Rudd’s MarketView for Thursday, June 22, 2017

Summary

The major equity indexes were relatively flat on Thursday as investors looked forward to the second-quarter earnings season.; The S&P healthcare index rose 1 percent on Thursday, hitting its fifth consecutive record close following the release of Senate Republicans’ bill to replace Obamacare, while financial and consumer staple shares ended lower.

The legislation aims at curbing Medicaid funding and reshaping subsidies to low-income people for private insurance. The index has risen 3.9 percent in five days.

The Nasdaq biotechnology index rose 1.3 percent, for a 9.4 percent increase this week. While it was not clear whether the bill would get enough support to become law, drug stocks were among the S&P 500’s biggest gainers, with Gilead rising 4.4 percent on Thursday.

The S&P energy index ended down 0.1 percent after recording 3.5 percent of losses in the previous three sessions on falling oil prices.

The S&P bank index was down 0.6 percent ahead of the release of the sector’s annual stress test results, released after the market close. Bank shares remained unchanged after the news.

The consumer staples sector ended down 0.7 percent and was the second-biggest drag on the S&P behind financials.

Economic data on Thursday indicated jobless claims for last week increased by 3,000 to 241,000 claims, but remain at levels consistent with a tight labor market.

Oracle’s 8.6 percent rise to $50.30 provided the S&P with its largest upward push after Oracle forecast an upbeat current-quarter profit.

Accenture fell 3.9 percent after the consulting and outsourcing services provider trimmed its annual revenue forecast.

Tesla was up 1.6 percent at $382.61 after the company said it was in exploratory talks with the Shanghai municipal government to establish an electric vehicle manufacturing plant in China.

Approximately 6.65 billion shares changed hands on the major domestic equity exchanges, as compared to 6.95 billion share average ovewr the last 20 tading sessions.

Jobless Claims Rise

The number of Americans filing for unemployment benefits increased slightly last week, but remains at levels consistent with a tight labor market. According to a labor Department report released Thursday morning, Initial claims for state unemployment benefits increased by 3,000 claims to a seasonally adjusted 241,000 claims for the week ended June 17.

Jobless claims for the prior week were revised upwards by 1,000 claims to 238,000 claims from 237,000 claims. The week’s calculation indicates that this is the 120th consecutive week with claims below 300,000, the threshold associated with a strong labor market. It’s the longest stretch that claims have remained below that level since 1970.

The four-week moving average of claims, considered a better measure of labor market trends as it removes much of the week-to-week volatility, rose by 1,500 claims to 244,750 claims last week, the highest since early April. The labor market is now considered by many to be at or near full employment. The unemployment rate in May declined to a 16-year low of 4.3 percent.

Indeed, some policymakers at the Fed have begun to show increasing concern that a recent pullback in inflation may point to sustained difficulty in returning it to the Fed’s 2 percent target.

Thursday’s claims report also showed the number of people still receiving benefits after an initial week of aid increased 8,000 to 1.94 million in the week ended June 10. The so-called continuing claims have now been below 2 million for 10 straight weeks, indicating diminishing labor market slack.

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Rudd’s MarketView for Wednesday, June 21, 2017

Summary

Fed’s Quagmire

The outlook for inflation and the future of financial stability are emerging as a quagmire  at the Fed as it debates over how fast to proceed on future interest-rate hikes.

What you have is a distinct change from years past where high unemployment was at the top of the Federal Reserve’s list of concerns. With the unemployment rate at 4.3 percent, many Fed officials are of the opinion that nearly all Americans who want jobs can and do get them.

That is a main reason the Fed recently raised its target range for short-term interest rates for the second time this year, even though recent inflation readings have drifted away from the Fed’s 2-percent target, confounding expectations based on history and theory.

Fed Chair Janet Yellen expressed confidence inflation would eventually perk up, but some policymakers cast doubt.

Chicago Federal Reserve Bank President Charles Evans on Tuesday became the latest to express concerns, stating that he is increasingly concerned that a recent softness in inflation is a sign the Fed will struggle to get price pressures back to its 2 percent objective.

“I will say that the most recent inflation data made me a little nervous about that. I think it’s much more challenging from here on out,” Evans said in an interview with broadcaster CNBC.

Evans, who is a voter this year on the central bank’s rate-setting committee, said that global forces, not just specific one-off reasons, could be behind a retreat in inflation over the past three months. He said on Monday that he supports waiting until the end of the year before considering another rate hike.

Speaking to reporters after a speech at the Commonwealth Club of California, Dallas Fed President Robert Kaplan had similar concerns, stating that he wants to wait for more evidence that the recent retreat in inflation would be temporary.

And though Kaplan said he retains an “open mind” about how many more rate hikes the Fed should deliver this year, he also highlighted an additional worry: the likelihood in his mind that even when fully healthy the economy will need interest rates to stay below 3 percent.

With the 10-year Treasury yield barely above 2 percent, he said, markets are forecasting sluggish growth ahead, and the Fed should be “careful” about lifting short-term rates, now between 1 percent and 1.25 percent, much further. Kaplan, like Evans, votes this year on monetary policy.

Meanwhile two other Fed policymakers, speaking at a conference on macroprudential policy in Amsterdam jointly organized by the Dutch and Swedish central banks, suggested they are concerned less about raising rates too fast or too high than about keeping them too low for too long.

Boston Fed President Eric Rosengren said on Tuesday that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making.

“Reach-for-yield behavior can be risky,” Rosengren said. He noted financial intermediaries will need to factor in the possibility of lower rates, particularly during economic downturns, and flatter yield curves.

Earlier, at the same conference, Fed Vice Chair Stanley Fischer warned that while the United States and other countries have taken steps to make their housing finance systems stronger, a prolonged period of low interest rates has helped raise house prices, which was a precursor to the last financial crisis.

Neither Rosengren nor Fischer mentioned the economic outlook or current monetary policy in their prepared remarks.

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Rudd’s MarketView for Wednesday, June 21, 2017

Summary

The S&P 500 and Dow Jones Industrial Average were weighed down by lower energy shares as oil prices fell on Wednesday and added to concerns over low inflation, while healthcare and technology stocks helped lift the Nasdaq Composite index.

Energy was the weakest S&P sector with a 1.6 percent decline after oil prices reversed course during the morning session and domestic crude reached its lowest level since August, despite larger-than-expected declines in inventories. Continued weakness in oil futures added to investor worries over inflation.

The S&P bank stock index fell 0.8 percent over concerns that interest rate margins would be hurt by a flattening yield curve, which is also driven by inflation expectations.

The industrial sector index was also among the day’s worst hit indexes with a 0.7 percent drop. Caterpillar’s 3.3 percent share price drop weighed on the sector while a 1.6 percent rise in FedEx gave the index its largest positive push.

Investors looking for growth opportunities turned to the Nasdaq, which contains many technology and biotechnology companies. Healthcare stocks were helped by reports that President Trump’s efforts to rein in drug prices may be friendlier than expected.

The energy index has fallen 14.9 percent so far this year compared with an 8.9 percent rise for the S&P 500. Oil futures have fallen about 21 percent so far, this year. The four-company telecommunications sector was the second weakest with a 1.2 percent drop, with AT&T leading the percentage declines.

The Nasdaq biotechnology index was up 4.1 percent, on track for its larggest one-day gain since the day after Trump’s Nov. 8 election. Its biggest boosts were Celgene, and Regeneron, both of which gained more than 5 percent. Biogen rose 4.7 percent.

Approximately 7.16 billion shares changed hands on the major domestic equity exchanges, as compared to a 6.92 billion share average for the last 20 sessions.

Home Resales Rise Unexpectedly

Home resales were unexpectedly higher during May to the third highest monthly level in a decade and a chronic inventory shortage pushed the median home price to an all-time high. The National Association of Realtors said on Wednesday existing home sales increased 1.1 percent to a seasonally adjusted rate of 5.62 million units last month. Sales were up 2.7 percent from May 2016.

The number of homes on the market rose 2.1 percent, but supply was down 8.4 percent from a year ago. Housing inventory has dropped for 24 straight months on a year-on-year basis.

The median house price increased to an all-time high of $252,800, a 5.8 percent jump from one year ago, reflecting the dearth of properties on the market.

“We have a housing shortage, we may even use the term housing crisis in some markets,” NAR chief economist Lawrence Yun said.

House price gains have also been helped by an unemployment rate that is at a 16-year low. Mortgage rates also remain favorable by historical standards.

At the current sales rate, it would take 4.2 months to clear inventory, down from 4.7 months one year ago. The median number of days homes were on the market in May was 27, the shortest time frame since NAR began tracking data in 2011.

Despite robust demand for housing, the sector has shown some recent signs of strain. U.S. homebuilding fell for a third straight month in May to its lowest level in eight months, the Commerce Department reported last week.

Fed’s Quagmire

The outlook for inflation and the future of financial stability are emerging as a quagmire  at the Fed as it debates over how fast to proceed on future interest-rate hikes.

What you have is a distinct change from years past where high unemployment was at the top of the Federal Reserve’s list of concerns. With the unemployment rate at 4.3 percent, many Fed officials are of the opinion that nearly all Americans who want jobs can and do get them.

That is a main reason the Fed recently raised its target range for short-term interest rates for the second time this year, even though recent inflation readings have drifted away from the Fed’s 2-percent target, confounding expectations based on history and theory.

Fed Chair Janet Yellen expressed confidence inflation would eventually perk up, but some policymakers cast doubt.

Chicago Federal Reserve Bank President Charles Evans on Tuesday became the latest to express concerns, stating that he is increasingly concerned that a recent softness in inflation is a sign the Fed will struggle to get price pressures back to its 2 percent objective.

“I will say that the most recent inflation data made me a little nervous about that. I think it’s much more challenging from here on out,” Evans said in an interview with broadcaster CNBC.

Evans, who is a voter this year on the central bank’s rate-setting committee, said that global forces, not just specific one-off reasons, could be behind a retreat in inflation over the past three months. He said on Monday that he supports waiting until the end of the year before considering another rate hike.

Speaking to reporters after a speech at the Commonwealth Club of California, Dallas Fed President Robert Kaplan had similar concerns, stating that he wants to wait for more evidence that the recent retreat in inflation would be temporary.

And though Kaplan said he retains an “open mind” about how many more rate hikes the Fed should deliver this year, he also highlighted an additional worry: the likelihood in his mind that even when fully healthy the economy will need interest rates to stay below 3 percent.

With the 10-year Treasury yield barely above 2 percent, he said, markets are forecasting sluggish growth ahead, and the Fed should be “careful” about lifting short-term rates, now between 1 percent and 1.25 percent, much further. Kaplan, like Evans, votes this year on monetary policy.

Meanwhile two other Fed policymakers, speaking at a conference on macroprudential policy in Amsterdam jointly organized by the Dutch and Swedish central banks, suggested they are concerned less about raising rates too fast or too high than about keeping them too low for too long.

Boston Fed President Eric Rosengren said on Tuesday that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making.

“Reach-for-yield behavior can be risky,” Rosengren said. He noted financial intermediaries will need to factor in the possibility of lower rates, particularly during economic downturns, and flatter yield curves.

Earlier, at the same conference, Fed Vice Chair Stanley Fischer warned that while the United States and other countries have taken steps to make their housing finance systems stronger, a prolonged period of low interest rates has helped raise house prices, which was a precursor to the last financial crisis.

Neither Rosengren nor Fischer mentioned the economic outlook or current monetary policy in their prepared remarks.

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Rudd’s MarketView for Tuesday, June 20, 2017

Summary

The major domestic equity indexes closed lower on Tuesday as a sharp decline in the price of crude oil hurt energy stocks. At the same time, retail stocks were pulled down by concerns about Amazon’s plan to increase its apparel business. There was also some residual concern over the future Federal Reserve rate hikes in conjunction with what appears to be a bit of slowing in certain sectors of the economy.

Healthcare was the brightest spot with a 0.3 percent increase in the sector index, while the consumer discretionary index showed a 1.25 percent drop, in line with the energy index decline.

Oil prices fell about 2 percent after news of increases in supply by several key producers, a trend that has undermined attempts by OPEC and other producers to support the market through reduced output.

The market deepened its losses heading into the close after comments by Dallas Federal Reserve President Robert Kaplan appeared to add to investor unease about the Fed’s projected pace of monetary policy tightening.

Kaplan said technology and globalization is holding down inflation, which suggested that low inflation might remain for a while.

Earlier, Boston Fed President Eric Rosengren said the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making.

The costliest congressional race in history – between Democrat Jon Ossoff and Republican Karen Handel – as a key political test for President Donald Trump’s pro-business agenda is also being watched on Wall Street.

Nasdaq’s biotechnology index rose 1.3 percent after a 2.5 percent jump the previous day. The S&P technology sector fell 0.8 percent, with the Microsoft and Apple causing most of the damage.

Approximately 7.1 billion shares changed hands on the major domestic equity exchanges, as compared to the 6.86 billion share average for the last 20 sessions.

Crude Continues Slide Downward

The price of crude oil fell about 2 percent on Tuesday, with Brent settling at seven-month lows and domestic crude at its lowest price since September. The price decline comes after an increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC oil producers with a deal to cut global output.

Brent closed 89 cents lower at $46.02 a barrel, its lowest settlement since Nov. 15, two weeks before OPEC and other producers agreed to cut output by 1.8 million barrels per day (bpd) for six months from January.

The domestic crude futures contract for July, due to expire on Tuesday, settled down 97 cents at $43.23, the lowest since Sept. 16. Both benchmarks were down more than 15 percent since late May, when OPEC, Russia and other producers extended limits on output until the end of March 2018.

OPEC and non-OPEC oil producers’ compliance with the deal to cut output reached its highest in May since they agreed on the curbs last year, reaching 106 percent last month, a source familiar with the matter said.

OPEC supplies, however, increased during May as output recovered in Libya and Nigeria, both exempt from the production reduction agreement. Libya’s oil production rose more than 50,000 bpd to 885,000 bpd after the state oil company settled a dispute with Germany’s Wintershall.

Nigerian oil supply is also rising. Exports of Nigeria’s Bonny Light crude are set to reach 226,000 bpd in August, up from 164,000 bpd in July, loading programs show.

Ahead of weekly U.S. inventory reports, domestic crude oil stocks were forecast to have fallen 2.1 million barrels last week, while gasoline was seen building by 400,000 barrels after last week’s data showed an unexpected build that weighed heavily on the market.

The investment community has become quite bearish about the outlook for oil prices as production from countries outside OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.

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Rudd’s MarketView for Monday, June 19, 2017

Summary

The major equity indexes recouped losses on Monday, with the S&P 500 index and the Dow Jones Industrial Average reaching record highs with growth sectors such as technology in favor again as confidence in the economy surged again after upbeat comments from Federal Reserve officials.

Nasdaq’s biotechnology index rose 2.5 percent in its largest one-day gain since February while the S&P’s healthcare index had a record-high close.

Amazon’s announcement that it would buy Whole Foods and an upbeat tone from Federal Reserve speakers seemed to help reassure investors after the Fed’s rate hike last week.

The S&P’s financial sector was also one of the benchmark’s strongest gainers with a 0.98 percent rise after New York Federal Reserve President William Dudley said inflation was a bit low but should rise alongside wages as the labor market continues to improve, allowing the Fed to continue gradually tightening monetary policy.

The Fed commentary last week had surprised investors who expected more caution after some weak U.S. economic data.

The S&P technology sector finished up 1.7 percent after its second straight weekly decline, which was triggered by fears of stretched valuations. Tech stocks have led the S&P 500’s 9.6 percent rally this year.

Apple rose 2.9 percent to $146.34, providing the largest boost to the S&P followed by JPMorgan Chase, which rose 2.2 percent to $88.07. The S&P 500 bank subsector index rose 1.3 percent.

The two largest gainers for the biotechnology index were Biogen and Clovis Oncology. Biogen ended the trading day up 3.5 percent to $260.54, after it was upgraded to “neutral” from “sell” at UBS. Shares of Clovis Oncology gained 46.5 percent to $87.88 after late-stage data on its ovarian cancer drug.

Approximately 6.3 billion shares changed hands on the major domestic equity exchanges, as compared to the 6.8 billion share average for the last 20 sessions.

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Rudd’s MarketView for Friday, June 16, 2017

Summary

The major domestic equity indexes ended little changed on Friday even as Amazon’s $13.7 billion deal to buy Whole Foods roiled the retail sector and rocked shares of an array of companies including Wal-Mart and Target.

Energy sector shares helped buoy the S&P 500 and the Dow Jones Industrial Average, while Apple dragged on the Nasdaq. The deal by Amazon, a proven retail disruptor, marked a major step by the internet retailer into the brick-and-mortar retail sector.

Wal-Mart sank 4.7 percent, weighing on the Dow. Shares of Target, Walgreen Boots and Costco fell between 5 percent and 7 percent.

Amazon gained 2.4 percent, making the stock the largest boost to the S&P 500. Whole Foods surged 29.1 percent.

The S&P consumer staples sector index fell 1 percent, by far the worst performing major sector. The S&P 500 food and staples retailing index fell 4.2 percent.

Kroger was the largest loser on the S&P 500, falling 9.2 percent, while Supervalu dropped 14.4 percent.

The technology sector index fell 0.2 percent, continuing its recent slump. Apple ended the day down 1.4 percent.

Tech has led the S&P 500’s 8.7 percent rally this year, but posted its second week of declines.

The energy index rose 1.7 percent, propping up the S&P 500. Oil prices bounced off the year’s lows as some producers reduced exports and domestic rig additions slowed.

Homebuilding fell for a third straight month in May to the lowest in eight months as construction activity declined broadly.

Approximately 9.7 billion shares changed hands on the major domestic equity exchanges, a number that was well above the 6.8 billion share daily average over the last 20 trading sessions.

Amazon Rocks Wall Street

Amazon said on Friday it would buy grocer Whole Foods Market $13.7 billion in a move that gives the online retailer a physical network of stores to distribute fresh food and other goods to millennials and wealthy consumers.

Amazon, which is known for squeezing suppliers and has been experimenting with its own outlets, will take over a natural and organic grocer pioneer brimming with 456 stores and high-end shoppers but struggling to rein in prices and integrate technology.

The deal sent shockwaves across the food distribution market and beyond. Shares of Kroger fell 11 percent, while Wal-Mart was down 5 percent, signaling fears that Amazon could cut prices and broaden Whole Foods’ product mix, turning it into a much broader retailer.[]

Amazon’s shares were up 3 percent at $993.40, adding more than $14 billion to its market capitalization.

Amazon has agreed to pay $42 per share in cash for Whole Foods, a 27 percent premium on the company’s closing share price on Thursday. Whole Foods shares were trading just above that level on Friday, as investors saw negligible regulatory risk to the deal closing.

Amazon has been looking at stores that could allow traditional in-store purchase, online ordering with on-site pickup, and home delivery, using the store’s warehouse as a distribution point.

Still, Amazon is playing catch-up in the grocery business. Wal-Mart Stores Inc already offers in-store pickup. Amazon announced a similar service called AmazonFresh Pickup at two locations. Amazon also has dealt with technology problems at a prototype store inside its corporate office in Seattle, called Amazon Go, where sensors and tech-savvy cameras detect what shoppers pull off the shelves and charge their Amazon accounts when they leave.

And while is expected Amazon to bring vast buying power to Whole Foods, Amazon’s heft in the food market is far smaller than in other areas, and high demand for organic products gives farmers unusual bargaining power.

Whole Foods has posted seven straight quarterly sales declines at established stores and had overhauled its board of directors in the face of pressure from activist hedge fund Jana Partners LLC.

The deal is for $13.4 billion in cash and the remainder in debt. The acquisition price implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index.

Amazon and Whole Foods expect to close the deal during the second half of 2017.

The grocer will continue to operate stores under the Whole Foods Market brand and John Mackey will remain as its chief executive officer, the companies said. Whole Foods’ headquarters will still be in Austin.

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Rudd’s MarketView for Thursday, June 15, 2017

Summary

The recent decline in the shares of technology companies deteriorated further on Thursday, dragging down the major domestic equity indexes, as Wall Street worried over the economy’s health after the Federal Reserve lifted interest rates.

The S&P technology sector fell 0.5 percent, continuing a slide that began last Friday. The sector cut steeper losses from earlier in the session, as did the benchmark S&P 500.

Apple ended the day down 0.6 percent while Google parent Alphabet fell 0.8 percent, due in part to two bearish reports by Street analysts.

The consumer discretionary sector fell 0.5 percent, as Amazon’s shares fell 1.3 percent. Nike fell 3.2 percent after the company said it would cut about 2 percent of its global workforce and eliminate a quarter of its shoe styles.

Technology is still the best-performing sector this year, and consumer discretionary have been among the sectors that have fueled the S&P 500’s 8.6-percent rally in 2017.

Financials and energy, sectors that should thrive during economic expansions, also sold off. Financials slipped 0.4 percent and energy fell 0.7 percent.

Utilities and real estate, which are high-dividend paying groups known as “bond proxies”, gained 0.6 percent and 0.5 percent, respectively, making them the best performing sectors along with the 0.6 percent rise for industrials.

Long-dated Treasury bond yields hit their lowest since early November on Wednesday after surprisingly weak data on inflation and retail sales overshadowed the Fed’s interest rate hike.

Following that disappointing economic data, a report on Thursday showed the number of Americans filing for unemployment benefits fell more than expected last week, pointing to shrinking labor market slack that could allow the Fed to raise interest rates again this year despite moderate inflation growth.

In other corporate news, Kroger closed down 18.9 percent after the supermarket chain slashed its full-year profit forecast.

Approximately 6.5 billion shares changed hands on the major domestic equity exchanges, a number that was below the nearly 6.8 billion share daily average over the last 20 sessions.

Factory Output Falls

Factory output fell unexpectedly in May on a broad decline in production, including the manufacturing of cars, casting a shadow over the economy’s rebound from sluggishness at the start of the year.

The Federal Reserve indicated on Thursday that manufacturing production fell 0.4 percent last month, the second decline in three months. After downward revisions to data for prior months, factory output was lower in May than it was in February.

Output fell across manufacturing industries, with motor vehicles and parts production dropping 2 percent and output for fabricated metal products down 0.7 percent. If not for a 1.1 percent surge in chemicals output, manufacturing would have fallen more.

Overall industrial production was flat last month, with a 1.6 percent increase in mining and a 0.4 percent gain in utilities countering the factory weakness.

Manufacturing, which accounts for about 12 percent of the U.S. economy, had been regaining ground as the prolonged drag from lower oil prices, a strong dollar and an inventory overhang faded.

However, last month, manufacturing capacity utilization, which measures how fully factories are deploying their resources, fell 0.3 percentage point to 75.5 percent.

Overall industrial capacity utilization fell 0.1 percentage point to 76.6 percent.

Labor Market Tightens

The number of Americans filing for unemployment benefits fell more than expected last week, pointing to a shrinking labor market that could force the Federal Reserve to raise interest rates again this year despite moderate inflation growth.

Inflation could remain sluggish for a while as other data on Thursday showed import prices recorded their largest drop in 15 months in May. The Fed on Wednesday raised interest rates for the second time this year amid expectations of moderate economic growth and further strengthening in the labor market.

Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 237,000 for the week ended June 10, the Labor Department said on Thursday, better then economists’ expectations for a decline to 242,000.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 119 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller. The labor market is near full employment, with the jobless rate at a 16-year low of 4.3 percent.

While monthly job growth has slowed, record high job openings suggest that is likely because companies cannot find qualified workers. The number of people still receiving benefits after an initial week of aid increased 6,000 to 1.94 million in the week ended June 3.

The so-called continuing claims have now been below 2 million for nine straight weeks, pointing to diminishing labor market slack.

In another report, the Labor Department said import prices declined 0.3 percent last month as the cost of imported petroleum products tumbled. That was the biggest drop since February 2016 and followed a 0.2 percent increase in April.

In the 12 months through May, import prices rose 2.1 percent, the smallest gain since last December. Import prices rose 3.6 percent year-on-year in April.

The slowdown in import prices suggests domestic inflation could remain soft for a while. Consumer inflation measures have slowed in recent months, retreating below the U.S. central bank’s 2 percent target.

The Fed on Wednesday acknowledged the ebb in price pressures and said it expected annual inflation rates to remain somewhat below 2 percent in the near term but to stabilize around the target over the medium term.

In May, import prices excluding petroleum were unchanged after increasing 0.3 percent in April. They increased 1.0 percent in the 12 months through May.

A third report from the Fed showed manufacturing production fell 0.4 percent last month, weighed down by a 2.0 percent drop in motor vehicle assembly. With auto sales slowing and inventories bloated, motor vehicle production could remain a drag on factory output for a while.

Manufacturing output jumped 1.1 percent in April. It rose 1.4 percent in the 12 months to May, pointing to underlying strength in manufacturing, which accounts for about 12 percent of the U.S. economy.

That was supported by a survey from the New York Fed showing its Empire State current business conditions index surged 21 points to 19.8 in June, the highest reading since September 2014.

While another survey from the Philadelphia Fed showed a measure of business conditions in the mid-Atlantic region fell to a reading of 27.6 this month from 38.8 in May, unfilled orders and delivery times increased.

Crude Prices Fall

Crude oil prices fell sharply and remained under pressure from high global inventories and fears that OPEC’s agreed production cuts cannot offset rising production elsewhere.

The dollar rose to its highest point in more than two weeks, adding to the pressure on oil, because a stronger dollar makes dollardenominated oil more expensive for buyers in other currencies.

Saudi Arabia’s oil exports are expected to fall below 7 million barrels per day this summer and Russian oil exports were broadly flat in the third quarter, yet prices continue to fall.

The market has not been able to sustain a rally since March, as efforts by OPEC and non-OPEC producer Russia to reduce supply have been met with higher output from Nigeria and Libya, who are exempt from the deal, along with the United States.

Brent crude touched a low of $46.70 a barrel on Thursday, weakest since May 5 and just above six-month lows, before recovering to $46.92 a barrel. U.S. crude was down 21 cents at $44.52, after earlier touching a six-month low of $44.32 a barrel.

Crude prices fell nearly 4 percent on Wednesday, after our gasoline inventories rose unexpectedly and the International Energy Agency said it expects supply to outpace demand in 2018 despite consumption hitting 100 million bpd for the first time.

U.S. gasoline inventories rose 2.1 million barrels last week, putting them 9 percent higher than their five-year average for this time of year, according to the U.S. Energy Information Administration (EIA).

Both benchmarks have given up all of the gains made since OPEC agreed to cut output to prop up prices late November.

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Rudd’s MarketView for Wednesday, June 14, 2017

Summary

A slide in technology stocks pulled down the Nasdaq Composite on Wednesday and the S&P 500 ended slightly lower, as investors worried about the pace of economic growth after weaker-than-expected inflation numbers and an interest rate hike from the Federal Reserve.

The Nasdaq cut its loss in more than half in a late rebound, having earlier fallen 1 percent, while financials buoyed the Dow Jones Industrial Average.

The Fed cited continued economic growth and job market strength, proceeding with its first tightening cycle in more than a decade.

However, the Street worried about the Fed’s hawkish tone and that concerns about rate hikes were being reflected in the tech sector, which has led the S&P 500’s nearly 9-percent rally this year.

The tech sector fell 0.5 percent, recovering from steeper losses in the session and coming on the heels of its biggest two-day swoon in nearly a year. Tech remains up 18 percent in 2017.

Earlier on Wednesday, data indicated that consumer prices unexpectedly fell in May, while retail sales recorded their largest decline in 16 months.

Financials, which have underperformed this year and tend to benefit in a rising rate environment, rallied late to close up 0.2 percent. The group had fallen as much as 1.3 percent during the session.

The energy sector fell 1.8 percent as oil prices weakened. Data indicated an unexpectedly large weekly build in gasoline inventories, along with an International Energy Agency projection for a large increase in non-OPEC output in 2018.

The Fed clearly outlined a plan to reduce its $4.2-trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

In corporate news, Alexion shares rose 9.3 percent making it the largest percentage gainer on the S&P 500 after the biotechnology company named Biogen’s chief financial officer as its CFO. Biogen’s stock fell 3.1 percent.

H & R Block rose 7.9 percent after the tax preparation service’s quarterly revenue and profit exceeded analysts’ expectations.

Approximately 7.1 billion shares changed hands on the major domestic equity exchanges, a number that was above the 6.8 billion share daily average over the last 20 sessions.

Fed Lifts Interest Rates

The Federal Reserve raised interest rates on Wednesday for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year, signaling its confidence in a growing economy and strengthening job market.

In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data.

The Fed’s rate-setting committee said the economy had continued to strengthen, job gains remained solid and indicated it viewed a recent softness in inflation as largely transitory.

The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

It expects to begin the normalization of its balance sheet this year, gradually ramping up the pace. The plan, which would feature halting reinvestments of ever-larger amounts of maturing securities, did not specify the overall size of the reduction.

“What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis,” Fed Chair Janet Yellen said in a press conference following the release of the Fed’s policy statement.

She added that the balance sheet normalization could be put into effect “relatively soon.”

The initial cap for the reduction of the Fed’s Treasuries holdings would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month.

Fed policymakers also released their latest set of quarterly economic forecasts, which showed only temporary concern about inflation and continued confidence about economic growth in the coming years.

They forecast economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.

A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes. But the Fed maintained its forecast for three rate hikes next year.

The Fed’s preferred measure of underlying inflation has retreated to 1.5 percent, from 1.8 percent earlier this year, and has run below the central bank’s 2 percent target for more than five years.

Earlier on Wednesday, the Labor Department reported consumer prices unexpectedly fell in May, the second drop in three months.

Yellen indicated the Fed remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labor market that is continuing to strengthen.

The Fed’s estimates for the unemployment rate by the end of this year moved down to 4.3 percent, the current level, and to 4.2 percent in 2018, indicating the Fed believes the labor market will continue to tighten.

The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent.

Minneapolis Fed President Neel Kashkari dissented in Wednesday’s decision.

Consumer Price Index and Retail Sales Both Down

Consumer prices unexpectedly fell in May and retail sales recorded their biggest drop in 16 months, suggesting a softening in domestic demand that could limit the Federal Reserve’s ability to continue raising interest rates this year.

The Labor Department indicated Wednesday morning that its Consumer Price Index fell 0.1 percent last month, weighed down by declining prices for gasoline, apparel, airline fares, motor vehicles, communication and medical care services, among others.

The second drop in the CPI in three months followed a 0.2 percent rise in April. In the 12 months through May, the CPI rose 1.9 percent, the smallest increase since last November, after advancing 2.2 percent in April.

The year-on-year gain in the CPI in May was still larger than the 1.6 percent average annual increase over the past 10 years.

The so-called core CPI, which strips out food and energy costs, rose 0.1 percent in May after a similar gain in April as rents continued to increase moderately. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April.

The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.5 percent. The Fed said on Wednesday it expected annual inflation rates to “remain somewhat” below 2 percent in the near term but stabilize around the central bank’s target over the medium term. Chair Janet Yellen said they were monitoring inflation developments closely.

The Fed hiked its benchmark overnight interest rate by 25 basis points to range of 1.00 percent to 1.25 percent, and said it would start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities this year.

In a separate report, the Commerce Department said retail sales fell 0.3 percent last month amid declining purchases of motor vehicles and discretionary spending after a 0.4 percent increase in April. May’s drop was the largest since January 2016 and confounded economists’ expectations for a 0.1 percent gain.

Retail sales rose 3.8 percent in May on a year-on-year basis. While some of the drop in monthly retail sales reflected lower gasoline prices, which weighed on receipts at service stations, sales at electronics and appliance stores recorded their biggest decline since March 2010.

Excluding automobiles, gasoline, building materials and foodservices, retail sales were unchanged last month after an upwardly revised 0.6 percent rise in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have increased 0.2 percent in April.

Consumer spending accounts for more than two-thirds of the U.S. economy. Despite last month’s weak core retail sales reading, low inflation could translate into higher consumer spending in the calculation of GDP.

The economy grew at a 1.2 percent annualized rate in the first quarter, held back by a near stall in consumer spending and a slower pace of inventory investment.

Output increased at a 2.1 percent pace in the October-December period. The Atlanta Fed is forecasting GDP rising at a 3.2 percent annualized rate in the second quarter.

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Rudd’s MarketView for Tuesday, June 13, 2017

Summary

Wall Street gained on Tuesday, with the S&P 500, Dow Industrial Average and the Russell 2000 setting record closing highs, as technology stocks bounced back and investors positioned for an expected Federal Reserve interest rate hike.

The S&P 500 technology sector rose 0.9 percent, recovering from its largest two-day decline in nearly a year that also weighed on the broader market. Big tech names, such as Microsoft and Facebook, pushed the S&P 500 higher.

Tech has led the benchmark S&P 500’s 9-percent rally this year, and its recent swoon has sparked speculation that investors may be rotating into other swaths of the market that have lagged in 2017, such as financials and energy.

The financial sector gained 0.4 percent on Tuesday, while energy gained 0.7 percent. Materials were the top gaining sector, rising 1.3 percent.

Traders are overwhelmingly expecting an interest rate increase when the Fed concludes its two-day meeting on Wednesday. The central bank is scheduled to release its decision at 2 p.m. on Wednesday with a news conference to follow from Fed Chair Janet Yellen.

Financials, which tend to benefit when rates are rising, were higher after the Treasury Department announced a plan to upend the country’s financial regulatory framework, which would grant many items on Wall Street’s wish list.

In corporate news, Cheesecake Factory (CAKE.O) shares fell 9.9 percent after the restaurant chain warned of a decline in comparable store sales.

Approximately 6.4 billion shares changed hands on the major domestic equity exchanges, a number that was below with the 6.8 billion share daily average over the last 20 sessions.

Producer Price Index Unchanged

Producer prices were unchanged in May as energy costs recorded their biggest decline in more than a year, suggesting inflation pressures were easing after rising at the start of the year.

Signs of abating inflation came as Federal Reserve officials prepared to gather for a two-day policy meeting on Tuesday. The U.S. central bank is expected to raise interest rates at the end of the meeting on Wednesday, but weakening inflation could limit the scope for further monetary policy tightening this year.

The Labor Department said last month’s unchanged reading in its producer price index for final demand followed a 0.5 percent increase during April. In the 12 months through May the PPI increased 2.4 percent, retreating from April’s 2.5 percent surge, which was the biggest yearly increase since February 2012.

Last month’s inflation readings were broadly in line with economists’ expectations.

The Fed has a 2 percent inflation target and tracks a measure that is currently at 1.5 percent. The central bank raised its benchmark overnight interest rate by 25 basis points in March.

The dollar’s fading rally and rising oil prices boosted producer prices at the start of the year. However, oil prices have retreated in recent weeks, putting a lid on producer inflation.

Energy prices fell 3.0 percent last month, the biggest drop since February 2016, after rising 0.8 percent in April. The cost of gasoline declined 11.2 percent in May, which was also the largest drop since February of last year.

Because of weak energy prices, the cost of goods fell 0.5 percent, reversing April’s 0.5 percent increase. At the same time, prices for services rose 0.3 percent last month, driven by a 1.1 percent surge in the index for final demand trade services, which measures changes in margins received by wholesalers and retailers. Services rose 0.4 percent in April.

Half of the increase in services last month was driven by margins for fuels and lubricants retailing, which rose 16.1 percent. There were also increases in margins for apparel retailing, machinery and equipment wholesaling and automobiles and parts retailing.

However, the cost of renting a guest room fell a record 5.2 percent. Food prices fell 0.2 percent as prices of fresh fruits and melons recorded their biggest drop since June 2010. But the cost of beef and veal increased by the most since July 2008.

Food prices surged 0.9 percent in April.

A key gauge of underlying producer price pressures that excludes food, energy and trade services fell 0.1 percent last month, the first decline in a year. The so-called core PPI rose 0.7 percent in April.

The core PPI increased 2.1 percent in the 12 months through May after a similar gain in April.

The cost of healthcare services fell 0.1 percent last month after being unchanged in April. The cost of inpatient healthcare services dropped 0.2 percent last month after a similar decrease in April.

Outpatient care prices rose 0.2 percent, while physician care edged up 0.1 percent. Those costs feed into the Fed’s preferred inflation measure, the core personal consumption expenditures price index.

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Rudd’s MarketView for Monday, June 12, 2017

Summary

Apple shares added to last week’s drop on Monday to lead a market downturn as tech, still the best performing S&P 500 sector this year, succumbed under its own weight.

Mizuho Securities cut its rating on Apple to “neutral” from “buy” on Monday, saying the stock had outperformed this year and that the “upcoming product cycle is fully captured at current levels.” Apple shares, down 2.4 percent on Monday, are up about 26 percent so far in 2017.

The S&P technology sector fell 0.8 percent after dropping 2.7 percent Friday for its largest two-day decline in nearly a year. The tech-heavy Nasdaq Composite underperformed the S&P 500 as the ongoing rout in the sector sparked a search for value elsewhere.

Energy sector, the worst performing sector year-to-date, was among the sectors trying to stop the bleeding on the S&P 500.

General Electric was the S&P’s best performer with a 3.6 percent advance to $28.94. Jeff Immelt will retire as chief executive and would be replaced by John Flannery, the head of GE healthcare, who said he will conduct a swift review of the business portfolio.

The largest percentage gainer on the S&P 500 was Under Armor, which rose 5.8 percent, while the largest decliner was Netflix, down 4.2 percent.

Coherus BioSciences fell 23.8 percent to $15.73 after the FDA denied the approval of its biosimilar for Amgen’s Neulasta. Amgen edged up 0.5 percent to $164.88.

Approximately 7.89 billion shares changed hands on the major domestic equity exchanges, a number that was far above the 6.81 billion daily average over the last 20 sessions.

Treasury Suggests Easing Rules

The Treasury Department suggested major revisions to key Wall Street regulations that were put in place after the 2008 financial crisis in a lengthy report on Monday suggesting over 100 possible changes.

Most of the recommendations laid out in the Treasury’s 150-page report can be accomplished by regulators appointed by President Donald Trump without any legislative changes from Congress, Treasury Secretary Steven Mnuchin told lawmakers Monday.

The report relies heavily on those regulators, as the Trump administration cannot count on legislation from Congress. Democrats are resisting major changes to the 2010 Dodd-Frank Wall Street reform law that came out of the financial crisis and was a signature achievement for former President Barack Obama.

Among other things, the Treasury would expand the authority of the Financial Stability Oversight Council, ease up on the Volcker rule, which restricts banks’ ability to place speculative market bets, and reduce the authority of the Consumer Financial Protection Bureau.

It would also provide relief for smaller banks by raising a $50 billion asset threshold that now requires tougher regulatory scrutiny.

Recession Remote for 12-Months

Chances are remote the economy will fall into a recession during the next 12 months despite a recent flattening of the U.S. yield curve suggesting growing recession risk, Deutsche Bank’s economists indicated on Monday.

Based on other bond market indicators, they estimated the probability of a U.S. recession from now to June 2018 at less than 10 percent. This as compared to the yield curve, or the gap between long-dated and short-dated yields, which currently implies roughly a 33 percent chance of a recession.

“Despite this development, we do not see U.S. recession risk as particularly elevated; indeed, we think it is quite low for the next year,” Deutsche Bank economists wrote in a research note.

Historically, a sharp flattening of the yield curve has preceded a recession as traders pile into longer-dated Treasuries in anticipation of an economic contraction.

On Monday, the two-year to 10-year portion of the Treasury yield curve flattened to 83.80 basis points, its tightest since early October. It reached nearly 137 basis points in December, which was its steepest level in a year, Tradeweb data showed.

Analysts and traders have attributed the curve flattening to doubts about any forthcoming fiscal stimulus from Washington and recent economic data that fell short of expectations.

Still, some aspects of the economy, such as the labor market and housing, continue to perform well without signs they will overheat in the next 12 months, Deutsche Bank economists said.

However, a further tightening of the labor market in the next 18 months might force the Federal Reserve to accelerate its pace of rate increases, raising the chances of a recession by 2010, according to the bank’s economists.

“The more hawkish scenario would clearly move the Fed’s policy stance to a level that would make a recession likely by late-2019 or 2010,” they wrote.

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