Financial Review

Whiplash

…Fed minutes point to more rate hikes. CPI inflation heats up a little. Tweets fly, volatility rules. Gas prices rise with Middle East tensions. Facebook and your lack of privacy. Ryan retiring. Boehner goes green. Payday lenders v. CFPB.

Financial Review by Sinclair Noe for 04-11-2018

DOW – 218 = 24,189
SPX – 14 = 2642
NAS – 25 = 7069
RUT + 3 = 1546
10 Y – .01 = 2.79%
OIL + 1.30 = 66.81
GOLD + 13.70 = 1353.80

 

The good news is that the Dow is holding above 24,000; the Nasdaq is still above 7000; and the S&P 500 is still above 2581. The volatility is crazy. The markets are up one day, down the next, sometimes up and down in the same day. That discomfort in your portfolio and pain in your neck is the result of whiplash. And it doesn’t really make sense because the economy is in pretty good shape. So says the Fed. Today, the Fed released minutes from the March 20-21 FOMC meeting. All of the Federal Reserve’s policymakers felt that the U.S. economy would firm further, and that inflation would rise in the coming months. “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months,” the Fed said in the minutes. “In addition, all participants expected inflation on a 12-month basis to move up in coming months.” At the March meeting, “some” participants suggested it might become necessary to revise statement language to acknowledge that “monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.”  So, the Fed thinks the economy is so strong that they will hike rates, maybe at a slightly faster pace. Doves fly the coup. Hawks in control.

 

The Fed’s target range for its benchmark lending rate is currently between 1.50 and 1.75 percent. The increase in March was the sixth rise since the central bank began a tightening cycle back in December 2015. As the economy has strengthened, the Fed has upped the pace of hikes. It sees another two rate rises this year, although quarterly forecasts at the last meeting showed more officials than in December were supportive of three more hikes in 2018. The labor market is tightening, the dollar weakening and the stimulus from a $1.5 trillion income tax cut package and increased government spending yet to impact on the economy.

 

One potential headache for Fed officials remains threats of tit-for-tat tariffs worth tens of billions of dollars between the Trump administration and China, which if implemented could damage U.S. growth and raise consumer prices. In the minutes, Fed policymakers showed concern about this as well as uncertainty about the implication of Trump’s stimulus on fiscal sustainability and real interest rates.

 

The federal government’s budget deficit was $209 billion in March, the Treasury said, up 18% from the same month a year ago, as employers withheld less from workers’ paychecks.

 

The consumer price index fell 0.1% in March to mark the first drop in 10 months, but the decline was entirely due to the lower cost of gasoline. Americans paid more for almost everything else as inflation continues to creep higher. Yet the rate of inflation over the past 12 months rose to 2.4% from 2.2% and hit a one-year high. After stripping out gas and food, the more closely followed core rate of inflation advanced 0.2% in March. And the 12-month rate of core inflation jumped to 2.1% from 1.8%, the highest level in more than a year. Adjusted for inflation, hourly wages jumped 0.4% in March. And up just 0.4% in the past 12 months.

 

So, that is the economic news of the day – and it doesn’t seem to move markets in the slightest. Instead, the markets were responding to news headlines, again. This morning it was a Trump tweet warning “nice and new and ‘smart'” missiles would soon be fired toward Syria. Also criticizing Moscow for standing by Assad, whose new nickname is “Gas Killing Animal.” Trump, the master of surprise, did not specify when a missile strike might come or where it could target, the message made clear he plans retaliatory action soon for the suspected chemical gas attack that killed at least 40 people over the weekend. Overall, the market’s recent propensity for large moves shows the low-volatility doldrums of 2017 are over and suggests multi-hundred-point Dow fluctuations are the new normal. Trump hasn’t helped matters much, and the surge in volatility is a clear byproduct of his recent actions.

 

Before Wednesday’s escalation with Russia, whose ambassador to Lebanon had earlier suggested Russia would retaliate to any US strike in Syria, the president had been locked in a trade stare down with China for weeks, stoking investor fears of a trade war. One of the interesting things about recent market turmoil is that for the most part, volatility has been confined to equities. Most notably, volume in the Forex market has remained subdued despite the fact that currencies are where you’d be inclined to think trade war concerns and tariff jitters would show up first. The currency traders just are not buying into the idea that we will go down that road, even if stock traders are nervous. And all this volatility is changing investor sentiment. After years of riding the “buy the dip” strategy to success, investors seem to have flipped the switch and are now “selling the rip” — or using periods of strength as an excuse to offload holdings.

 

Lower gas prices kept inflation tame in March, but oil prices are moving higher – fast. Oil prices jumped to their highest level since 2014, as worries about fighting in the Middle East spooked markets. Syria is not a major oil producer, especially after years of civil war there. But its allies Russia and Iran are both major global producers. Then later in the day, Saudi Arabia’s air defense reported that it intercepted missiles heading towards its capital Riyadh. Saudi Arabia has been defending itself against missiles launched by Iranian-backed Houthi rebels in Yemen in recent weeks. The average price of a gallon of unleaded gas stands at $2.66 a gallon, according to AAA. That’s up 13 cents in just the last month and up 11%, or 26 cents a gallon, from a year ago. Prices are expected to climb even higher this summer. And if more missiles fly, look for prices to jump even higher.

 

Yesterday, Facebook CEO Mark Zuckerberg answered 5 hours of mostly inane questions from senators on Capitol Hill. Today, he answered 5 hours of questions from the House side. Zuckerberg repeated an apology offered in the previous hearing that Facebook made a “big mistake” by not taking “a broad enough view” of its responsibility. Multiple legislators raised the prospect that Facebook’s data policies with third-party apps violated a 2011 agreement with the Federal Trade Commission after a prior privacy complaint. If so, Facebook could be subject to hefty fines. The FTC confirmed last month that it’s investigating Facebook. In both hearings, legislators pushed Zuckerberg on its potential monopoly power. Zuckerberg says there is plenty of competition, but he was open to the broad, general idea of more regulation for the internet.

 

Lawmakers repeatedly asked whether users control how their data is shared with and used by advertisers, developers, and other third parties. Zuckerberg repeatedly went back to explaining how they can decide what their fellow Facebook users can see. That didn’t really answer the question. There are two kinds of privacy issues on Facebook: one having to do with what users are sharing with other people, and another with what they’re sharing with advertisers and other third parties by sharing on Facebook at all. But Zuckerberg continually dodged the question about advertisers by talking about what users are sharing. Zuckerberg clarified on multiple occasions that the company doesn’t sell users’ data. But that’s doesn’t mean it doesn’t profit from it. Facebook’s business model is that it runs ads, and it does that by letting companies target people based on their information. Facebook allows users to share certain pieces of data, and once that data gets shared, it’s often used for ad targeting. Investors appeared to like Zuckerberg’s debut on Capitol Hill. Facebook stock ended Tuesday up 4.5% and ticked up another 1.5% in trading today.

 

House Speaker Paul Ryan announced today that he won’t seek re-election in November. Ryan’s retirement had been the subject of rumors in the halls of Congress for months. Ryan said he’s retiring to be more than a “weekend dad” to his children and that he’s confident Republicans will keep the House majority. More than 40 House Republicans have either resigned this year or aren’t seeking re-election in November. Democrats need to gain a net 23 seats to take the majority.

 

Meanwhile, John Boehner, the Republican former speaker of the House has joined the advisory board of Acreage Holdings, a company that cultivates, processes and dispenses cannabis in 11 U.S. states.

 

JPMorgan Chase has been hit with a lawsuit in Manhattan federal court accusing it of charging surprise fees when it stopped letting customers buy cryptocurrency with credit cards in late January and began treating the purchases as cash advances.

 

In the waning days of the Obama Administration, the Consumer Financial Protection Bureau concocted a little rule that could severely limit payday lending. The regulation would require payday lenders to verify that borrowers can afford the debt before giving them the money and would limit the number of times a person can take out successive loans. This rule is set to go into effect next August. Acting part-time CFPB director Mick Mulvaney has been working hard to make sure the rule does not happen. Congress is considering legislation, but not fast enough for the payday lenders.  So, payday lenders are now suing to make sure the rule is killed off before financial firms go too far down the road to actually implementing the rule.

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