September 29, 2016

The major stock market averages opened lower this morning (Dow -55 pts; SPX -.3%). Utilities and healthcare are the worst-performing groups in early trading. Banks, transports and retailers are modestly higher. The dollar and commodities are flat. WTI crude oil is up modestly to $47.30/barrel. Bonds are trading a bit lower as yields tick higher. The 5- and 10-year Treasury yields are currently hovering around 1.15%, and 1.59%, respectively. 

Yesterday, OPEC apparently came to an agreement to (ever so slightly) cut oil production beginning in November. Headlines are reporting a cut to 32.5 million barrels per day vs. the current level of 33 million barrels per day. Some OPEC member countries will be exempt from production cuts. Saudi Arabia softened its stance on Iran, conceding to that country’s demand to increase its production to 4 million barrels per day. There is some talk that Libya and Algeria will also be allowed to produce at “maximum levels.” Following the announcement, WTI crude oil jumped 5%, or about $2/barrel. But US traders are skeptical that OPEC will even follow through. Yesterday’s headlines made the deal sound a whole lot more positive than it is. 

Second quarter US economic growth (“GDP”) was revised a bit higher to 1.4% from the previous estimate of 1.1%. Consumer spending, a key component of GDP, was revised down to 4.3% growth; inflation was left unchanged at 2.3%. So the reasons for the upgrade in GDP were 1) a boost in non-residential fixed investment (i.e. corporate capital spending) and 2) better than expected net exports. Both of these crucial areas have been subtracting from growth, but are now additive. And one more thing, consumer spending at +4.3% is very healthy. 

Pending home sales (i.e. contracts signed) fell 2.4% in August following a 1.2% gain in July. The volume of new contracts has fallen to a 7-month low. Three of the four major geographic regions posted a monthly decline and Barron’s says the report “points to outright weakness in coming months” for existing home sales. We’ve seen fairly strong new home sales activity, but existing home sales have softened despite very low mortgage rates and a strong job market. The National Association of Realtors says would-be buyers are reacting to the relatively low number of homes for sale. 

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