December 12, 2016

Stocks opened mixed this morning (Dow +28 pts; SPX -.15%). Energy and telecom sectors are up over 1% in early trading. Most of the cyclical sectors, however, are lower. Biotechs, semiconductors and banks are down .75% to 1%. The VIX Index is trading up to 12.4 and VIX January futures are up around 15.5. Expected volatility is still pretty low. WTI crude oil is up another 3.4% to trade around $53.25/barrel. That’s the highest level since July 2015. Looking at the chart, the next major resistance level is around $60/barrel. Bonds are selling off again. The 5-year Treasury yield is back up to 1.90% and the 10-year is trading around 2.49%. Investors are absolutely convinced the Federal Reserve will resume interest rate hikes later this week. The 2-year Treasury yield at 1.14% is at its highest since April 2010. 

OPEC oil ministers met with Russia and some other non-OPEC countries this weekend to finalize the production cut deal. And this morning, oil-exporting currencies are gaining ground vs. the dollar. Nigeria’s petroleum minister says OPEC wants $60/barrel oil because that will allow OPEC countries some improvement in their country’s finances, but won’t be high enough to encourage US shale oil producers to turn on the spigot again. 

The Federal Reserve Bank of New York says its inflation expectations survey is rising. The 3-year inflation outlook is up to 2.7%. An increasing number of respondents expect to be receiving more interest on their deposit accounts in the next year. Interestingly, wage growth expectations were not as robust—just 2.0% for the coming year.  

Donald Trump this morning tweeted that “The F-35 program and cost is out of control.” He also said that once he’s president he will focus on cutting costs on military equipment. This continues Mr. Trump’s habit of singling out specific businesses to criticize, such as Boeing and United Technologies. Lockheed’s management is on the back foot this morning trying to justify its F-35 contract. And the stock is down 3.7% this morning. 

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