Financial Review

Tumbleweed Trade

…Stocks drift, rates push higher. Mortgage tops 5%. IMF cuts growth forecasts because of trade wars. Ford to cut workers. Bribing farmers with E15. Google got gadgets. Ackman buys coffee. Michael goes to Florida.

Financial Review by Sinclair Noe for 10-09-2018

DOW – 56 = 26,430
SPX – 4 = 2880
NAS + 2 = 7738
RUT – 7 = 1621
10 Y – .03 = 3.21%
OIL + .56 = 74.85
GOLD + 1.60 = 1190.10

The S&P 500 notched its fourth consecutive day of losses. The Nasdaq Composite snapped a 3-day losing streak. This was a sloppy trading session, with lots of ups and downs and no clear direction.


The yield on the benchmark 10-year Treasury note briefly rose above 3.25 percent today, the year-end target for a number of bond strategists, who say it could continue to go higher. The rising yield has hit stocks, but analysts disagree on what level on the 10-year would really hurt stocks. Bond sales this week will show whether investors are willing to buy at these higher levels. The Treasury is auctioning about $230 billion in 3- and 10-year notes and 30-year bonds Wednesday and Thursday.


The average rate on the 30-year fixed loan sat just below 4 percent a year ago, after dropping below 3.5 percent in 2016. Today, it crossed the 5 percent mark. That is the first time in eight years, and it is poised to move higher. Five percent may still be historically cheap, but higher rates, combined with other challenges facing today’s housing market could cause potential buyers to pull back. With rates now more than a full percentage point higher than a year ago, that adds at least $200 more to a monthly mortgage payment for a $300,000 loan. It also knocks some borrowers out of qualification because lenders are strict on how much debt a borrower can carry in relation to his or her income.


Nikki Haley abruptly resigned as US ambassador to the United Nations. Haley will leave her post in January. Haley went to the White House to make the announcement with Trump in the Oval Office; other topics were discussed.


Trump repeated his threat to impose tariffs on $267 billion worth of additional Chinese imports if China retaliates for the recent levies and other measures the United States has taken in the countries’ escalating trade war. Last month Trump imposed tariffs on nearly $200 billion of Chinese imports and then threatened more levies if China retaliated. China then hit back with tariffs on about $60 billion of U.S. imports. China imports less than the US, so there are limits to tit-for-tat tariffs.  China has choked back on imports of liquefied petroleum gas (LPG) from the United States, turning to the Middle East for extra supplies. China bought nearly 3.6 million tons of U.S. LPG in 2017, making the United States the country’s second-largest supplier of the fuel. However, U.S. imports have come off dramatically over the course of 2018, before stalling completely in late August when China imposed an additional 25 percent tariff on over 300 U.S. goods, including LPG, in retaliation for U.S. tariffs.


Earlier today, the International Monetary Fund cut its global economic growth forecasts for 2018 and 2019, citing the growing trade war. The IMF announced it had reduced its outlook on the global economy to a 3.7% growth rate for this year and next, down 0.2% from what it had originally predicted in July. The IMF expects the US economy to continue growing this year at 2.9%, but sees that rate falling to 2.5% next year. While the IMF’s outlook for the Chinese economy stayed at 6.6% this year, its forecast for next year of 6.2% represents the slowest growth rate the Asian country has seen since 1990.


Trump again criticized the Federal Reserve, telling reporters the central bank is going too fast in raising rates. The Fed last raised interest rates in September and left intact its plans to steadily tighten monetary policy, as it forecast that the U.S. economy would enjoy at least three more years of economic growth.


Ford Motor Company is planning to initiate major layoffs. Ford hasn’t yet revealed how many workers will be affected. But a report by Morgan Stanley estimated that as many as 12 percent of the company’s 202,000 workers worldwide could be cut. Layoffs will center on Ford’s 70,000-strong white-collar workforce as part of what the company is calling a “redesign” of its staff in an ongoing $22.5 billion reorganization. Ford ‘s shares fell 3.4 percent Tuesday to close at $8.95, finishing the day under $9 for the first time since August of 2012. The stock is down more than 28 percent so far this year. Trump’s tariffs and the retaliatory tariffs they triggered are taking a toll on the U.S. auto industry. Ford estimates $1 billion in losses due to the metals tariff.


Farmers are among the groups hardest hit by tariffs. Tomorrow, Trump plans to announce a plan to allow the sale of a higher concentration of ethanol in gasoline throughout the year would appease U.S. corn farmers who have been stung by low corn prices as a result of the U.S.-China trade war. The plan would allow the year-round sale of gasoline with up to 15% ethanol, also known as E15. That would include the use of the blend even during the summer driving season. Its use in the summer months is currently banned as it can produce more smog. It would help to push corn prices higher and benefit farmers, and it may even help to lower prices for gasoline, but it would hurt refiners who don’t have the ability to blend ethanol—and there are also concerns about the impact of E15 in car engines, especially those made before 2001.


“Oil markets are entering the red zone,” so says Fatih Birol, executive director of the International Energy Agency. Rising oil prices are beginning to push up gasoline prices. Higher prices putting pressure on emerging economies that are heavy energy consumers, contributing to worries about global growth prospects. Birol told Bloomberg that lacking any “major moves” by key producers, the fourth quarter of this year looks “very, very challenging.”


Today, Google unveiled the third edition of its Pixel smartphone, a Google Home smart speaker with a display and its first tablet computer. Google’s Android software has gone from being an also-ran to the brains of most of the world’s smartphones and Google topped Inc in smart speaker sales in recent quarters. Pixel phones, though, have been a tougher sell, launching with glitches and garnering less than 1 percent of the global market by shipments in Google’s first two years of trying. Google branched into hardware three years ago so that, like Apple, it could have full control of the performance of its applications and the revenue they generate. Other phone makers sometimes crowd out Google’s apps with their own or take a share of ad revenue, hurting Alphabet’s profits. A new artificial intelligence tool is sure to generate buzz among consumers. The software, launching on U.S. Pixels only, answers calls, requests information about the nature of the calls and shares it as text with the recipient. In other words, it’s the first phone that can answer the phone.


Meanwhile, fully self-driving cars may be on the fast lane to U.S. roads under a pilot program which would allow real-world road testing for a limited number of the vehicles. Self-driving cars used in the program would potentially need to have technology disabling the vehicle if a sensor fails or barring vehicles from traveling above safe speeds. The National Highway Traffic Safety Administration is still working out rules for notification of accidents and near misses. The U.S. House of Representatives passed legislation in 2017 to speed the adoption of self-driving cars, but the Senate has not approved it. Several safety groups oppose the bill, which is backed by carmakers. It has only a slender chance of being approved in 2018. NHTSA said it would partner with state and local governments in developing a pilot program.


Bill Ackman, the activist investor who took on Chipotle in 2016, revealed his hedge fund, Pershing Square Capital, has taken a roughly $900 million stake in Starbucks. Ackman’s core investment thesis is that despite recent struggles in same-store sales and a less-than-stellar stock market performance, Starbucks remains “one of the greatest businesses in the world,” and its potential growth in China could provide a substantial jolt to the coffee behemoth.


Hurricane Michael is currently expected to intensify as it travels across the Gulf of Mexico toward Florida. Forecasters now expect the storm to hit Florida’s northern Gulf Coast — the Panhandle and surrounding areas — by Wednesday afternoon. But tropical storm force winds will arrive overnight. The storm is currently a Category 3 — a “major hurricane” — with winds currently blowing at 130 mph. The National Hurricane Center has issued hurricane warnings — meaning hurricane conditions are imminent — for much of the Florida Gulf Coast, and parts of Alabama and Mississippi’s coast as well. The surge, or coastal flooding, tends to be the deadliest aspect of hurricanes. As wind from the storm pushes water onshore several feet above the normal tide, it can trap people in their homes, wash away entire houses, and make rescue missions harrowing and slow. Some areas may see storm surges in excess of 13 feet. That’s 13 feet of water on top of the normal high tide. It’s unclear right now how bad the storm will be. But generally, forecasters are better at predicting a hurricane’s path than its intensity. Once it hits lad Michael is expected to moved toward the northeast, dropping up to 10 inches of rain on Tallahassee, Atlanta, and then up through the Carolinas – which don’t need any more rain.




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