March 30, 2016

Stocks gapped up this morning, following on the heels of yesterday’s Fed-induced rally. The Dow and SPX are currently up 131 pts & .7%, respectively. The tech sector is up over 1%, with financials right behind. Telecoms and utilities are down modestly. We’re seeing big gains today in semiconductors, banks, insurance companies, and Apple (AAPL). In fact, CNBC is reporting that Apple is no longer in a “bear market,” having rallied about 20% from its recent bottom. In addition, General Electric (GE) stock is back up to nearly $32/share, a level not seen since 2008. WTI crude oil is up modestly to $39.30/barrel and most other commodities are up on the day. Bonds are selling off a bit, with the 5- and 10-year Treasury yields trading up to 1.30% and 1.85%, respectively.

Federal Reserve Chair Janet Yellen pledged yesterday to be patient and “cautious” with future interest rate hikes. She noted certain aspects of our economy are “quite favorable,” including the job market, consumer spending, income gains, and the housing market. But slow global growth and the collapse in oil prices have hampered business investment, manufacturing and exports. The “drag from abroad” will likely persist for a while as foreign economic growth looks weaker this year than previously expected. Ms. Yellen predicted that monetary policy will be adjusted gradually over time. The pace of rate increases will likely be slower than previously expected. Fed officials now see the Federal-funds target interest rate at about .9% at the end of 2016 and 1.9% at the end of 2017. Finally, Ms. Yellen reminded us that the real Fed-funds interest rate is actually negative, by about 1.5%, and that her concept of a more neutral rate would be around 0. So that implies a longer term nominal target of about 2.0% to 2.5% for the Fed-funds rate.

Payroll processor ADP says the US economy generated 200,000 new jobs in the month of March, following 205,000 in February. Results were in line with economists’ expectations. Payroll gains were seen in services businesses (+191k), as well as in manufacturing (+3k) and construction (+17k). Smaller companies added many more positions than did larger companies. Moody’s Analytics economist Mark Zandi said, “All indications are that the job machine will remain in high gear.” On Friday, we’ll get the official Bureau of Labor Statistics payroll numbers.

Metlife (MET) won an important court case, blocking the US government’s attempt to label it a “systemically important financial institution” (SIFI). This designation is also referred to as “too big to fail,” and it comes with increased federal regulations and scrutiny. A federal judge in Washington rejected the Financial Stability Oversight Council’s rationale for the label as it regards Metlife’s business. Bloomberg reports this is a huge setback for the Obama Administration’s plan to more heavily regulate non-bank financial institutions. Insurance stocks are rallying this morning (MET +6%; AIG +2%; TRV +1%). 

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