…Trump speaks at UN. Oil prices move higher. Unintended consequences of Iranian sanctions. Consumer confidence spikes. Home prices solid but moderating. Waiting on the Fed. Higher rates and the budget deficit. Name game.
Financial Review by Sinclair Noe for 09-25-2018
DOW – 69 = 26,492
SPX – 3 = 2915
NAS + 14 = 8007
RUT + 3 = 1708
10Y + .02 = 3.10%
OIL + .24 = 72.32
GOLD + 2.00 = 1201.80
Trump went to the UN today. After missing his initial time slot at the annual New York City summit of world leaders due to tardiness, Trump kicked off his morning speech by patting himself on the back for what he considers a job well done. Trump said, “In less than two years, my administration has accomplished more than almost any administration in the history of our country.” That kind of bragging might work on the campaign trail but it didn’t fly at the UN General Assembly, instead the attendees started laughing. Trump, clearly caught by surprise by the laughter said, “I didn’t expect that reaction, but that’s OK,” and that drew even more laughter.
Otherwise, the speech was fairly predictable, railing against such evils as globalism, Iran and the United Nations. It came just after Europe, China and Russia agreed to build a vehicle to let their companies keep trading with Iran, defying Trump’s new sanctions. This could be a big step toward building a global financial architecture that replaces the U.S. dollar. Besides calling out Iran, Trump also criticized China for its trade practices but made no mention of Russia’s interference in Syria’s war or its suspected meddling in U.S. elections.
Delivering a harsh message to OPEC members, Trump called on them to stop raising oil prices and to pay for their own military protection. He threatened to limit U.S. aid only to countries that are friendly to the United States. A Gulf diplomat said in response that “we have been doing our fair share of burden sharing.” Crude oil prices hit a four-year high, in part due to imminent U.S. sanctions on Iranian crude exports and the apparent reluctance of OPEC and Russia to raise output to offset the potential hit to global supply. In remarks to reporters on his way to his speech, Trump said he would not meet the Iranians until they “change their tune.” A spokesman for Iran said they had not requested a meeting with Trump.
More and more European companies are leaving Iran following the re-imposition of U.S. sanctions. And it may be tempting for Americans to write off Europe’s efforts to save the Iran nuclear deal. Not so fast. A new plan by Germany, France, Britain, China and Russia to create special financial infrastructure to work with Iran could be a credible challenge to the U.S. dollar’s long global dominance.
The U.S. sanctions make it virtually impossible for an entity with any U.S. exposure — including correspondent accounts with U.S. banks — to do business with Iran. The cost of defying American sanctions can be steep: in 2015, BNP Paribas, the French bank, paid a penalty of almost $9 billion for violating U.S. sanctions against Iran, Cuba and Sudan. Now sanctions are back, and it is clear to the Europeans (as well as the Chinese and Russians) that any future transactions with Iran must go through entities insulated from the American financial system. Germany, France and the U.K. could set up a multinational state-backed financial intermediary that would deal with companies interested in Iran transactions and with Iranian counter-parties. Such transactions, presumably in euros and pounds sterling, would not be transparent to American authorities. European companies dealing with the state-owned intermediary technically might not even be in violation of the U.S. sanctions as currently written. In his recent State of the European Union speech, European Commission President Jean-Claude Juncker called for strengthening the euro’s international role and moving away from traditional dollar invoicing in foreign trade. China and Russia have long sought the same thing, but it’s only with Europe, home of the world’s second biggest reserve currency, that they stand a chance of challenging American dominance. Trump’s confidence in his ability to weaponize the dollar against adversaries and stubborn allies alike could eventually backfire for the U.S. as efforts to push the dollar off its pedestal grow ever more serious.
The Conference Board said its consumer confidence index increased to a reading of 138.4 this month from an upwardly revised 134.7 in August. That was the best reading since September 2000 and the index is not too far from an all-time high of 144.7 reached that year. Consumers’ assessment of labor market conditions improved sharply even as the trade war between the United States and China escalated.
The consumer confidence report added to fairly upbeat data on consumer spending and manufacturing that have suggested solid economic growth in the third quarter. Gross domestic product increased at a 4.2 percent annualized rate in the second quarter. Growth estimates for the July-September quarter are above a 3.0 percent pace.
Separately, the S&P CoreLogic Case-Shiller composite home price index of 20 U.S. metropolitan areas rose 5.9 percent in July from a year ago after increasing 6.4 percent in June. Prices in the 20 cities edged up 0.1 percent in July from June on a seasonally adjusted basis. In Phoenix, existing home prices increased 0.7% month-over-month through July, and prices are up 7.5% over the past 12 months.
Moderation in house price inflation was also underscored by another report from the Federal Housing Finance Agency, which showed its home price index rising 0.2 percent in July after gaining 0.3 percent in June. The FHFA’s index is calculated by using purchase prices of houses financed with mortgages sold to or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac. Consumer demand is still strong but buyers are not bidding up prices of homes as much as they had been. Increasing prices and mortgage rates are reducing affordability and sales and that is translating into slower price gains.
The Federal Reserve FOMC meeting is underway. Expect the Fed to announce a rate hike tomorrow, with an update on their economic forecasts and dot plots. The yield on the 10-year Treasury note traded above 3.11% today. That is the highest level since May 18, when the 10-year yield hit a high of 3.128 percent. If we break the 3.13 level and the Fed is clearly still hiking, the next port of call is going to be 3.25. It’s a matter of when, not if. Investors will be paying attention, if there are any tweaks, to the Fed’s language on the level of accommodation that rates are providing to the economy. Playing down the accommodativeness of policy could create short-term uncertainty for markets as they absorb the implications.
Higher interest rates affect everybody from major corporations to individuals to the government. The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs. The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive. With less money coming in and more going toward interest, politicians will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions.
Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on other programs. Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office. The deficit is expected to total nearly $1 trillion next year — the first time it has been that big since 2012, when the economy was still struggling to recover from the financial crisis and interest rates were near zero.
A federal appeals court said Uber drivers seeking to be classified as employees rather than independent contractors must arbitrate their claims individually, and not pursue class-action lawsuits. Drivers had complained that Uber misclassified them as independent contractors to avoid having to reimburse them for gasoline, vehicle maintenance and other expenses.
Nike reported quarterly revenue beat estimates. Revenue rose 9.7 percent. The company’s net income rose to $1.09 billion, or 67 cents per share in the quarter, from 57 cents per share. The company, which came out with a controversial ad campaign featuring former NFL player Colin Kaepernick earlier this month, was trading down nearly 2 percent at $83.30 after the bell.
Raytheon has been awarded a $1.5 billion modification to a contract for the sale of Patriot missile systems to Poland.
Shares of Facebook fell after the two founders of photo-sharing app Instagram left the social networking giant under unexplained circumstances. Facebook bought Instagram in 2012 for $1 billion. Instagram has over 1 billion active monthly users, a sharp rise from the 30 million users when Facebook bought the app. Facebook’s shares are currently down about 6 percent this year.
Arby’s owner Inspire Brands is buying the Sonic drive-in hamburger chain. Privately owned Inspire is paying $43.50 per share cash, or $2.3 billion, for publicly traded Sonic, which has 3,600 restaurants in the U.S.
The name-game continues today. Yesterday we told you Weight Watchers was changing its name to WW. Also, Walmart removed the hyphen. Papa John’s was removing the apostrophe. Also, word that Michael Kors bid on Versace. Today, word that Michael Kors will change its name to Capri Holdings. Also today, Dunkin Donuts announced that in January it will just be known as Dunkin. You can still buy donuts there, they just aren’t proud to admit it.