…..PPI jumps. Unemployment claims shrink. Ugly day for retail. Waiting for more shoes to drop following Comey firing. Dudley warns against protectionism. Banks are starting to fail, again.
Financial Review by Sinclair Noe for 05-11-2017
DOW – 23 = 20,919
SPX – 5 = 2394
NAS – 13 = 6115
RUT – 9 = 1390
10 Y – .01 = 2.40%
OIL + .46 = 47.79
GOLD + 6.00 = 1225.80
This morning, we got two pieces of economic data that show the U.S. economy remains strong, with producer prices — a measure of inflation — rising 0.5% over the prior month, more than the 0.2% that was expected. With last month’s jump in prices, the PPI shot up 2.5% in the 12 months through April. That was the biggest gain since February 2012. Core PPI, which excludes food, energy prices and trade, rose 0.7% in April after a 0.1% gain in March. Core PPI increased 2.1% in the 12 months through April. Additionally, initial jobless claims also topped expectations, totaling just 236,000 last week, with continuing filings for unemployment insurance hitting the lowest in 28 years. The Bank of England on Thursday left its key interest rate at 0.25%, meeting widely held expectations.
It was an ugly day for retail stocks. Macy’s reported earnings per share of $0.24, less than the $0.35 expected by analysts, on same-store sales that dropped 4.6%. Macy’s shares were slammed for a 17% loss today.
Also in retail earnings, Kohl’s reported earnings per share that topped estimates though same-store sales declined more than expected during the quarter. Kohl’s reported adjusted earnings per share of $0.39, topping estimates for $0.29, while same-store sales fell 2.7%, more than the 1.1% expected by analysts. Kohl’s dropped almost 8% today.
Nordstrom reported better-than-expected quarterly earnings and quarterly revenue in line with expectations but it didn’t escape the pall over department stores in general. Nordstrom said it earned $63 million, or 37 cents a share, in the first quarter, compared with $46 million, or 26 cents a share, in the year-ago period. Net sales reached $3.3 billion, compared with net sales of $3.2 billion a year ago. Comparable-store sales for the first quarter decreased 0.8%. Shares dropped 4.5%.
In an interview today with NBC’s Lester Holt, President Trump called fired FBI chief James Comey a “showboat” and “grandstander”. Trump said he would have fired Comey even without a recommendation to do so by the two top Justice Department officials. That ran counter to previous administration explanations from White House aides and Vice President Pence of Comey’s dismissal. Trump also gave further details of his account that Comey informed him three times that he was not under investigation. That interview airs tonight.
Meanwhile, on Capitol Hill, acting FBI Director Andrew McCabe directly contradicted the White House on two points related to Comey’s firing and the law enforcement agency’s investigation into Russia’s meddling in the presidential election. McCabe said there is an investigation, it is significant and it is underway and will continue but he sidestepped the question of whether Comey directly told Trump on 3 occasions that there was no investigation. A day after the White House said Comey had “lost the confidence” of his employees, McCabe said Comey had a strong and positive relationship with the vast majority of FBI employees.
Senator John McCain, who heads the Armed Services Committee, and is no admirer of Vladimir Putin, defended Comey as an honorable man and called the firing “unprecedented,” which is true. Republican Richard Burr of North Carolina, who heads the Senate Intelligence Committee said today: “I am troubled by the timing and reasoning of Director Comey’s termination. I have found Director Comey to be a public servant of the highest order, and his dismissal further confuses an already difficult investigation by the Committee.”
Trump has been in office 110 days, and he’s already fired his acting attorney general, his national security adviser, and now the head of the FBI, all of whom have played key roles in the Russia investigation. What does it all mean? Well, at this point, not much. These people served at the pleasure of the president. Trump certainly has the authority to fire them. Trump’s Director of National Intelligence Dan Coats and CIA chief Mike Pompeo, testified to a senate committee today that they agreed with a finding that Russian president Putin had directed an effort to hack and disrupt the US election, but we do not know what, if anything has turned up in the investigation into possible collusion between the Russians and Trump and/or his campaign. If there is a connection, it would be very bad for Trump. If there is no connection, that fact will only be established after much hand wringing and gnashing of teeth. Right now, we just don’t know how this will play out. At a security conference in Munich, Senator McCain said, “This scandal is going to go on. I’ve seen it before. I guarantee you there will be more shoes to drop, I can just guarantee it. There’s just too much information that we don’t have that will be coming out.”
Yesterday, I said the firing of Comey will consume all the oxygen in Washington. Today there was no talk of the American Health Care Act, no talk of tax reform, no talk of infrastructure stimulus. Well, maybe someone was talking about it but all eyes and ears were on the Comey situation. For today, the Trump agenda was stalled, probably tomorrow as well – possibly into the near future.
Halfway around the world, in a speech at the Bombay Stock Exchange, William Dudley, head of the New York Federal Reserve gave a full-throated economic and even political argument for resisting trade barriers that he said would hurt growth and living standards in both the United States and around the world. “Protectionism can have a siren-like appeal,” said Dudley. “Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term. Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term.”
Dudley said he was speaking out because “we are at a particularly important juncture” in which trade issues could imperil the long-term health and productivity of the economy and “the economic opportunities available to our people.” Barriers to trade are very costly, he said, because they blunt export opportunities, make everyday goods more expensive, and they can often “backfire” by harming workers who can no longer compete in a global economy.
Don’t look now, but banks are failing again in America. The past several years have been relatively placid for the banking industry. After the wholesale failure of the system during the financial crisis, banks gradually recovered their footing. Aided by essentially free money from the Federal Reserve, bailouts, and widespread federal and central bank guarantees, banks once again became rock-solid American institutions. As the expansion rolled on, companies and individuals did a much better job keeping up with their financial obligations. The result: record profits for banks and an extremely low rate of bank failure. In 2016, banks covered by the Federal Deposit Insurance Corporation reported $171.3 billion in profits.
Only five banks failed last year, and they were small, a total of just 18 branches and a mere $277 million in assets between them. In 2015, seven banks in the continental U.S. failed; they had combined assets of $826 million. So far this year, five banks have already failed—as many as in all of 2016. More important, the banks that are failing are significantly larger. Last week, Guaranty Bank of Milwaukee ($1 billion in assets and 118 branches) bit the dust. The week before, it was First NBC Bank of New Orleans ($4.7 billion in assets and 29 branches).
The U.S. economy is, by most accounts, rolling along. The current expansion is now in its 95th month. The economy has added payroll jobs for a record 79 months, and the unemployment rate is at 4.4 percent. When expansions get longer, a few things happen. Banks, consumers, and companies all get more confident about their ability to handle debt, which leads to more credit being extended. At the same time, lenders seeking growth start to become more aggressive about putting money in the hands of people. Once all the people who can easily afford to purchase cars have taken car loans or mortgages, banks must seek out more marginal borrowers in order to keep boosting their profits. And once credit gets distributed a little too widely, borrowers begin to default—even if nothing else changes in the economy or the climate for credit.
For the first time in a decade, the Federal Reserve is raising interest rates—thus increasing the cost of borrowing and servicing debt. Before December 2015, when the Fed boosted the federal funds rate from zero to 0.25 percent, it had been 9.5 years since the Fed last raised the interest rates it controls. Janet Yellen has since raised rates in 0.25 percent increments twice. Yes, interest rates are still remarkably low, and the moves have been small. But it’s the direction that matters. For a decade, people in the economy had been conditioned to think that interest rates don’t really go up—and they borrowed and planned accordingly.
After hitting the lowest level since 2006 in the third quarter of 2016, mortgage delinquency rates rose in the fourth quarter to 4.8 percent. The delinquency rate on credit card loans, while still at a very low level, rose for three straight quarters in 2016. The volume of auto loans that are delinquent is rising rapidly. All these metrics will likely continue to rise. This doesn’t mean we’re headed for another financial meltdown, merely that the business cycle has not been repealed and this cycle is in the late stages.