….Stocks drop after FOMC minutes. 10-year note closes in on 3%. Home sales drop – no inventory. Small biz optimistic. No change in take home pay. ECB tomorrow. Apple hunting cobalt.
Financial Review by Sinclair Noe for 02-21-2018
DOW – 166 = 24,797
SPX – 14 = 2701
NAS – 16 = 7218
RUT + 1 = 1531
10 Y + .05 = 2.94%
OIL – .47 = 61.32
GOLD – 4.70 = 1325.00
Yesterday was a down day on Wall Street. This morning, stocks bounced back – the Dow climbed over 300 points, and then the Fed minutes were released. Poof. Gains evaporated but the major indices were clinging to positive territory, until the final 20 minutes of the session, when everything turned negative, fast. What terrible news was in the Fed minutes? Um, nothing. The minutes of the January 31st FOMC policy meeting simply confirmed previously stated Fed policy. The Fed is confident that the economy is gaining momentum, as a number of participants said they had marked up their growth forecasts since the previous month, encouraged by firm global growth and supportive financial markets. Still, others said the “upside risks” to growth may have increased, but inflation still lags the Fed target of 2%. Participants also discussed numerous uncertainties about the outlook. Several cautioned that “imbalances in financial markets may begin to emerge as the economy continued to operate above potential,” the minutes said. Fed officials also speculated on whether the tax cuts would translate into higher compensation for employees.
“It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low,” the minutes said. “That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.”
The Federal Open Market Committee signaled in its post-meeting statement that it expected “further gradual increases” in the benchmark lending rate after forecasting three hikes for 2018 in December. The minutes also explained the new wording: “Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the post-meeting statement to point to ‘further gradual increases.’”
Treasury yields spiked notably after the Minutes. The two-year note yield, the most sensitive to the vagaries of interest-rate expectations, was up 4.3 basis points to 2.27%, marking its seventh straight day of yield gains. The yield on the 10-year Treasury note, meanwhile, was up by 4.8 basis points to 2.943%, its highest since January 2014.
There are already signs that higher borrowing costs may be starting to pinch. Home sales fell in January, leading to the biggest year-on-year decline in more than three years, as a chronic shortage of houses lifted prices and kept first-time buyers out of the market. The supply squeeze and rising mortgage interest rates are stoking fears of a lackluster spring selling season. The second straight monthly drop in home sales reported by National Association of Realtors added to weak retail sales and industrial production in January in suggesting slower economic growth in the first quarter. Existing home sales dropped 3.2 percent to a seasonally adjusted annual rate of 5.38 million units last month, with purchases declining in all four regions. Existing home sales, which account for about 90 percent of U.S. home sales, declined 4.8 percent on a year-on-year basis in January. That was the biggest year-on-year drop since August 2014. The weakness in home sales is largely a function of supply constraints rather than a lack of demand, which is being driven by a robust labor market. The shortage of properties is concentrated at the lower end of the market. While the number of previously-owned homes on the market rose 4.1 percent to 1.52 million units in January, housing inventory was down 9.5 percent from a year ago. That was also the lowest inventory for January on record. Supply has declined for 32 straight months on a year-on-year basis. First-time buyers — or those who typically rely most on financing — made up 29 percent of purchases, down from 32 percent in December and 33 percent a year earlier.
According to JP Morgan’s annual business leaders outlook survey released Wednesday, 89% of mid-sized businesses and 63% of small businesses are optimistic about the U.S. economy. Small business optimism is the same compared to last year while mid-size business optimism is up nine points from a year ago. The firm defines medium-sized businesses as those with $20-$500 million in annual revenue; small businesses are those with $100,000-$20 million in annual revenue. The top complaint among businesses owners is a limited supply of talent in the employment pool. The survey also shows that 76% of mid-sized businesses plan on boosting pay this year, up 5% from last year’s survey, with 64% of firms planning to increase their full-time personal, up 7% from a year ago. JP Morgan’s numbers also jive with the most recent small business optimism report from the National Federation for Independent Business, which indicated that 89% of firms trying to hire reported few or no qualified applicants for the positions they were trying to fill.
Two months after Republicans passed sweeping tax legislation, just a quarter of Americans report seeing a change in their paychecks. Unsurprisingly, those on the higher end of the pay scale are likelier to have noticed an increase in their take-home pay, compared to those at the lower end. A Politico/Morning Consult poll found that 25 percent of registered voters say they have noticed an increase in their paycheck under the new tax law; 51 percent say they haven’t seen any change, and 24 percent aren’t sure.
Next up, the ECB, which will release the minutes from its Jan. 24-25 meeting on Thursday. Although policy makers didn’t raise rates then, ECB President Mario Draghi said at a press conference at the time that an increase this year is very unlikely. That was a minor surprise, given how well the euro zone economy has performed in recent months. Just a couple of days before the meeting the IMF boosted its 2018 growth forecast for the region to 2.2 percent from 1.9 percent. So, was Draghi underplaying the chances of a rate increase this year? Perhaps the minutes will provide the clues.
The final version of a landmark deal aimed at cutting trade barriers in some of Asia-Pacific’s fastest-growing economies was released. The United States has pulled out of the Trans-Pacific Partnership, or TPP. The 11 remaining nations, led by Japan, finalized a revised trade pact in January, called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It is expected to be signed in Chile on March 8. The deal will reduce tariffs in economies that together amount to more than 13 percent of global GDP – a total of $10 trillion. With the United States, it would have represented 40 percent. More than 20 provisions have been suspended or changed in the final text ahead of the deal’s official signing in March, including rules around intellectual property originally included at the behest of Washington.
Apple is reportedly in talks with major cobalt producers to secure supplies of the material vital for the lithium-ion rechargeable batteries that power its mobile phones. Cobalt is also used in batteries to power electric vehicles whose rapid growth is revolutionizing the motor industry, which is also looking to agree long-term supply deals. Auto makers, mobile device makers and manufacturers of super-alloys used to make jet engines are all getting jittery about possible scarcities of responsibly sourced cobalt. Cobalt prices have quadrupled since January 2016.
Broadcom cut its bid for Qualcomm by 4 percent to $117 billion as it objected to Qualcomm’s decision to raise its own bid for NXP Semiconductors to $44 billion. Qualcomm responded that Broadcom had made “an inadequate offer even worse,” setting up a showdown on March 6, when Qualcomm shareholders are scheduled to elect an 11-member board and decide whether to hand control to a slate of six nominees put forward by Broadcom.
The Supreme Court dealt a blow to Wall Street whistleblowers when it ruled that protections for them passed by Congress after the 2008 financial crisis only apply to those who report problems to the government, not more broadly, such as to a boss. The justices decided unanimously that measures in the Dodd-Frank Act that protects whistleblowers from being fired, demoted or harassed only applies to people who report legal violations to the Securities and Exchange Commission, the federal government’s financial watchdog. In a narrow interpretation of the law, they said employees who report problems only to company management don’t qualify. Reporting internally still affords some protections under an older law, the 2002 Sarbanes-Oxley Act. But the two laws differ in aspects such as how long people have to bring a lawsuit, for example if they have been fired after reporting suspected illegal activity in their company, and how much compensation they can receive.
A House of Representatives subcommittee plans to hold a hearing next week to discuss efforts to restore Puerto Rico’s electrical infrastructure in the wake of last year’s hurricane