Financial Review

The Radical and Necessary Notion

1Q GDP revised up to 0.8%; economy slogs along. Yellen hawkish, with an oops. Why G7? Why Sears? Philips turns out the lights. ACLU-MSFT tag team for 4th Amendment. Obama in Hiroshima.

Financial Review by Sinclair Noe for 05-27-2016

DOW + 44 = 17,873
SPX + 8 = 2099
NAS + 31 = 4933
10 Y + .03 = 1.85%
OIL – .06 = 49.40
GOLD – 9.50 = 1211.00

 

Gross domestic product rose at 0.8% rate from January to March, up from an initial 0.5% reading. The upward revision reflected a smaller drag from trade than previously estimated. The government also reported a rebound in after-tax corporate profits, which increased at a 0.6 percent rate in the first quarter after plunging at an 8.4 percent pace in the fourth quarter. Income growth for the first quarter also was revised higher. The economy has been hurt by a strong dollar and sluggish global demand. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.9 percent rate.

 

Consumer spending, the main engine of the economy, rose 1.9% in the first quarter. That was unchanged from the government’s original estimate. Americans spent more on housing, utility bills and health care and pared back purchases of new cars. Outlays on new home construction surged at 17.1% clip in the first quarter, up from a prior 14.8% estimate. That’s the biggest gain in nearly four years. Business investment declined, in some cases sharply. Outlays on structure such as oil rigs sank 8.9% and spending on new equipment such as computers fell 9%.

 

The PCE index, the Federal Reserve’s preferred inflation barometer, rose just 0.8% in the 12 months ended in March. That’s down from 1% in the prior month. Inflation as measured by the PCE index rose 0.1% in March, as did the so-called core measure that strips out the volatile food and energy categories. Consumer spending barely rose in March. Americans increased spending by a 0.1% last month. Incomes, meanwhile, advanced a sharp 0.4% last month. The savings rate in March climbed to 5.4% from 5.2%, matching the highest level since the end of 2012.

 

So inflation is not a problem right now, but the Fed is afraid that if oil prices stay at or above current levels, it will be inflationary. They also are afraid of wage push inflation, which results from a tight labor market. We still have some slack in the labor market but it is getting tighter. We still aren’t seeing consumer spending push the economy into high growth mode because people are still cautious and trying to save, although retail sales are picking up a little and the housing market is showing some serious muscle again. Business is still avoiding investment, which seems to be habit now, even though businesses have been consistently hiring workers. Overall, the revision to GDP showed the economy continues to slog along.

 

Janet Yellen thinks the economy has made a great deal of progress. Federal Reserve Chair Janet Yellen spoke today at an event hosted by Harvard University. Her speech comes after a number of Fed policymakers this week struck hawkish tones on the trajectory of interest rates. Yellen said the Fed doesn’t have the typical scope to cut rates in case of a shock, in other words they want some ammunition to combat the next inevitable economic downturn which could be coming sooner rather than later. Yellen said the economy continues to improve and if the gains continue, a rate hike would be appropriate in the coming months. Will the Fed raise rates at the June meeting? Well, they can; they have telegraphed their intentions so the markets will not be surprised. If it looks like the Brexit referendum will pass or if there is really nasty economic data (such as a horrible May Non-Farm Payroll report next Friday – they can still postpone a rate hike. Whether the Fed hikes rates in June or July, in the long run, there really isn’t much difference. We know they really, really want to hike rates.

 

As Yellen spoke, Treasurys fell, and the odds of a rate hike in the Federal Fund Futures market increased. Stocks slid to the lowest levels of the day. And while Yellen’s outlook for a hike were front and center, she actually said some other stuff. Yellen said the Federal Reserve did not see the financial crisis coming, even though there were apparent clues. She said the explosion in borrowing was a sign, but the Fed did not see the risks evolving into a full-blown crisis.

 

Crude oil prices are back below $50 in early trading on a round of profit taking by investors and with the U.S. dollar perking up. Traders are also positioning themselves ahead of the next OPEC meeting scheduled for June 2. Energy market watchers are unsure if key OPEC members will agree on a production cap or increase output. Also consider that if the Fed hikes rates in the next couple of months, it would signal a stronger dollar, which would mean lower oil prices. For the week, oil was 1.5% higher, for the third weekly gain in a row.

 

Enjoy the low gasoline prices this Memorial Day weekend while they last. Even with global oil prices grinding higher, holiday travelers will see the cheapest prices at the pump in more than a decade for this holiday weekend, saving nearly 50 cents a gallon compared with last year. The average gas station has raised its prices 17 cents a gallon over the last month — and 5 cents over the last week alone. According to the AAA motor club the average price for a gallon of regular gasoline nationally was $2.31, 43 cents below a year ago.

 

The G-7 winds down. Leaders from seven of the world’s biggest industrial powers met in central Japan over the past two days, discussing topics as varied as currency manipulation, Brexit worries, and North Korea. The group agreed to avoid “competitive devaluation” of its currencies and concluded, “Global growth is our urgent priority.” Do they ever accomplish anything at a G7 meeting?

 

Global investors have raised their holdings of cash and bonds, citing fears about potential shock waves from a Brexit vote rippling beyond Britain and the increased likelihood of a rise in U.S. interest rates this summer. Fund managers polled by Reuters in the United States, Europe, Britain and Japan raised cash allocations to 6 percent in May, the highest level since January when global equity markets were in free-fall. They also increased their bond exposure to 37.8 percent from 37.6 percent in April. Investors trimmed their equity allocation to 46.4 percent.

 

The American Civil Liberties Union has filed a motion to join Microsoft’s effort to challenge DOJ gag orders that prevent the tech company from telling customers when the government has ordered it to turn over data. Requests from law enforcement agencies for access to users’ personal information routinely flood tech companies that store vast amounts of data in the cloud. Massive data centers run by Microsoft, Amazon and other big tech companies allow businesses and individuals to access email, photos and other content from multiple devices, wherever they are. Law enforcement officials say that access to such data is critical to fighting crime and terrorism. But the ACLU believes the fourth amendment is critical to the Constitution.

 

Secretary of Labor Thomas Perez announced that Verizon Communications and unions representing nearly 40,000 wireline workers have reached a tentative deal to end a strike that has stretched for more than month. The two sides are writing up the agreement and it still needs to be ratified but workers are expected back on the job next week.

 

Royal Philips said it sold shares in the IPO of its 125-year-old lighting division at the lower end of the targeted range, valuing the business at $3.3 billion. The sale marks the end of Royal Philips as a sprawling conglomerate that produced everything from light bulbs and television sets to medical scanners and coffee machines.

 

Sears reported a bigger quarterly loss and said its chief financial officer would step down. Sears has lost more than $8 billion over the last five years. The company has managed to post a quarterly profit just once in the last four years. Sears said it did not intend to borrow money to fund operating losses and expected to close unprofitable stores more aggressively. The main focus this year will be to generate positive earnings. Sears Holdings said it is “exploring partnership opportunities” for top brand names such as Kenmore appliances, DieHard batteries and Craftsman tools to widen distribution, possibly even licensing rights with another company. So, if you can buy Craftsman tools someplace else, why would you ever go into a Sears store again?

 

Shares of Valeant Pharmaceuticals rose 8.5 percent after news reports of a takeover bid. The Wall Street Journal and Reuters said the company had rejected an overture made earlier this year from Takeda of Japan and the private equity firm TPG Capital.

 

Lab and medical equipment company Thermo Fisher Scientific said it will buy imaging company FEI for $4.2 billion in cash.

 

Abercrombie & Fitch posted its 13th straight quarter of sales decline, hit by lower customer traffic, as the apparel retailer struggles in a tough market that forced rivals Aeropostale and American Apparel into bankruptcy.

 

The atomic bombing of Hiroshima, Japan in 1945 was the beginning of a new era of warfare. But speaking in Hiroshima today, president Obama argued that it also signaled the beginning of a new moral era, one that challenges us to change the way we think about humanity and technology. And he warned of dire consequences if we don’t.

 

In a speech at the Hiroshima Peace Memorial, Obama said the nuclear attacks that ended World War II have a clear, simple legacy: We now have the ability to destroy ourselves. As the first sitting US president to visit Hiroshima, Obama didn’t offer an apology for the bombing. But he said the best way to honor its victims is to advance “the radical and necessary notion that we are part of a single human family.”

 

Have a good and safe Memorial Day.

 

 

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