March 6, 2018

The major stock market averages opened mixed this morning. The Dow is down 104 pts and the S&P 500 is down .1%. The Nasdaq is up .14%. Utilities are down .8% and biotechs, banks and retailers are in the red. Gold miners, semiconductors and materials stocks are in the green. The VIX Index, which uses stock options to measure investor fear, is holding around 18.5. VIX March futures are at the same level. Whereas the VIX remained below 12 for most of 2017, it has been significantly higher (that is, more normal) this year. The dollar is weaker today (and down 2.7% so far this year) and commodities are mostly higher. WTI crude oil is trading down a bit to $62.30/barrel. Bonds are modestly higher this morning. The 5-year and 10-year Treasury note yields ticked down to 2.63% and 2.86%, respectively. The trend for interest rates has been mostly higher this year, so bonds have traded lower. The popular iShares IBOXX Investment Grade Corporate Bond ETF (LQD) is down 4% this year; the iShares 20+ Year Treasury Bond ETF (TLT) is down 6.5%.  

The Governing Council of the European Central Bank (ECB) meets later this week to discuss monetary policy. Its $37bil-per-month bond buying program is scheduled to expire in September and this issue will surely come up. ECB chief Mario Draghi has suggested that perhaps the council would consider a “sudden stop” because, as Bloomberg notes, Europe’s economy has “recently been experiencing [its] strongest growth in more than a decade.” It’s not just Europe though. Both Japan and the US are in the same boat, trying to remove monetary stimulus as economic growth strengthens. 

Much is being made of the report that US factory orders fell 1.4% in January from prior month levels. CNBC says that after a very strong 2017, corporate capital spending “appear[s] to be slowing” amidst a “broad decrease in demand.” That’s the headline, but it’s misleading. First, economists widely expected a monthly drop in factory orders. Second, weakness was centered on a temporary dip in automobile & aircraft orders. Third, month-to-month data is often volatile and open to revisions in subsequent months; that’s why we look at year-over-year growth rate trends. On that basis, factory orders are up more than 5%. And new orders for capital goods excluding aircraft and defense are up 8.1%. That’s a pretty strong number, and fits with the up-trend we’ve seen over the last year-and-a-half. 

Emerging markets’ funds are trading sharply higher (+1%) today after Bloomberg reported China’s banking regulator just relaxed bank reserve requirements. The bad loan coverage ratio was adjusted down to 120% from the previous minimum of 150%. This will allow banks to extend more credit, and of course, more lending usually means stronger economic growth. China’s economic growth will likely decelerate this year to 6.5% from 6.9% last year. So the country’s central planners are looking for ways to cushion that dip. Of course, President Jinping’s campaign to reduce financial system risk in China runs counter to this move, but growth is growth. 

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