ISDAfix settled, Fed jawbones, Detroit schools closed, and other economic news of the day.
Financial Review by Sinclair Noe for 05-03-2016
DOW – 140 = 17,750
SPX – 18 = 2063
NAS – 54 = 4763
10 Y – .07 = 1.80%
OIL – 1.13 = 43.65
GOLD – 5.20 = 1286.70
Eurozone growth will be slower than previously expected with subdued inflation in 2016, the European Commission announced in its spring economic forecast, warning of high risks to the bloc’s economy. The GDP of the 19-nation area is now predicted to expand just 1.6% this year, less than the 1.7% growth of 2015, while consumer prices are seen up 0.2%, significantly below the 0.5% increase projected in February.
The Reserve Bank of Australia has cut its official cash rate by 25 basis points to a historic low of 1.75%, the first reduction since May 2015. The RBA noted that inflation was “unexpectedly low,” and it also gave a cautious outlook for the Australian economy. Following the rate cut, the yen surged against the Australian dollar, pushing the greenback below ¥106-yen for the first time in about 18 months.
Federal Reserve Bank of Atlanta President Dennis Lockhart says financial markets may be underestimating the odds of a rate increase in June. Lockhart calls it a real option. At the most recent FOMC meeting Federal Reserve officials signaled that they expect to raise interest rates twice this year, while investors see only one move. If economic theory is any guide, even the central bank’s more hawkish outlook would still leave the target for the benchmark policy rate way too low. Meanwhile, San Francisco Fed President John Williams laid out a “pretty optimistic” outlook, with unemployment coming down, growth rebounding and inflation picking up, allowing the Fed to raise interest rates gradually. Williams said he doesn’t agree with negative scenarios for the economy and doesn’t take a “strong signal” from the 0.5% growth rate in the first quarter. He said GDP data were distorted by seasonal factors and growth was actually closer to 2% annual rate.
Seven of the world’s biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging the ISDAfix, an interest rate benchmark used in the $553 trillion derivatives market; ISDA stands for the International Swaps and Derivatives Association. The settlement resolves antitrust and other claims against Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase and Royal Bank of Scotland. Several pension funds and municipalities accused the banks of engaging in a conspiracy to rig the “ISDAfix” benchmark from 2009 to 2012. Other bank defendants have yet to settle.
Nearly every school in Detroit was closed for the second straight day, once again causing more than 45,000 students to miss class because of a funding crisis that has put the city at odds with teachers. The Detroit Teachers Federation called for a mass sickout after the school district’s management announced over the weekend that it would not be able to pay teachers in the summer. Union leaders met with district leadership on Monday but did not reach an agreement. Though most school districts in the US are run by local governments, the state took over the Detroit school district because of financial difficulties in 2009. A series of emergency managers have headed the district in the seven years since.
Puerto Rico’s debt crisis has moved into a more perilous phase after it missed a $422 million bond payment deadline for its Government Development Bank. Treasury Secretary Jack Lew warned in a letter to Congress that a US “taxpayer-funded bailout may become the only course available” if the proposed restructuring legislation isn’t approved. The missed payment, the largest so far by the island, is widely viewed on Wall Street as foreshadowing additional defaults this summer, when more than $2 billion in bills are due.
Mortgage buyer Freddie Mac said it has a loss of $354 million in the quarter, compared with a prior-year profit of $524 million and a fourth-quarter profit of $2.16 billion. Ahead of the release, some had speculated that Freddie Mac might need what’s called a “draw” from the U.S. Treasury this quarter. While that didn’t occur, the company is clearly vulnerable to needing one in the future. Some shareholders of Freddie have pursued court action to invalidate the 2012 Treasury decision to sweep all of the profits of Freddie and its Fannie Mae to the government. Freddie and Fannie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new home loans. The two companies don’t directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.
According to the latest report from CoreLogic, Home prices nationwide, including distressed sales, moved higher year-over-year by 6.7% in March 2016 compared with March 2015 and increased month-over-month by 2.1% in March 2016 compared with February 2016. The highest appreciation was in the West, where prices continue to increase at double-digit rates.
Pfizer reported first-quarter results that blew past analyst estimates, boosted by sales of its new cancer and arthritis treatments and the acquisition last year of hospital products company Hospira. The largest US drugmaker also raised its revenue and earnings forecast for the year, helped in part by the weakening dollar.
UBS Group reported a 64 percent decline in first quarter profit, with earnings at its wealth-management and securities unit hit hardest. UBS is planning job cuts. Commerzbank AG, Germany’s second-biggest lender, reported first-quarter profit was cut in half. HSBC Holdings reported profits that beat analyst forecasts, as cost-cutting measures started to bear fruit.
Sprint reported a wider quarterly loss and added fewer subscribers than expected, but vowed to cut more than $2 billion in costs in the current fiscal year to stop the red ink.
Halliburton said it would consider acquisitions to bolster its weaker businesses as the oilfield services company looks to move on after a deal to buy smaller rival Baker Hughes fell through. Halliburton also reported a higher-than-expected adjusted profit for the first quarter.
Detroit automakers reported another month of strong demand from US consumers for trucks and sport utility vehicles, but their shares dropped as analysts focused on signs the world’s second largest auto market has little room to grow. Ahead of the final tally for US light vehicle sales in April, General Motors estimated the seasonally adjusted annualized selling rate will be 17.6 million vehicles. U.S. auto sales in 2015 hit a record 17.4 million vehicles. GM said sales of the Chevrolet Silverado pickup truck rose nearly 9 percent in April compared to a year earlier. However, sales of GM’s Cadillac CTS and ATS luxury sedans plummeted 23 percent and 18 percent respectively. Other luxury brands also had weak results in April, especially for cars. Toyota’s Lexus luxury division suffered a 26 percent decline in sales of cars such as the large LS sedan, although sales of Lexus brand SUVs rose 20 percent. Still, April sales for Ford, Honda, and Nissan all beat analysts’ expectations. Ford’s sales rose 4 percent from a year earlier, Fiat Chrysler was up 5.6 percent and Toyota, No. 3 in the U.S. market, rose 3.8 percent. Honda’s sales rose 14.4 percent.
Google has agreed to buy about 100 plug-in hybrid minivans from Fiat Chrysler to expand its self-driving vehicle testing program, in the most advanced partnership to date between Silicon Valley and a carmaker. The vehicles will not be offered for sale to the public. Unlike prior testing in which Google bought Toyota vehicles from dealers and retrofitted them, the search engine giant will work with Fiat Chrysler directly to equip around 100 of the Chrysler Pacifica minivans it launched in February with Google’s self-driving technology.
Philips is spinning off its lighting division, the world’s largest maker of lights, selling a stake of at least 25% in the new company during the IPO, which will take place on Euronext Amsterdam. Philips began as a lighting company in 1891. Analysts have valued the unit as being worth roughly $5.8 billion.
Bankruptcy talk… Fairway Group Holdings, which has lost money in every quarter since it went public in 2013, has filed for Chapter 11 bankruptcy in a New York court. The grocery chain operator listed assets and liabilities in the range of $100 million to $500 million, and is seeking approval for $55 million of debtor-in-possession financing. Meanwhile, Aeropostale, delisted by the NYSE just over a week ago, is said to be preparing a bankruptcy filing this week in which it would close more than 100 of its 800 stores.
Johnson & Johnson must pay $55 million to a 62-year-old South Dakota woman who blamed her ovarian cancer on the company’s talcum powder in the second such trial loss this year. In February, J&J lost a $72 million verdict in the same St. Louis courthouse to the family of a woman who died of the disease. J&J is accused in more than 1,000 lawsuits in state and federal courts of ignoring studies linking its Shower-to-Shower product and Johnson’s Baby Powder to ovarian cancer. Women contend the company knew the risk and failed to warn customers.
Solar Impulse 2 touched down in the Phoenix suburb of Goodyear, last night around 9 PM, after a 16 hour flight from northern California. The wings of the plane are equipped with 17,000 solar cells that power propellers and charge batteries. After Phoenix, the plane will make two more stops in the United States before crossing the Atlantic. It began its globe-circling journey last year, and flew from Hawaii to the Silicon Valley last week.