March 17, 2016

Stocks surged in early trading this morning (Dow +92 pts; SPX +.3%). Energy, materials and industrials (sectors battered in 2015) are leading way, each up over 1%. Healthcare continues to lag, and now the health insurers are getting hammered. Bloomberg reports medical loss ratios are rising for insurers with a lot of Medicaid members. We already know they’re struggling to make a profit with the ObamaCare exchanges. WTI crude oil is trading up to nearly $40/barrel, dragging other commodities along with it. Bond prices surged in the wake of the Fed announcement yesterday (read below), and are roughly flat this morning. The 10-year Treasury yield is sitting at 1.9% and the 5-year is at 1.39%.

Peabody Coal (BTU) missed a debt payment and warned it may have to file for bankruptcy. In a statement, the company noted substantial doubts about its ability to stay in business. Coal demand is plummeting in the face of ultra-cheap natural gas. For the first time ever, more power plants are being fueled by natural gas than by coal. Patriot Coal and Walter Energy have already filed for bankruptcy.

The Federal Reserve declined to raise short-term interest rates at its policy meeting which ended yesterday. In the accompanying statement, Fed officials acknowledged financial market turmoil around the world as one reason why it will continue to be patient with rate hikes. In addition, while there are signs of rising inflation, the Fed prefers to wait and see if that nascent trend persists. Early in 2016 many Fed bank governors were talking about 4 rate hikes this year; now the forecast is for only two. The Fed now forecasts US economic growth (GDP) to rise 2.1% in 2016 after rising 2.4% last year. CNBC reporter Bob Pisani summarized the Fed announcement pretty well: “The Fed has come to the Street’s position essentially.”

The US Index of Leading Indicators (LEI) ticked up .1% in February from prior month levels. Economists were anticipating a .2% gain. LEI is intended to be a predictive indicator of the health of the economy, and while the index has softened over the last year, it’s still healthy enough to suggest a continuation of moderate economic growth. On a year-over-year basis, LEI accelerated to 2.3% y/y growth from 2.1% in the prior month. Separately, Citigroup’s Economic Surprise Index, has risen back to -3 from its recent low of -55 in early February.

 


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