…..Fed minutes show disagreement on timing. Factory orders slip. Home prices rise. Oil down. Volvo goes electric. Tesla must produce. Not the life O’Reilly. A glitch in tech.
Financial Review by Sinclair Noe for 07-05-2017
DOW – 1 = 21,478
SPX + 3 = 2432
NAS + 40 = 6150
RUT – 6 = 1420
10 Y – .01 = 2.33%
OIL – 1.46 = 45.61
GOLD + 3.50 = 1227.70
Welcome back. A holiday shortened trading week kicked off today with FOMC minutes and will finish with a G20 meeting and the jobs report on Friday. Today, the Fed released minutes of its Federal Open Market Committee meeting from June 13-14. We know the Fed raised its fed funds target rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases. Beyond that, the Fed was divided on the timing of when to begin shrinking its massive balance sheet. Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year, maybe within a couple of months – without naming an exact date. The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.
The minutes said, “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.” Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.
The minutes showed Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts. “Some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”
Factory orders sank 0.8% in May following a smaller decline in April. Factory orders were up 4.8 percent from a year ago. Activity is slowing against the backdrop of a moderation in oil prices and declining motor vehicle sales. Motor vehicle manufacturers reported on Monday that auto sales fell in June for a fourth straight month, leading to a further increase in inventories, which could weigh on vehicle production.
Nationally, home prices rose 6.6% compared to a year ago, according to a home price index from data provider CoreLogic. Prices rose 1.2% from April to May. Arizona posted 6.1% price growth over the past year, and 0.8% from April to May. The cost of rent is growing much faster than inflation – and wages. Overall single-family rents rose 3.1% for the year in May, while rental costs in the affordable single-family rental segment of the market, which includes properties with rents less than 75% of the regional median, grew 4.7%. Wages rose 2.5% in May compared to a year ago.
Two weeks ago, crude oil slipped into a bear market, then it rallied. Today, oil prices fell sharply, ending the longest winning streak this year, as Russia was said to oppose any proposal to deepen OPEC-led production cuts. They will stick with current production limits but they won’t go for additional output cuts. After the close, the American Petroleum Institute reported Wednesday a much larger-than-expected drop of 5.8 million barrels in U.S. crude supplies for the week ended June 30. Supply data from the Energy Information Administration will be released Thursday morning.
The death of the internal combustion engine might be just down the road. Volvo will become the first major car manufacturer to go all electric, with the Swedish company saying that every new car in its range will have an electric power train available from 2019. The company said the announcement marks “the historic end” of cars solely powered by petrol or diesel and “places electrification at the core of its future business”. Volvo – which is owned by China’s Geely – will launch five fully electric cars across its range between 2019 and 2021. Two of these new cars will be in the company’s Polestar high performance sub-brand, which is being revived. The rest of the company’s range will be available with “plug-in hybrid” power trains and 48-volt “mild hybrid” systems, which give an extra “kick” to the acceleration of normally powered cars.
Meanwhile, other countries are pushing forward with legislation to reduce greenhouse gas emissions that will impact car manufacturing: Germany recently mandated that all vehicles sold in the country must have zero emissions by 2030, effectively outlawing sales on solely gas-powered vehicles; Sweden is aiming to have net-zero emissions of greenhouse gases by 2045; and the EU is tightening the restrictions on how much carbon dioxide vehicles can emit by 2021. By starting the move to a fully electrified catalogue of offerings now, Volvo is ensuring it can continue to sell its vehicles in some of the largest car-buying markets in the near future.
Volvo’s announcement comes in the same week that Tesla announced its low-cost Model 3 electric car will go sale. The latest Tesla car – priced at around $35,000 – is aimed at bringing electric cars to the mass market, rather than being the preserve of early adopters of technology or those with deep pockets.
Tesla reports deliveries are flatlining. Tesla reported quarter-by-quarter shipment declines for the second time in the past year. After the market closed on Monday, the company reported more than 22,000 vehicle deliveries in the second quarter. In addition to stoking fear about whether demand has peaked, these figures cast doubt on whether Tesla can pull off a steep production ramp for the cheaper Model 3 sedan. The Tesla investment thesis hinges on the success of Model 3, and the ability for the company to ramp production, make the car profitably and deliver good initial build quality. Tesla plunged as much as 6.1 percent today to $331, the steepest intraday decline since May 4.
O’Reilly’s stock plunged $41.64, or 18.9%, to suffer the biggest one-day price and percentage decline since it went public in April 1993. Volume ballooned to 12.8 million shares in recent trade, which was nine times the full-day average. The auto parts retailer said second-quarter same-store sales rose 1.7% from a year, well short of its guidance of 3% to 5% growth. O’Reilly said the disappointing sales results, in the wake of a slowdown during the final two months of the quarter, will have a “consequent impact” on profitability. There seem to be 2 long term trends at play here; first, brick and mortar retailers are struggling almost across the board; second, auto sales have been extremely strong the past 3 years – meaning people have been buying new rather than repairing.
US credit card processor Vantiv agreed to buy Britain’s Worldpay for about $10 billion. Payments companies have become targets for credit card companies and banks seeking to capitalize on a switch from cash transactions to paying by smartphone or other mobile devices.
Tech stocks moved higher today, breaking a 4-day slump. A funny thing happened while we were celebrating the Fourth. A computer glitch sent shares in dozens of US technology companies including Apple, Amazon and Microsoft to the same price, leading some to apparently lose billions in market value. The bug showed many stocks on the Nasdaq exchange to briefly be reported as $123.47 on Bloomberg, Reuters and Google Finance data. It was triggered after financial information providers wrongly interpreted a Nasdaq data test as live prices, leading to brief pandemonium on trading floors. Amazon’s shares were shown falling from almost $950, a drop of 87 per cent, Google owner Alphabet’s fell by 86 per cent and Apple fell by 14.3 per cent. Other companies that have share prices well below $123.47 saw them briefly rocket. Microsoft shares jumped almost 80 per cent, giving the company a valuation of more than $1 trillion and gaming company Zynga rose by more than 3,000 per cent. The glitch occurred in after-hours trading after the Nasdaq had closed early ahead of the July 4 holiday and led several stocks to be halted. The Nasdaq stock exchange says the glitch stemmed from a routine daily data test that was moved up by several hours because trading closed early on July 3. Erroneous prices apparently based on test data showed up on Bloomberg terminals used by professional traders, as well as on websites like Google used by non-pros. The root of the error can probably be found somewhere along the chain between Nasdaq and a small number of third-party vendors who distribute market data. Perhaps someone failed to heed a notice of the early data test, or didn’t receive it in the first place. So far, it doesn’t seem like anyone lost much—if any—money, so the main harm is reputational. But it is increasingly a fact of modern life that mundane, simple human errors now have the potential to spiral rapidly and cause problems for people all over the world. It also reveals the vulnerability of an interconnected world. If someone really wants to do serious harm, a glitch that could not be easily undone might shake financial institutions to their core.