February 28, 2018

The major stock market averages rebounded this morning (Dow +21 points; SPX +.14%). The cyclical sectors (tech, financials, and consumer discretionary) are leading the way after a positive GDP report. The VIX Index is back down today to trade at 17.7 and VIX March futures are now at 17.5. So there’s still a little edginess among traders about inflation’s impact on the stock market this year. European markets are poised to close modestly higher, but Asia was mostly down overnight. That’s because China’s official manufacturing business activity index (“PMI”) fell to 50.3 in February. Economists expected to see 51.1. The implication is that a large swath of China’s economy stagnated this month. Partly as a result, the dollar is stronger today. Commodities are mixed. Not surprisingly, copper is down 1.5% as it tends to move with China’s economic outlook. WTI crude oil is down 1% to trade around $62.30/barrel. Bonds are slightly higher in price, lower in yield. The 5-year and 10-year Treasury yields are hovering around 2.67% and 2.89% at the moment. Lately, whenever the 10-year moves closer to 3%, the stock market retreats, and when it falls back toward 2.8% stocks rise. 

Yesterday, new Fed Chair Powell told a congressional committee that the Fed is on track to raise its short-term interest rate three times this year in order to keep pace with rising inflation expectations. But the Fed could possibly move a fourth time if economic growth and inflation so warrant. “We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target.” That view is based on not only strong US economic growth but also better economic conditions around the world. This was just hawkish enough to tank equity markets late in the day. 

US economic growth for the fourth quarter of 2017 was revised slightly lower, to 2.5%. Consumer spending, which accounts for most of the Gross Domestic Product (GDP) calculation, was unchanged at a very strong 3.8%. Residential fixed investment rose a better-than-expected 13.1% in the quarter. Non-residential investment (think corporate capital spending) rose 6.6%, down from the initial estimate of 6.8%. Government spending growth was revised down a bit to 2.9%. Even so, these numbers are very positive. Unfortunately, imports grew much faster than exports and that subtracted an incredible 1.1 percentage points from GDP. Barron’s says “Strength is definitely the message of this report, masked by the nation’s trade imbalance and the quarter’s inventory change…”   

Comcast (CMCSA) announced a bid to acquire Sky, a British satellite TV business, for about $31bil. This surprised everyone and will intensify the media industry’s M&A feeding frenzy. First, Disney (DIS) has already offered $52bil to acquire 21st Century Fox (FOXA), which own 39% of Sky. So now DIS needs to decide whether to get into a bidding war with CMCSA. And now FOXA’s board of directors may have to try to renegotiate the deal with DIS. Anyway, uncertainty reigns and that’s why both CMCSA (-7.4%) and DIS (-4.5%) tanked yesterday. 

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