Financial Review

Slipping from Highs

…..Personal income, consumer spending and inflation inch higher in April. FICO scores back at 2005 levels. Home prices up 5.8% in March. Consumer confidence down. Fed likely to hike rates in two weeks. Amazon tops $1,000 per share; Alphabet close behind. British Airways back on schedule. Payless closing more stores. Goldman Sachs props up Venezuelan bad guy. SCOTUS, once you buy it, it’s yours to do what you want.

 

Financial Review by Sinclair Noe for 05-30-2017

DOW – 50 = 21,029
SPX – 2 = 2412
NAS – 7 = 6203
RUT – 11 = 1371
10 Y – .03 = 2.22%
OIL – .04 = 49.62
GOLD – 4.00 = 1263.80
Stocks inched lower, with the S&P 500 retreating slightly from a record, as weakness in the energy and financial sectors outweighed gains in technology shares.

Aided by rising incomes and tax refunds, Americans boosted spending in April at the fastest clip since the end of 2016 and monthly inflation rebounded but remained fairly low due to lower oil prices. Personal income rose 0.4 percent in April, in line with expectations, and consumer spending increased by 0.4 percent. Americans spent far less in the first three months of 2017, inducing the economy to slow to a paltry 1.2% rate of growth. Although spending in March was revised up to show a 0.3% increase instead of no change, outlays barely rose in the first two months of the year. The personal consumption expenditures price index, the Federal Reserve’s preferred measure of inflation, rose 0.2 percent. The rate of inflation over the past 12 months slowed to 1.7% in April from a multiyear high of 2.1% in February. The core rate of inflation dipped to a 1.5% pace from 1.6% in March.

The average credit score nationwide hit 700 in April – the highest level since 2005 – according to Fair Isaac, the creator of FICO credit scores. Meanwhile, the share of consumers deemed to be riskiest, with a score below 600, hit a new low of roughly 40M, or 20% of U.S. adults who have FICO scores.

 

Meanwhile, U.S. home prices rose 5.8 percent in March, according to the S&P/Case-Shiller U.S. National Home Price Index. The gains were enough to reach a 33-month high, climbing at the strongest rate in nearly three years. The inventory of homes for sale remains “unusually low.” Prices are rising across the country. Half of the 20 cities tracked by the S&P Corelogic Case-Shiller rose more than 6% from March 2016 to March 2017. The smallest gain of 4.1%, in New York, was roughly double the rate of inflation. The index is based on a three-month average. For March, Phoenix posted a 0.6% gain, with a 5.6% gain for the past 12 months.

 

And the consumer confidence reading for May, came in at 117.9, slightly below a consensus estimate of 119. Just three months earlier, consumer confidence hit its highest level in more than 16 years, but heading into summer, the bloom is off the rose. An index that measures current economic conditions edged up to 140.7 from 140.3, but a gauge that looks out six months dipped to 102.6 from 105.4.

The economic data, while not overwhelming, still points to firming domestic demand that could allow the Federal Reserve to raise interest rates next month. Fed Governor Lael Brainard said a hike is probably coming soon, though the central bank may want to delay if inflation remains soft. The Fed has also signaled it plans later this year to begin shedding some of its $4.5 trillion in bond holdings, most of which it amassed in the wake of the financial crisis and recession. It would initially set a low cap on the securities allowed to run off, and raise that every three months, under the plan. Brainard largely agreed, saying the process should be set on “autopilot” and be “calibrated” to the differences between maturing Treasury- and mortgage-backed assets. She also suggested it would likely begin this year, noting the process could be halted and even reversed if the U.S. economy faced an “adverse shock.”

Dallas Fed head Robert Kaplan told CNBC that while he was concerned about the recent economic data, he expected two more rate hikes in 2017 and a start to the process of unwinding the Fed’s $4.5 trillion bond portfolio, most of which was accumulated after the financial crisis. However, he doesn’t think that’s because the economy is about to take off. Instead, Kaplan sees growth likely continuing on the path of about 2 percent and not the 3 percent or more boom in gross domestic product that the administration has been forecasting.

Fed Bank of St. Louis President James Bullard said the path of inflation in the U.S. is “worrisome”, speaking in Tokyo on Friday. The Fed’s plan for raising interest rates in the coming years is also too aggressive. Bullard suggested the financial markets’ view of the upcoming rate hike trajectory is currently out of lockstep with that of the Fed. Fed futures are currently pricing in around a 65 percent chance of a rate hike in June.

 

Amazon.com became the second of the current S&P 500 components to hit the $1,000 price mark. Priceline was the first S&P 500 stock to hit $1,000, doing so in September 2013. Alphabet’s Class A shares were close behind, hitting a record of $997.62 before ending the session up 0.3 percent at $996.17. Shares of Amazon have risen 33 percent so far in 2017 alone, adding roughly $120 billion to its market value.  Among the other four largest U.S. companies by market cap, Apple and Facebook share prices have also risen nearly 33 percent this year while Alphabet has gained 26 percent and Microsoft has added 13 percent. The combined market cap of the top five is near $3 trillion, or more than 13 percent of the S&P 500 index stocks’ capitalization. Amazon, the only one of the top five not in the technology sector, accounts for 17 percent of the market cap of the S&P 500 consumer discretionary sector.

 

British Airways’ flights are back to their normal schedule, following an IT glitch over the long weekend that saw thousands of people stranded around the world. Explaining the disaster over the weekend, CEO Alex Cruz told the BBC: “There was a power surge and there was a back-up system, which did not work at that particular point in time.” Customers are entitled to compensation under EU law if their flights are delayed by at least 3 hours for reasons within an airline’s control. So this glitch will likely cost British Airways about $130 million just in customer compensation.

Payless ShoeSource is preparing to launch a second round of store closings, seeking court approval to trim its retail business by closing up to 408 stores if negotiations with landlords fail to result in rent concessions. The latest closings would bring the total number of recently closed Payless stores to nearly 800. Payless is already in the process of closing nearly 400 of its locations. The Kansas-based retailer had more than 4,000 stores, employing some 22,000 people, when it sought chapter 11 protection last month.

As traditional retail stores close and vacancies mount, landlords across the country appear newly receptive to leases as short as a week. The upswing in pop-up stores, as the short-term placements are called, is playing out in all sorts of ways, and in all sorts of places — including dark malls, former grocery stores and shuttered art galleries, according to real estate brokers, landlords and tenants. The rise in pop-up stores is adding another element of change to a retail industry facing upheaval from profound shifts in consumer habits and powerful new competitors, especially online. In the past, short-term tenants focused on holidays like Halloween: Costumes were hot items in October, but sales evaporated once the calendar turned to November. For retailers, the stores can offer lower rents and far less commitment. For the landlords, the reason is just as clear: A short-term tenant is better than no tenant at all.

The Brazilian Supreme Court has order President Michel Temer must respond within 24 hours to federal police questions about his alleged involvement in a sprawling political graft probe. Executives from the world’s biggest meatpacker JBS SA said in plea-bargain testimony to police that Temer condoned bribing a potential witness in the “Car Wash” corruption case and they paid the president nearly $5 million in bribes in recent years.

 

Goldman Sachs has confirmed it has bought $2.8 billion worth of bonds from Venezuela’s central bank. According to the Wall Street Journal, Goldman paid just $865 million for bonds valued at $2.8 billion – paying about 31 cents on the dollar for the bonds. Venezuela is in the midst of the worst financial crisis in its history and has been rocked by months of violent demonstrations that have led to at least 55 deaths. Inflation has soared past 400%, there are widespread shortages of essential supplies including food and medicines, a quarter of the country is unemployed. The bond sale will likely help finance the administration of the embattled president Nicolas Maduro.

The Federal Reserve said it had fined Deutsche Bank $41 million for failing to ensure its systems would detect money laundering regulations and it said the lender agreed to increase its controls. The New York Fed found that the German bank had faulty systems to detect suspicious transactions between 2011 and 2015

 

The Supreme Court today placed sharp limits on how much control patent holders have over how their products are used after they are sold. The case concerned Lexmark International, which makes toner cartridges for use in its printers. The court ruled that the company could not use patent law to stop companies from refilling and selling the cartridges. Lexmark sold the cartridges on the condition that they not be reused after the ink ran out. Impression Products, a small company in West Virginia nonetheless bought Lexmark cartridges in the United States and abroad, refurbished and refilled them and sold them more cheaply than Lexmark does. Lexmark sued for patent infringement. Chief Justice John Roberts wrote: “The purchaser and all subsequent owners are free to use or resell the product just like any other item of personal property, without fear of an infringement lawsuit.”

 

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