….Stocks end lower. Bonds down, 10-yr yield tops 2.9%. Commodities rise. Bidding war for Shire. LEI inches higher. Retail sales up. AZ unemployment rate flat. Wells Fargo v. teachers. Cuba, not Castro.
Financial Review by Sinclair Noe for 04-19-2018
DOW – 83 = 24664
SPX – 15 = 2693
NAS – 57 = 7238
RUT – 9 = 1573
10 Y + .05 = 2.91%
OIL – .32 = 68.15
GOLD – 3.90 = 1346.30
Stocks ended lower, with consumer staples, real estate and technology shares leading the losses. Investors continued to digest a mixed bag of corporate earnings. While results have largely come in ahead of expectations thus far, there have been some disappointments, and others haven’t produced the kind of blowout results seen necessary to continue pushing shares higher from elevated levels. Financials and energy shares were the only industry groups closing in the green. Financials rallied 1.5%. The S&P 500 components are expected to see earnings growth of 17.3% for the period, the fastest rate of expansion since 2011. The results have been enough to largely overshadow uncertainties such as trade policy questions and tensions over Syria.
Shares in tobacco giant Philip Morris tumbled 16% after the company posted weaker-than-expected revenue, along with a stronger-than-anticipated adjusted profit. The stock was on track for its biggest one-day percentage decline since being spun off from Altria Group in 2008. Altria fell 6%.
Shares in Amazon.com rose 1.9% after CEO Jeff Bezos disclosed in an annual letter to shareholders that the e-commerce juggernaut’s Amazon Prime subscription program has topped 100 million members world-wide.
After a brief respite, the bear market in bonds appears to be back on. From the U.S. to the U.K., and from Germany to Australia, major government debt markets took a tumble today. What makes the selloff a bit ominous is that it came as stocks fell the most in almost two weeks. Normally, demand for the safety of bonds tends to rise as equities drop.
Investors are on edge because the yield on the benchmark 10-year Treasury note has quietly risen back above 2.90 percent and may be poised to make a run at the psychologically important 3 percent level. The culprit behind the higher yields is commodities prices, back at the highest levels since 2015.
Oil prices just hit a 3 1/2-year high and American businesses say they are paying more for many other raw materials, offering signs that the recent rise in inflation is likely to persist or even get worse. Earlier today, oil prices briefly topped $69 a barrel, heralding higher gasoline prices in the busy summer driving season. Airfares could also go up. Don’t expect much relief, either. The strongest global economy in years is driving up demand for energy, for one thing. OPEC is trying to keep production down to prop up prices. And bottlenecks in the U.S. are preventing drillers from producing as much oil and natural gas as they would like.
Oil isn’t the only commodity whose price is rising, however. A handful of business surveys indicate companies are paying more for a variety of raw or partly finished goods. One of them is steel thanks to recently announced Trump administration tariffs on foreign imports. The Philadelphia Federal Reserve’s regional business index, for example, showed that what companies pay for their supplies hit the highest level since 2011. A national survey of manufacturers, meanwhile, found that the cost of supplies also touched a seven-year high, according to the Institute for Supply Management. Small businesses also say costs are rising, especially for labor. The number of small firms that say they are raising pay and benefits for workers climbed to the highest level since 2000, the National Federation of Independent Business said.
That’s fueling concern inflation may be about to accelerate and hurt bonds by eroding the value of their fixed-interest payments over time while also denting business confidence. Breakeven rates on five-year Treasuries, or what traders expected the rate of inflation to be over the life of the securities, reached 2.14 percent on Wednesday, about the highest since 2014.
The S&P 500 Index fell 0.57 percent today, while the MSCI All-Country World Index dropped 0.36 percent. Equity strategists are worried with the yield on the 10-year note pushing above 2.9%, staring down 3% – that yields that high would deter companies and consumers from borrowing money, hindering the economic expansion, while the rise in commodity prices might erode profit margins. Already, average yields on corporate bonds are the highest since the start of 2012, while Freddie Mac said that the average rate on a 30-year mortgage is now 4.47 percent, the highest since early 2014. The Federal Reserve Bank of Philadelphia released its monthly business outlook survey and said that the prices-paid portion of its survey rose to 56.4, highest since 2011, while the prices-received portion was 29.8. At 26.6, that gap is almost double the median of 15.6 over the past 20 years and suggests companies are having trouble passing along the higher input prices to their customers. Higher rates and inflation without higher economic growth raises the discount rate for equity cash flows (lower P/E) but also raises stagflation risks for the economy and the stock market.
While investors have been focused on large-cap tech and the surge in commodities, small-cap stocks have quietly come within a stone’s throw of the recent all-time highs. The S&P 500 is up 0.5 percent and the Dow is down 0.5 percent since the start of 2018, but the Russell 2000 has risen 2.3 percent. Furthermore, the S&P 500 is still more than 6 percent off its record high, while the Russell 2000 is less than 3 percent from its all-time high.
There’s a $60 billion bidding war brewing for Shire, the maker of ADHD medications like Adderall. Shire has already rejected an offer of that amount from Japan’s Takeda. Shire said in a statement that Takeda’s $60 billion bid “continues to significantly undervalue the company and Shire’s growth prospects and pipeline.” Allergan then confirmed it was “in the early stages of considering a possible offer” for Shire. That sent Allergan’s stock price plummeting, falling more than 8%. CNBC then reported that Allergan would not make a bid for Shire, with Allergan’s share price rebounding.
Procter & Gamble (P&G) has agreed to acquire Merck’s consumer health unit $4.2 billion, giving it vitamin brands such as Seven Seas and greater exposure to Latin American and Asian markets.
Shares of Skechers fell more than 16% late Thursday after the retailer missed first-quarter per-share earnings expectations by one penny and predicted second-quarter earnings and sales below Wall Street forecasts.
The leading economic index rose 0.3% in March, and while it was the smallest increase since last September, the gauge also showed little reason to be worried. The index points to continued solid growth in the U.S. economy for the rest of the year. A measure of current economic conditions rose 0.2%. A “lagging” index that looks back at the recent past edge up 0.1%. Several indicators of labor-market health softened a bit, but that likely reflects seasonal distortions caused by the Easter holiday. The U.S. economy took a sideways step in the first quarter largely because Americans reduce spending after the Christmas holiday season. But growth is expected to forge ahead in the spring and summer, aided by recent tax cuts, higher government spending and the strongest labor market a long time.
The Commerce Department reports sales at U.S. retailers rose 0.6% in March to end a streak of three straight declines. Sales rose a smaller 0.3% last month if autos and gas are stripped out. Home centers, apparel outlets and department stores also saw a drop in sales.
Arizona’s seasonally adjusted unemployment rate remained unchanged at 4.9% in March. The U.S. seasonally adjusted unemployment rate remained unchanged at 4.1% in March. Arizona gained 12,300 jobs in the month, including 14,100 jobs in the private sector; but that was countered by a loss of 1,800 government jobs. The Leisure and Hospitality sector posted the largest job gains.
Wells Fargo’s financial ties to gunmakers and the National Rifle Association have prompted the American Federation of Teachers to remove the bank from its list of recommended mortgage lenders. The 1.7-million-member national union said the move came after its attempts to meet with bank executives to discuss the matter went unanswered. The AFT had contacted the bank earlier, urging the firm to stop doing business with the NRA and makers of guns and ammunition.
A federal appeals court said today that the U.S. Justice Department cannot deny public safety grants to so-called sanctuary cities that limit cooperation with the Trump administration’s crackdown on illegal immigration. The Seventh U.S. Circuit Court of Appeals affirmed a lower court injunction in a case brought by the city of Chicago. The appeals court agreed the injunction should apply nationally while the lawsuit proceeds in federal court.
Sweden and Switzerland are among the places the White House is considering for an unprecedented summit between North Korean leader Kim Jong Un and Trump.
Who is the president of Cuba? For almost 50, the answer has been Castro – either Fidel or Raul. No more. Miguel Diaz-Canel was officially declared as Cuba’s new president Thursday, a day after a vote in the National Assembly cleared the way for a leader not named Castro for the first time in nearly six decades. As the current first vice president, Díaz-Canel, 59, was the sole candidate to succeed an aging Raúl Castro as president, part of an effort to ensure that the country’s single-party system outlasts the aging revolutionaries who created it. Diaz-Canel was not yet born when Raúl’s older brother, the late Fidel Castro, led his revolution in 1959. Raul Castro, 86, will remain head of the Communist Party, designated by the constitution as “the superior guiding force of society and the state.” As a result, Castro is almost certain to remain the most powerful person in Cuba