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Record high close for Dow industrials and S&P 500. It’s raining yen. BOE plans rate cuts. Global stocks erase losses. IMF says Brexit impact is negligible on US. Inventories barely rose. Job openings lower. Small biz sentiment up again. EU-US Privacy Shield is big deal for big data. The Hague rules against China. Happy Prime Day.
Financial Review by Sinclair Noe for 07-12-2016
DOW + 120 = 18,347
SPX + 14 = 2152
NAS + 34 = 5022
10 Y + .09 = 1.52%
OIL + 2.04 = 46.80
GOLD – 21.90 = 1333.70
Japan’s Nikkei extended gains overnight, rising 2.5% to almost recapture its pre-Brexit level, after Prime Minister Shinzo Abe ordered a new round of fiscal stimulus. The yen had its biggest two-day slide since 2014. Former Federal Reserve Chairman Ben Bernanke met with Prime Minister Shinzo Abe Tuesday. Bernanke noted during the face-to-face meeting that Japan’s central bank still has a range of monetary easing measures at its disposal. Brushing aside a view among Japanese economists that BOJ policy has reached its limit, Bernanke’s assessment added to speculation that Tokyo will unleash new rounds of fiscal and monetary stimulus to reboot Abenomics, Abe’s growth plan. It sounds like Bernanke is giving instructions on how to use the helicopter to make it rain yen.
The European Commission has slashed its U.K. and Eurozone growth forecasts following the Brexit vote, stating the cumulative negative impact for British GDP would be about 1%-2.5%, and the euro area between 0.2%-0.5%, by 2017. For the first time in more than seven years, analysts are finally expecting some action on UK interest rates from the Bank of England when it meets for its first post-Brexit policy decision on Thursday. The central bank is widely seen as reducing its key interest rate to 0.25% from a current record low of 0.5%, where it has stood since March 2009.
So, a fresh round of stimulus from Japan, plus lower interest rates in the UK, plus decent economic news from the EU and a high probability of stimulus from the ECB. Also, China performed a stealth devaluation of the yuan to support its economy. Around the world, there is a push for more stimulus or QE, and in the US, the Fed seems to have abandoned the idea of rate hikes, even as last Friday’s jobs report showed a strong rebound. Central bank policy, essentially throwing money at the markets, works – at least it works to lift the financial markets. Just in case you missed what was happening the last 8 years.
Global stocks erased losses sparked by the UK’s Brexit vote. The MSCI All-Country World Index capped a 7.6 percent rally from its post-Brexit low to reach the highest level in a month. The pound rose the most since the vote. US crude oil surged the most in three months. Treasuries fell in the biggest 2-day sell-off this year.
The IMF said in its formal annual review of the U.S. economy and policies that the June 23 “Brexit” vote has prompted a rise in the dollar that has been less than feared, up about 1% in nominal effective terms, while stock markets have recovered losses incurred right after the vote. Meanwhile, a safe-haven rush into U.S. Treasuries has lowered yields, and home and business financing costs, considerably. The IMF’s conclusion: “The net effect on growth is pretty negligible.” The IMF kept unchanged its previous U.S. economic growth forecasts of 2.2 percent for 2016 and 2.5 percent in 2017.
However, the IMF said a “more complex and harmful” downside risk is that the potential growth rate may be lower than previously estimated, with a smaller output gap. The United States faces a confluence of forces that will weigh on future gains, including a rising share of the U.S. labor force shifting into retirement, aging basic infrastructure, low productivity gains and labor markets and businesses that appear less adept at reallocating human and physical capital. It said growth in future years under this scenario could settle at well below 2 percent.
U.S. wholesale inventories barely rose in May as automobile stocks recorded their biggest drop in more than 2-1/2 years, suggesting inventory investment likely remained a drag on economic growth in the second quarter. The Atlanta Federal Reserve’s GDPNow forecast model shows the US economy likely expanded at a 2.3 percent annualized rate in the second quarter following the latest data on wholesale trade. The latest GDP estimate was slightly lower than the 2.4 percent figure calculated on July 6
Job openings in the U.S. fell in May to the lowest of the year. The Labor Department’s JOLT survey shows job openings fell to a seasonally adjusted 5.5 million in May from a record 5.85 million in April. That’s the biggest decline in openings since last August. The fewer number of jobs available could be a blip that gets reversed in June. The economy added a whopping 287,000 jobs last month after just a meager 11,000 gain in May. What is clear is that hiring has slowed in 2016. The hiring rate among private sector companies slipped to 3.8% in May to mark the lowest level in more than two years. The quit rate was unchanged at 2%, which is actually a negative; people quit their jobs in order to take new jobs, so more quits are seen as more mobility in the labor force.
Small-business sentiment rose for the third straight month in June, but remained muted compared to its long-term average. The optimism index from the National Federation of Independent Business rose 0.7 to 94.5. Only three of ten components declined in June, and the biggest jump was in the number of people who expect the economy to improve. Still, the index has spent most of the economic expansion well below its long-term average of 98.
A new commercial data pact between the European Union and the United States has been approved and companies such as Google and Facebook can sign up by the end of the month. The new agreement that will allow the transfer of online data across the Atlantic; this includes everything from social media posts and search queries to information about workers’ pensions and payroll. The pact, known as the EU-U.S. Privacy Shield will underpin over $250 billion dollars of transatlantic trade in digital services annually. The previous such framework, Safe Harbor, was struck down by the EU’s top court in October on the grounds that it allowed U.S. agents too much access to Europeans’ data.
An arbitration court ruled that China has no historic title over the waters of the South China Sea and has breached the Philippines’ sovereign rights with its actions. China boycotted the hearings at the Permanent Court of Arbitration in The Hague and vowed to ignore the ruling and said its armed forces would defend its sovereignty and maritime interests. China claims most of the energy-rich waters through which about $5 trillion in ship-borne trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.
Amazon.com said this morning that some customers were reporting difficulty with checkout after making purchases in its highly publicized “Prime Day” shopping event. The glitches seem to have been worked out. The one-day sale, for members of Amazon’s $99 per year Prime subscription service, is expected to generate up to $1 billion in sales, more than double the amount last year. Amazon devices such as Echo, Fire TV, Fire TV Stick and Fire tablet are available at big discounts as are a host of other products from high-end televisions to shoes and toys. Big U.S. retailers such as Wal-Mart and Gap are also offering midsummer promotions online to cash in on the hype around Amazon’s Prime Day sale. For Amazon, it is a chance to grow its base of prime customers; who then end up spending more than twice as much each year compared to non-subscribed customers. Users who subscribe to Amazon Prime membership are promised 100,000 special bargains by the e-commerce platform, launching the kind of purchasing frenzy that saw more than 34.4 million items sold last year.
To move all that stuff, Amazon has a sprawling logistics network, designed to deliver most Prime products in just 48 hours. In some warehouses, known as “Fulfillment Centers,” robots have even been introduced to shorten the “click-to-ship” gap to just 15 minutes.