Financial Review by Sinclair Noe for 11-05-2015
DOW – 4 = 17,863
SPX – 2 = 2099
NAS – 14 = 5127
10 YR YLD + .02 = 2.25%
OIL – .94 = 45.38
GOLD – 3.90 = 1104.60
SILV – .12 = 15.04
Janet Yellen testified on Capitol Hill yesterday afternoon. Yellen was speaking at a hearing about financial regulation. Congress in 2010 created the position of vice chairman for regulation at the Fed and required that person to report regularly, but 5 years later, the position has not been filled; Ms. Yellen testified instead. The conversation quickly turned to interest rates, and Yellen said the Fed could raise rates in December; she thinks the economy is performing well, and so a rate hike would be appropriate, but no decision has been made. The markets are now putting the odds of a December rate hike at almost 60%.
The Bank of England said “no” to an interest rate hike this morning; they cited gloomier prospects for global growth. Bank of England chief Mark Carney, who had previously played down threats to major economies from slowing growth in China and other emerging markets, sent a cautious message that pointed to UK borrowing costs remaining on hold until 2017. The pound fell a full cent against the dollar in response, but the dollar handed back all of its gains in morning trade to stand flat on the day. The BOE’s cautionary path is in-line with the European Central Bank and other central banks in the Eurozone, and China which is pursuing expansionary policies, and Japan which is continuing with Abenomics, but it is contrary to the Federal Reserve’s assertions that it is onboard with a December rate increase.
They are calling it “Super Thursday” in Britain because of the deluge of economic data. In addition to holding interest rates at 0.5%, the BOE voted 9 to 0 to hold the central bank’s asset-purchase program at $573 billion. All outcomes were expected. As for inflation, the BOE sees a CPI of less than 1% into the second half of 2016.
The United Nations says refugees and migrants continue to pour into Europe at a rate of 5,000 per day. About 760,000 people have already crossed the Mediterranean in 2015, mainly to Greece and Italy, after fleeing wars in Syria, Afghanistan and Iraq, as well as conflicts in Africa. It is expected that more than one million people will have fled to the continent this year, and about 3 million are expected by 2017. The European Union issued an economic forecast on the impact of the migrants, and it is slightly positive – a net gain of about a quarter of a percent over the next 2 years.
The long-awaited text of the Trans-Pacific Partnership has been released (full text here), revealing the details of a landmark trade pact aimed at freeing up commerce in 40% of the world’s economy. Up until now, TPP has been kept largely from public scrutiny. With the release of the text – some 30 chapters plus side amendments – Congress begins months of review and then debate. Votes for approval in the House and Senate next spring. Under fast-track rules, Congress is prohibited from amending the TPP deal. Also expected along the way are government reports that will evaluate the economic benefits of the agreement. Those issues include the environment, worker rights, investment, automotive and agricultural market access, rules of origin, currency manipulation, and the potential effect on U.S. jobs and the economy.
Asian shares continued their climb higher today, sending the Shanghai Composite Index into a bull market as government support underpinned a rebound from China’s $5T stock rout. China’s main stocks are now more than 20% above their August 26 low.
New applications for unemployment benefits last week recorded their largest increase in eight months, but remained at levels consistent with a fairly healthy labor market. Initial claims for state unemployment benefits rose 16,000 to a seasonally adjusted 276,000 for the week ended Oct.31, the Labor Department said. It was the largest weekly increase since late February. Claims had hovered near 42-year lows for much of October. Still, last week marked the 35th straight week that claims were below the 300,000 threshold.
Layoffs in October fell 14% from September. According to global outplacement firm Challenger, Gray & Christmas, the country’s employers announced plans to cut 50,504 workers from their payrolls last month. The energy sector saw the heaviest number of cuts last month with 17,344 jobs slashed. Far behind in second place was the retail sector at 5,153 layoffs in October.
Investors and economists alike do everything they can to guess the jobs report numbers on the first Friday of each month. ADP is the most common preview, but TrimTabs also previews the payrolls, and last month they were more accurate. So now we have the payrolls gains projected for October from TrimTabs. They signal that the economy added 178,000 jobs in October, up from 149,000 jobs in September.
The Labor Department said productivity, which measures hourly output per worker, increased at a 1.6 percent annual rate after increasing at an upwardly revised 3.5 percent rate in the second quarter. Manufacturing productivity increased at its fastest pace in four years, led by the durable goods sector. The trend in productivity remained weak. Productivity increased only 0.4 percent compared to the third quarter of 2014. Also in the third quarter, hours worked declined at a 0.5% rate, the first decline in 6 years.
The National Association of Realtors has published its annual profile of buyers and sellers, not including investors. Sixty-four percent of first-time buyers surveyed said their primary reason for purchasing was the “desire to own.” That is up from 53 percent just one year ago. For repeat buyers, ownership tied with the desire for a larger home. The view of home ownership as a good investment also moved slightly higher to 80 percent; 43 percent of those surveyed said they see housing as a better investment than stocks. While the majority of buyers do finance their homes with mortgages, that share dropped slightly in the latest survey; and more buyers pay cash. The average FICO credit score for those getting a mortgage is historically high today, but more borrowers are getting approved, according to an analysis by Zillow. Today’s buyers are using the internet at an ever-increasing pace to find their potential purchases. They are faster, buying in an average 10 weeks compared with 12 between 2009 and 2013. The median time on the market for recently sold homes stayed at four weeks for the second-straight year.
Expedia is buying online vacation rental marketplace operator HomeAway for $3.9 billion. HomeAway says it currently features more than a million paid vacation rental home listings in 190 countries, and owns a portfolio of other rental sites. The deal is expected to close in the first quarter of 2016.
U.S. and European security sources now believe a bomb planted by Islamic State is the likely cause of last weekend’s crash of a Russian airliner over Egypt’s Sinai Peninsula, but cautioned that there was no conclusive proof yet. The Airbus A321 crashed on Saturday after taking off from the resort of Sharm el-Sheikh on its way to St. Petersburg, killing all 224 people on board. ISIS affiliates in Egypt’s Sinai Peninsula insist that they took down a plane, and if this is true it has major geo-political ramifications in the Middle East. So far, Russia has focused most of its involvement in Syria on hitting rebel targets to shore up territory for the regime of Syrian President Bashar al-Assad, an ally of Russian President Vladimir Putin. Russian airstrikes have mostly hit areas where non-ISIS rebels who fight the Assad regime operate. Experts have accused Russia of obscuring its true intentions in Syria, to prop up the Assad regime rather than defeat ISIS. But if ISIS is responsible for bombing the Russian civilian jetliner, everything changes. The UK says they have evidence ISIS is responsible for downing the plane. Britain, Ireland, Germany and the Netherlands have suspended flights to and from Sharm al-Sheikh, leaving thousands of European tourists stranded in the Red Sea resort where the plane took off from. It is too early to know with certainty the cause of the crash, and far too soon to know if Russia will acknowledge ISIS as the cause, even if the evidence is conclusive.
The U.S. House of Representatives has voted to pass a 3 year transportation funding bill that also renews the Export-Import Bank’s charter, but final provisions of the measure will be subject to negotiations with the Senate. The measure authorizes federal spending on road, bridge and rail transit infrastructure projects for six years, providing guaranteed funding for three years. The measure also would revive the Export-Import Bank, which has been idled for more than four months since its charter expired on June 30.
The State Department has officially rejected TransCanada’s request to pause the government’s evaluation of the proposed Keystone XL pipeline. A State Department spokesperson said there was no legal requirement to pause the review based on the applicant’s request.
A jury in Manhattan today found two former London traders for a Dutch bank, Rabobank, guilty on all 22 counts of criminal fraud and conspiracy to rig Libor, the London interbank offer rate, a global interest rate benchmark. More than a half-dozen banks, including Rabobank, have paid more than $10 billion to settle regulatory charges that they conspired to rig Libor. In a separate case in London this summer, a former UBS and Citigroup trader, Tom Hayes, was convicted of conspiring with others to manipulate Libor. Six former brokers who were accused of assisting Hayes are on trial in London. Considering that Libor is a measure tied to more than $350 trillion in loans and securities, it is hard to imagine that only a dozen or so traders knew about the rigging. Even if this doesn’t result in higher level convictions, it will be fodder for multiple civil lawsuits.