of U.S. companies doing business in China found that 31% are considering delaying or canceling investment decisions over uncertainties created by tariffs.
The Turkish lira gained as much as 5% after Turkey’s central bank raised its key interest rate 625 basis points to 24%. Wall Street doubts the recent troubles of emerging markets will turn catastrophic. It’s a reasonable assumption; it’s unlikely the Turkish lira, say, will crush U.S. banks. But there is a chain of potential contagion that could give markets more of a scare than they’ve felt so far. The global economy isn’t exactly in the best shape; and as we discovered a decade ago, markets are linked in ways that can surprise investors: If EM stresses persist, then advanced economies face additional credit tightening, exacerbating the reductions in liquidity underway and potentially transmitting price shocks. One accelerant to those EM stresses is the strengthening U.S. dollar. Strong economic numbers in the US, plus rising interest rates offsetting global troubles such as we’ve seen in Turkey are driving investors to the relative safety of the greenback. That means they’re shunning EM assets, which makes EM stresses worse, which leads to still more dollar strength. And on and on, until…
A couple of days ago, Trump called the government response to Hurricane Maria in Puerto Rico last year an “unsung success”, but it wasn’t; 2975 people died during and after the hurricane. I don’t care who sings that song, it is a disgraceful failure. So, this morning Trump changed his tune and declared that the official death count of 2975 is wrong. He claims it is more like 6 or 18 deaths in Puerto Rico, or maybe some other number (who knows), but he offered not evidence to support his claim. Again, disgraceful.
Hurricane Florence is sitting off the coast of the Carolinas, close enough now to do damage. Hurricane Florence has been downgraded to a Category 2 storm with maximum sustained winds of 110 mph; however, a storm surge of 9 to 15 feet is still expected along parts of the Carolina coast. The next 24 hours will be perilous. As the storm passes, billions in recovery aid will flood into the impact zone, as construction crews work 24/7 to rebuild wrecked buildings. Hurricanes and other natural disasters destroy value, on the whole, and normally cause an economic setback—not a boom. Whenever there’s a hurricane, there will be somebody saying the silver lining is, it will stimulate the economy, but that is wrong. Hurricanes destroy real resources—roads, inventories, factories, offices, homes, vehicles. When people have to rebuild a roof that was perfectly fine yesterday and is now destroyed, that’s money people don’t have to spend on other things. There are certainly some parts of the economy that benefit from the rebuilding that follows natural disasters. Construction crews, cleanup teams and utility workers will make bank working as much overtime as they can stand. Demand for construction materials spikes, a windfall for retailers like Lowe’s and Home Depot. On the negative side – stores, restaurants and businesses close, sometimes for weeks. They recoup some sales once they reopen, but other sales are lost forever. People who evacuate or tend to damaged properties miss work, and sometimes don’t get paid. Insurance covers some losses, but individuals and businesses also get hit with out-of-pocket costs that can wreck their finances. In worst-case outcomes, businesses go bust and families lose their homes.
Disruption at ports such as Charleston could hurt supply chains throughout the south, and beyond, in industries including autos, lumber and paper. Exports to Europe will slow down. Fuel pipelines and refineries may have to be shut temporarily. The U.S. economy is so large and diverse that even giant storms causing widespread damage—such as Hurricanes Harvey, Irma and Maria last year—barely show up in national economic growth numbers. But in the impact zone, the economic pain can endure, and be intense.