Financial Review

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…Fed minutes dovish. Stocks erase early losses. Trade disputes still muddled. Uber nixes autonomous cars in AZ. GE’s long arc of losses. Retail mixed.

Financial Review by Sinclair Noe for 05-23-2018

DOW + 52 = 24,886
SPX  + 8 = 2733
NAS + 47 = 7425
RUT + 2 = 1627
10 Y – .06 = 3.00%
OIL – .38 = 71.82
GOLD + 2.40 = 1294.00

 

Stocks ended with small gains after minutes from the Federal Reserve’s latest policy meeting suggested higher inflation may not result in faster interest rate hikes. Most Fed policymakers thought it likely another rate increase would be warranted “soon” if the U.S. economic outlook remains intact, and many participants saw little evidence of general overheating of the labor market. Inflation, even a bit above 2 percent, may not necessarily mean a faster rate of increases. The Fed has hiked borrowing costs once so far this year, in March, and policymakers are currently about evenly split between those who expect two more rate rises this year and those who anticipate three. Investors overwhelmingly expect a rate rise at the next meeting on June 12-13. Although inflation hit the Fed’s 2% target in the latest reading for March, for the first time in a year, officials were not convinced it would remain there for long.  According to the minutes: “It was noted that it was premature to conclude that inflation would remain at levels around 2%, especially after several years in which inflation had persistently run below the Fed’s 2% objective,” the minutes said. Only a “few” officials thought inflation might move “slightly” above the 2% target. I guess it took so long to get to 2% inflation, that the policymakers just don’t believe it will really last. The summary also said that participants had “noted that a temporary period of inflation modestly above 2% would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.” Now is probably a good time to look at the Fed’s symmetric inflation objective. The Fed has targeted inflation at 2%. As if to drive home the point, the minutes use the word “symmetric” nine times in reference to inflation. And 2% is a target, not a ceiling, so if the Fed is under or over 2%, it should be equally concerning. The policy decision at the May meeting was widely seen as an affirmation by Fed officials that they will stay the course on their plans to increase rates to historically normal levels, after leaving them near zero for years following the Great Recession. The minutes seem to affirm that Fed officials are not wavering in that approach — though they report officials expressing “a range of views” on the amount of rate increases that will be needed to maintain the Fed’s policy objectives in the medium term.

 

While some Fed officials have warned in recent months that they are concerned about the economy “overheating” — a condition when very low unemployment sets off a rapid increase in wages and prices, which then forces the Fed to raise rates abruptly — there were few signs of such concerns in the May meeting statement.

 

Officials disagreed on whether the flattening of the yield curve was a reliable signal of a recession. The yield curve is the plot of government bonds of different maturities, and an inverted yield curve has often preceded recession. Several officials said it would be important to monitor the slope of the curve. A few others thought that central bank asset purchases and other factors made it less reliable.

 

A few developments in the data appear to have surprised officials in recent months. One was a slowdown in growth in advanced countries around the world, particularly Britain. Consumer spending in the United States has lagged the expectations of Fed staff in recent months, the minutes showed, which in turn has lowered the staff’s growth projections slightly.

 

On the trade dispute with China, officials said the possible outcome on inflation and growth remained “particularly wide,” but there was some concern the dispute would hurt business confidence. In several Fed districts, the minutes said, “contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending.” In other cases, “it was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S. competitiveness.”

 

Stocks rallied in late trade, erasing losses after the Fed minutes revealed a dovish outlook. reassured investors that the central bank will not be too aggressive with raising interest rates. The probability of three more rate hikes by the end of this year instead of two slipped immediately after the minutes.

 

This morning, Trump played down expectations for a China trade deal to be hatched soon, instead signaling a possible new direction for trade talks. The statement comes as the White House negotiates the framework of a deal to avoid tariffs between the countries. Also today, Trump railed against Mexico and Canada’s efforts in NAFTA, saying both of the United States’ neighbors had been very difficult.

 

New-home sales ran at a seasonally adjusted annual 662,000 rate in April. The Commerce Department reports April was 1.5% lower compared with March, but 11.6% higher than a year ago. The median sales price in April, $312,400, was 0.4% higher than a year ago.

 

The Trump administration is considering a plan that would impose new tariffs on imported vehicles on national-security grounds. Trump has already used a legal provision known as Section 232 to impose global tariffs on imported steel and aluminum, and now the administration is considering starting a probe of imported cars under the same law, possibly applying tariffs at the end. According to industry officials briefed on broad outlines of the plan, Trump has repeatedly floated the idea of tariffs on auto imports in meetings. The plan remains in its early stages and is likely to face significant opposition from a number of interest groups, from foreign trading partners to domestic dealers of imported cars. Applying the tariffs under Section 232, meanwhile, would require a lengthy investigation and report from the U.S. Commerce Department. Shares of Ford, GM, and Toyota all traded lower today.

 

Uber Technologies released its first-quarter financial results, posting net income of $2.4 billion on gross bookings of $11.2 billion. Uber said gross bookings grew 55% from the year-earlier period. After adjustments, Uber reported a loss of $577 million, about half the loss of the prior quarter.

 

Uber has shut down its self-driving car operation in Arizona two months after a fatal crash involving one of its vehicles. Uber will still test autonomous vehicles in Pittsburgh, Pennsylvania, and two cities in California. It aims to resume self-driving operations this summer, likely with smaller routes and fewer cars. Uber suspended its program in Arizona and elsewhere immediately after one of its SUVs operating in autonomous mode hit and killed a woman crossing the street on a March night in Tempe, marking the first fatality involving a self-driving vehicle. The crash sparked a backlash in Arizona, where Governor Doug Ducey suspended Uber’s self-driving testing, a little more than a year after he gave the company a warm reception and poked fun at California’s stricter regulations. The crash is under investigation by the National Transportation Safety Board. Uber will wait until the agency issues its preliminary report on the crash, expected within the next couple of weeks, before it puts its self-driving cars back on the road.

 

General Electric dropped 7.2%, on heavy volume. It was the worst single day drop since last November, when John Flannery, then newly named CEO, unveiled a transformation plan, including the halving of the company’s dividend. Today, Flannery started speaking at the Electrical Products Group conference in Florida. Flannery explained that turning around GE was a challenge because GE is a “huge company” with a “long arc of history,” so he owed it to the company and its investors to act in a “very deliberate” and “thoughtful” way. What may also be worrying investors, however, is that when Flannery was asked whether he could “stand behind” the current annual dividend rate of 48 cents a share, he was less than definitive. Flannery said that while he was aware of how important the dividend was for investors, “it’s ultimately a function of the free cash flow of the company and that’s ultimately a function of our operating performance with the assets and things that we do with the portfolio.” In other words, he didn’t simply say, “Yes.” GE’s stock has tumbled 19% year to date, and 50% the past 12 months.

 

Retailers were mixed, with Target sinking 5.7 percent after the retailer’s quarterly profit rose less than expected as price cuts, higher wages and investments into its online business dented margins. Tiffany surged 23.3 percent after the jeweler’s quarterly results blew past estimates and the company raised its full-year profit forecast and announced a $1 billion buyback program. Ralph Lauren also soared, ending up 14.3 percent after the company’s higher margins helped deliver a solid profit that beat analysts’ estimates. Also, Lowe’s gained 10.4 percent after the home improvement retailer maintained its annual financial targets and billionaire investor Bill Ackman said his hedge fund had taken a roughly $1 billion stake in the company.

 

Shares of Williams-Sonoma soared nearly 15 percent in after hours trading. The home and kitchen retailer reported first quarter earnings and revenue that beat expectations and prompted the company to strengthen outlook for fiscal 2018 revenue and earnings.

 

L Brands stock plunged more than 6 percent after the bell. The parent company of brands like Victoria’s Secret and Bath and Body Works reported first quarter financial results that beat analyst expectations on both top and bottom lines, but weakened second quarter guidance.

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