Wed 11 Oct 2017


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  • Today at the stock market Opinion
  • The portfolio today Opinion
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  • Today at the stock market

    bull/bearMajor stock indexes edged up to post record closing highs on Wednesday with sector moves in the S&P 500 showing preference toward so-called defensive stocks. A report that a market-friendly candidate was being pushed as successor to Janet Yellen at the helm of the Federal Reserve helped indexes close at record highs.

    • The S&P 500 rose 4.6 points, or 0.18%, to 2,555.24. The S&P 500 posted 48 new 52-week highs and 9 new lows.
    • The Dow Jones Industrial Average rose 42.21 points, or 0.18%, to end at 22,872.89.
    • The Nasdaq Composite rose 16.30 points, or 0.25%, to 6,603.55. The Nasdaq Composite recorded 147 new highs and 28 new lows.
    • Advancing issues outnumbered declining ones on the NYSE by a 1.49-to-1 ratio; on Nasdaq, a 1.01-to-1 ratio favored advancers.
    • About 5.66 billion shares changed hands in U.S. exchanges, compared with the 6.1 billion daily average over the last 20 sessions.

    Real estate, utilities, and consumer staples were among S&P 500 sectors that posted gains, while financials were pressured by a slip in Treasury yields and industrials also fell. “You’ve got sector rotation grinding the indexes higher and it’s hard to see what stops that,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

    Federal Reserve policymakers had a prolonged debate about the prospects of a pickup in inflation during their September meeting, but many policymakers still felt that another rate increase this year “was likely to be warranted.”

    “Nothing changes the opinion that the Fed is likely to hike rates after the December meeting,” Hogan said.

    Stocks ended near session highs after a report from Politico said Treasury Secretary Steven Mnuchin was pushing president Donald Trump to name Jerome Powell, seen as a safe pick for financial markets, as the next Federal Reserve chairman. “The market prefers status quo. Everyone knows rates are going up but they prefer the policy that Yellen has laid out. Maybe the market is telling you it thinks it’s going to be status quo.” Powell is seen as closer policy-wise to Yellen than another front-runner, Kevin Warsh.

    Gains in Wal-Mart and Johnson & Johnson nudged the Dow Jones Industrial Average to another record high but declines in financials kept gains on the S&P 500 in check.

    J&J rose 2.1% to $136.65 after Jefferies upgraded the stock to “buy,” saying the company’s pharma division would help it top analysts’ profit estimates.

    The consumer staples sector got a boost from gains in Wal-Mart), which rose 1.9%, as well as from Kroger, which jumped 1.2% to $20.78 after news it was exploring the sale of its nearly 800 convenience stores.

    Banks take the focus as JPMorgan Chase and Citigroup report results on Thursday, with analysts warning that results in the sector will largely be held back by low trading volumes compared with a year earlier. “Third-quarter results of large banks are expected to be tepid,” said Stephen Biggar, an analyst at Argus Research. “Trading revenue (will be) down due to low volatility and loan growth remaining flat to slightly negative.”

    With the S&P 500 up 14% in 2017, investors are betting on strong earnings growth across the S&P 500.

    Wunderlich’s Hogan said the catalyst to stop the grind higher in stocks would be “some big names missing the mark in earnings, away from any hurricane-related explanations.”

    General Electric fell 1.2% to $23.07 after JPMorgan said a dividend cut was “increasingly likely” and lowered its price target on the stock.Reuters

    Market indices

    :-) The three market indices reported here closed on record highs.

    Market indices
    ^ Market indices today (mouseover for 12 month view) Chart: Google Finance

    Index Ticker Today Change 31 Dec 16 YTD
    S&P 500 SPX (INX) 2,555.24 +0.18% 2,238.83 +14.13%
    DJIA INDU 22,872.89 +0.18% 19,762.60 +15.73%
    NASDAQ IXIC 6,603.55 +0.24% 5,383.12 +22.67%

    Portfolio Indices

    USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
    ^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

    Index values

    Index Currency Today Change 31 Dec 16 YTD
    USD-denominated Index USD 2.832 +0.64% 2.105 +34.54%
    Valuation Rate USD/AUD 0.78444 +0.15% 0.72663 +7.95%
    AUD-denominated Index AUD 3.612 +0.48% 2.895 +24.77%

    Portfolio stock prices

    :-) Alphabet Class A shares closed at a record $1,005.65, beating their 8 Jun 2017 record of $1,004.28.
    :-) Alphabet Class C shares closed at a record $989.25, beating their 5 Jun 2017 record of $983.68.
    :-) PayPal closed at a record $67.78, beating its 9 Oct 2017 record of $66.23.
    :-) Visa closed at a record $108.44, beating its 10 Oct 2017 record of $107.31.

    Stock Ticker Today Change 31 Dec 16 YTD
    Alphabet A GOOGL $1005.65 +1.81% $792.45 +26.9%
    Alphabet C GOOG $989.25 +1.71% $771.82 +28.17%
    Apple AAPL $156.55 +0.42% $115.82 +35.16%
    Amazon AMZN $995 +0.79% $749.87 +32.68%
    Ebay EBAY $38.31 -1.36% $29.69 +29.03%
    Facebook FB $172.74 +0.67% $115.05 +50.14%
    PayPal PYPL $67.78 +2.63% $39.47 +71.72%
    Twitter TWTR $17.73 +1.84% $16.3 +8.77%
    Visa V $108.44 +1.05% $78.02 +38.99%
    VMware VMW $112.03 +0.21% $78.73 +42.29%

    FX: USD/AUD

    USD

    DXY movements
    ^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

    The Bloomberg Dollar Spot Index fell 0.3 percent.
    The euro climbed 0.5 percent to $1.1867.
    The Turkish lira strengthened 1.6 percent.
    Bloomberg

    AUD

    AUD movements
    ^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com

    Oil and Gas Futures

    Futures prices

    Prices are as at 15:47 EDT

    • NYMEX West Texas Intermediate (WTI): $51.30/barrel +0.75% Chart
    • ICE (London) Brent North Sea Crude: $56.84/barrel +0.41% Chart
    • NYMEX Natural gas futures: $2.89/MMBTU -0.07% Chart

    flag_australia AU: Building Activity, Jun 2017

    Press Release Extract [ser_au_building]

    Building Work Done

    The trend estimate of the value of total building work done rose 0.3% in the June 2017 quarter.
    The seasonally adjusted estimate of the value of total building work done fell 0.6% to $26,829.4m in the June quarter, following a fall of 0.2% in the March 2017 quarter.

    New Residential Building Work Done

    The trend estimate of the value of new residential building work done fell 1.2% in the June quarter. The value of work done on new houses fell 1.3% while new other residential building fell 1.0%.
    The seasonally adjusted estimate of the value of new residential building work done fell 1.3% to $15,360.8m. Work done on new houses fell 2.6% to $8,049.4m, while new other residential building rose 0.2% to $7,311.4m.

    Non-Residential Building Work Done

    The trend estimate of the value of non-residential building work done rose 2.8% in the June quarter.
    The seasonally adjusted estimate of the value of non-residential building work done in the quarter rose 0.3%, following a rise of 4.8% in the March 2017 quarter.

    Total Dwellings

    The trend estimate for the total number of dwelling units commenced fell 3.0% in the June 2017 quarter following a fall of 2.8% in the March quarter.
    The seasonally adjusted estimate for the total number of dwelling units commenced rose 1.2% to 52,895 dwellings in the June quarter following a fall of 8.3% in the March quarter.

    New Private Sector Houses
    The trend estimate for new private sector house commencements fell 1.6% in the June quarter following a fall of 2.7% in the March quarter.
    The seasonally adjusted estimate for new private sector house commencements rose 3.2% to 27,619 dwellings in the June quarter following a fall of 5.4% in the March quarter.

    New Private Sector Other Residential Building

    The trend estimate for new private sector other residential building commencements fell 4.6% in the June quarter following a fall of 3.0% in the March quarter.
    The seasonally adjusted estimate for new private sector other residential building rose 0.3% to 24,154 dwellings in the June quarter following a fall of 11.5% in the March quarter.

    Feature Article: Abandonment Rates for New Dwellings

    The number of dwellings in the pipeline (i.e. approved but not yet commenced) has surged to unprecedented levels over the last few years. This is mainly due to an increase in other residential dwelling approvals, particularly for new apartments in New South Wales, Victoria and Queensland. There has also been a recent increase in the average time between approval and commencement for these projects. This could indicate an increased risk that these projects will not proceed to commencement (i.e. are abandoned), therefore not contributing to future building activity.

    This article examines long term trends in abandonment rates of new dwelling approvals to inform future building activity figures. The composition of abandoned dwellings by type of building, location and length of time in the pipeline are presented.

    Once a new dwelling has been approved (a building approval is defined as the final certification required before building activity can legally commence), it may be considered abandoned before or after construction has commenced, where:

    • The owner of the building job reports that the approved work is not going to commence or continue, and the building job has not been sold to another entity; or
    • No construction has commenced within the required period and the approval has expired.

    Results: Dwelling Abandonments Over Time

    The number of dwellings abandoned has remained relatively stable over the past decade, with 5,114 dwellings abandoned in the 2016-17 financial year compared to 4,643 dwellings abandoned in the 2006-07 financial year.

    As a proportion of dwellings approved each financial year, the rate of dwellings abandoned has decreased slightly over the past decade. This is largely due to an increase in the number of dwellings approved over this time, along with a slight decrease in the number of dwellings abandoned. The abandonment rate reached a peak of 3.7% in the 2008-09 financial year due to a decrease in approvals following the global financial crisis.

    The increase in the abandonment rate in the 2016-17 financial year was due to an increase in abandonments of 2,028 dwellings, along with a decrease in approvals of 18,478 dwellings.

    Australian Bureau of Statistics, “8752.0 Building Activity, Australia, June 2017.“, 11 Oct 2017 More

    flag_europe EU: House Price Index. Q2/2017

    Press Release Extract [ser_eu_houseprices]

    House prices, as measured by the House Price Index, rose by 3.8% in the euro area and by 4.4% in the EU in the second quarter of 2017 compared with the same quarter of the previous year. These figures come from Eurostat, the statistical office of the European Union.

    eu_houseprices_20171011

    Compared with the first quarter of 2017, house prices rose by 1.5% in the euro area and by 1.8% in the EU in the second quarter of 2017.

    House price developments in the EU Member States

    Among the Member States for which data are available, the highest annual increases in house prices in the second quarter of 2017 were recorded in the Czech Republic (+13.3%), Ireland (+10.6%) and Lithuania (+10.2%), while prices fell in Italy (-0.2%).

    Compared with the previous quarter, the highest increases were recorded in Latvia (+6.1%), Slovakia (+5.6%) and Romania (+4.9%), while decreases were observed in Hungary (-1.5%) and Belgium (-0.7%).

    Eurostat, “Second quarter of 2017 compared with second quarter of 2016: House prices up by 3.8% in the euro area, Up by 4.4% in the EU“, 11 Oct 2017 More

    flag_usa US: Job Openings and Labor Turnover Survey. Aug 2017

    Press Release Extract [ser_us_jolts]

    The number of job openings was little changed at 6.1 million on the last business day of August, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were also little changed at 5.4 million and 5.2 million, respectively. Within separations, the quits rate and the layoffs and discharges rate were little changed at 2.1 percent and 1.2 percent, respectively. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

    Job Openings

    On the last business day of August, there were 6.1 million job openings, little changed from July. The job openings rate was 4.0 percent in August. The number of job openings was little changed for total private and for government. Job openings increased in health care and social assistance (+71,000) and in durable goods manufacturing (+31,000). Job openings decreased in other services (-95,000), educational services (-51,000), and nondurable goods manufacturing (-48,000). The number of job openings increased in the Midwest region.

    us_jolts1_20171011

    Hires

    The number of hires was little changed at 5.4 million in August. The hires rate was 3.7 percent. The number of hires was little changed for total private and for government. The number of hires was little changed in all industries. Hires decreased in the Northeast region.

    us_jolts2_20171011

    Separations

    Total separations includes quits, layoffs and discharges, and other separations. Total separations is referred to as turnover. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. Layoffs and discharges are involuntary separations initiated by the employer. Other separations includes separations due to retirement, death, disability, and transfers to other locations of the same firm.

    The number of total separations was little changed at 5.2 million in August. The total separations rate was 3.6 percent. The number of total separations was little changed for total private and for government. Total separations was little changed in all industries. The number of total separations decreased in the South region.

    The number of quits was little changed at 3.1 million in August. The quits rate was 2.1 percent. The number of quits was little changed for total private and for government. Quits decreased in information (-14,000) and mining and logging (-6,000). In the regions, the number of quits increased in the West but decreased in the South.

    There were 1.7 million layoffs and discharges in August, little changed from July. The layoffs and discharges rate was 1.2 percent in August. The number of layoffs and discharges was little changed for total private and for government. The layoffs and discharges level decreased in state and local government education (-11,000) and federal government (-4,000). The number of layoffs and discharges was little changed in all four regions.

    The number of other separations was little changed in August. Other separations was little changed for total private and for government. Other separations was also little changed in all industries and regions.

    Net Change in Employment

    Large numbers of hires and separations occur every month throughout the business cycle. Net employment change results from the relationship between hires and separations. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. Conversely, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising. Over the 12 months ending in August, hires totaled 63.8 million and separations totaled 61.7 million, yielding a net employment gain of 2.1 million. These totals include workers who may have been hired and separated more than once during the year.

    Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey. Aug 2017“, 11 Oct 2017 (10:00) More

    flag_usa US: FOMC Minutes (Extracts)

    Extracts from Minutes

    Staff Review of the Economic Situation

    The information reviewed for the September 19-20 meeting showed that labor market conditions continued to strengthen in July and August and that real gross domestic product (GDP) appeared to be rising at a moderate pace in the third quarter before the landfall of Hurricanes Harvey and Irma. Only limited data pertaining to the economic effects of these hurricanes were available at the time of the meeting, but it appeared likely that the negative effects would restrain national economic activity only in the near term.5 Total consumer price inflation, as measured by the 12‑month change in the price index for personal consumption expenditures (PCE), continued to run below 2 percent in July and was lower than at the start of the year. Survey‑based measures of longer-run inflation expectations were little changed on balance.

    Total nonfarm payroll employment rose solidly in July and August, with strong gains in private-sector jobs and declines in government employment. The unemployment rate dipped to 4.3 percent in July and edged back up to 4.4 percent in August. The unemployment rates for African Americans, for Hispanics, and for whites were lower, on average, in recent months than around the start of the year, whereas the unemployment rate for Asians was a little higher. The overall labor force participation rate edged up in July and was unchanged in August, and the share of workers employed part time for economic reasons was little changed on net. The rate of private-sector job openings increased in June and July, the hiring rate ticked up, and the quits rate edged down. Initial claims for unemployment insurance benefits jumped in early September from a very low level, and the Department of Labor noted that Hurricane Harvey had an effect on claims. Changes in measures of labor compensation were mixed. Compensation per hour rose just 1¼ percent over the four quarters ending in the second quarter of 2017 (partly reflecting a significant downward revision to compensation per hour in the second half of 2016), the employment cost index for private workers increased 2½ percent over the 12 months ending in June, and average hourly earnings for all employees rose 2½ percent over the 12 months ending in August.

    Total industrial production (IP) increased for a sixth consecutive month in July but then declined sharply in August. The decrease in August largely reflected the temporary effects of Hurricane Harvey on drilling, servicing, and extraction activity for oil and natural gas and on output in several manufacturing industries that are concentrated in the Gulf Coast region, including petroleum refining, organic chemicals, and plastics materials and resins. Production disruptions from Hurricane Harvey continued into September, and the effects of Hurricane Irma were anticipated to hold down IP in that month as well. Even so, anecdotal reports from the hurricane-affected regions, as well as daily data on capacity outages in selected Gulf Coast industries, indicated that production had already started to recover. Meanwhile, automakers’ assembly schedules suggested that motor vehicle production would move up, on balance, over the remainder of the year despite a somewhat elevated level of dealers’ inventories and a slowing in the pace of vehicle sales in recent months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to moderate gains in factory output over the near term.

    Several pieces of information suggested that real PCE was likely increasing at a slower rate in the third quarter than in the second. First, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in August and were revised down in June and July. Second, the pace of light motor vehicle sales moved lower, on net, in July and August. Third, Hurricanes Harvey and Irma appeared likely to temporarily reduce consumer spending. However, recent readings on key factors that influence consumer spending–including continued gains in employment, real disposable personal income, and households’ net worth–remained supportive of solid growth in real PCE. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, was upbeat through early September.

    Recent information on housing activity suggested that real residential investment spending was decreasing in the third quarter after declining in the second quarter. Starts for new single-family homes edged down, on net, in July and August, and starts for multifamily units moved lower in both months. Building permit issuance for new single-family homes–which tends to be a good indicator of the underlying trend in construction–declined in July and August. Sales of both new and existing homes decreased in July.

    Real private expenditures for business equipment and intellectual property appeared to be increasing at a solid rate in the third quarter. Nominal orders and shipments of nondefense capital goods excluding aircraft rose over the two months ending in July, and readings on business sentiment remained upbeat. In contrast, investment in nonresidential structures was poised to decline in the third quarter. Firms’ nominal spending for nonresidential structures excluding drilling and mining fell sharply in June and July, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, leveled out in the past couple of months after increasing steadily for the past year.

    Total real government purchases looked to be roughly flat, on balance, in the third quarter. Nominal outlays for defense in July and August pointed to a small increase in real federal government purchases in the third quarter. However, payrolls for state and local governments declined in July and August, and nominal construction spending by these governments decreased in July.

    The nominal U.S. international trade deficit narrowed substantially in June and was about unchanged in July. After increasing in June, exports retraced a bit of this gain in July, with lower exports of consumer goods, automotive products, and services. Imports decreased a little in both months. The available data suggested that net exports contributed positively to real GDP growth in the third quarter.

    Total U.S. consumer prices, as measured by the PCE price index, increased nearly 1½ percent over the 12 months ending in July. Core PCE price inflation, which excludes consumer food and energy prices, also was about 1½ percent over that same period. Over the 12 months ending in August, the consumer price index (CPI) increased almost 2 percent, while core CPI inflation was 1¾ percent. Retail gasoline prices moved up sharply following the landfall of Hurricane Harvey and appeared likely to put temporary upward pressure on the 12-month change in total PCE prices. The median of inflation expectations over the next 5 to 10 years from the Michigan survey edged back up in the preliminary reading for September, and the median expectation for PCE price inflation over the next 10 years from the Survey of Professional Forecasters edged down. The medians of longer-run inflation expectations from the Desk’s Survey of Primary Dealers and Survey of Market Participants were relatively little changed in September.

    Foreign economic activity continued to expand at a solid pace. Economic growth picked up in the advanced foreign economies (AFEs) in the second quarter, especially in Canada, and incoming indicators suggested that growth slowed in the third quarter but remained firm. Recent indicators from the emerging market economies (EMEs) also pointed to continued strong economic growth, notwithstanding some slowing in the rate of expansion of activity in China. Headline inflation in most AFEs remained subdued, held down in part by falling retail energy prices, but data through August suggested that the drag from energy prices was diminishing. Inflation also remained low in most EMEs, although food prices continued to put upward pressure on inflation in Mexico.

    Staff Review of the Financial Situation

    Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices increased, longer-term Treasury yields declined, and the dollar depreciated. Investors’ interpretations of FOMC communications, market perceptions of a reduced likelihood of U.S. fiscal policy changes, and heightened geopolitical risks all reportedly placed downward pressure on longer-term yields. At the same time, financing conditions for households and nonfinancial businesses continued to provide support for growth in spending and investment.

    FOMC communications over the intermeeting period reportedly were interpreted as indicating a somewhat slower pace of increases in the target range for the federal funds rate than previously expected. Market participants were attentive to the Committee’s assessment of recent below-expectations inflation data and the acknowledgment in the July FOMC minutes that inflation might continue to run below the Committee’s 2 percent objective for longer than anticipated. Investors also took note of the Committee’s guidance in the July FOMC statement that it expected to begin implementing its balance sheet normalization program relatively soon. By the end of the intermeeting period, market participants appeared nearly certain that the Committee would announce the implementation of its balance sheet normalization plan at the September meeting. The probability of an increase in the target range for the federal funds rate occurring at either the September or the November meeting, as implied by quotes on federal funds futures contracts, fell to essentially zero, while the probability of a 25 basis point increase by the end of the year stood near 50 percent and was little changed since the July meeting. Quotes on overnight index swaps (OIS) pointed to a slight flattening of the expected path of the federal funds rate through 2020, with a staff model attributing most of the declines in OIS rates to lower expected rates.

    Yields on intermediate- and longer-term nominal Treasury securities decreased modestly over the intermeeting period. Treasury yields fell following the July FOMC meeting, reflecting the response of investors to the postmeeting statement, and then dropped further amid rising geopolitical tensions related to North Korea and market perceptions of reduced prospects for enactment of a fiscal stimulus program. Economic data releases appeared to have little net effect on Treasury yields over most of the period. A staff term structure model attributed about half of the decline in the 10-year Treasury yield to a decrease in the average expected future short-term rate and the remaining half to a lower term premium. Measures of inflation compensation over the next 5 years rose modestly, on net, partly in response to the release of higher-than-expected CPI data for August, while inflation compensation 5 to 10 years ahead was little changed.

    Broad U.S. equity price indexes increased over the intermeeting period. One-month-ahead option-implied volatility of the S&P 500 index–the VIX–remained at historically low levels despite brief spikes associated with increased investor concerns about geopolitical tensions and political uncertainties. Over the intermeeting period, spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over those on comparable-maturity Treasury securities widened a bit.

    Short-dated Treasury bill yields were elevated for a time, reflecting concerns about potential delays in raising the federal debt limit. However, following news of an agreement to extend the debt ceiling by three months, rates on Treasury bills maturing in October retraced their entire increase from early in the intermeeting period. Conditions in other domestic short-term funding markets were stable. Yields on a broad set of money market instruments remained in the ranges observed since the FOMC increased the target range for the federal funds rate in June. Daily take-up at the System’s overnight reverse repurchase agreement facility ran somewhat lower than in the previous intermeeting period.

    Since the July FOMC meeting, asset price movements in global financial markets were driven by geopolitical tensions in the Korean peninsula, improving economic prospects abroad, communications from AFE central banks, and changes in prospects for fiscal policy legislation in the United States. The broad index of the foreign exchange value of the dollar decreased 1½ percent; the decline was widespread, led by the strengthening of the euro and the Chinese renminbi. The Canadian dollar appreciated following a rate hike by the Bank of Canada at its September meeting that came sooner than market participants expected. Similarly, sterling appreciated after the Bank of England signaled a potential rate hike in the coming months. Against this backdrop, longer-term yields rose slightly in Canada and the United Kingdom. In contrast, longer-term German yields declined moderately, despite better-than-expected economic data releases for the euro area, as market expectations shifted toward a more gradual withdrawal of stimulus by the European Central Bank (ECB) even though the ECB kept its policy stance unchanged.

    Despite generally better-than-expected earnings releases, AFE equity prices were mixed over the period, with bank stocks underperforming broader indexes. Outside South Korea, most emerging market asset prices were little affected by the recent escalation of geopolitical concerns. Net flows to emerging market mutual funds briefly turned negative in early August, but they quickly returned to near the high levels seen since early this year. Yield spreads on EME sovereign bonds edged down.

    Financing conditions for U.S. nonfinancial businesses continued to be accommodative. Issuance of corporate debt and equity was strong in July and August. Gross issuance of institutional leveraged loans continued its robust pace in June but slowed notably in July, as is typical during the summer. Meanwhile, the growth of commercial and industrial (C&I) loans on banks’ books ticked up in July and August compared with its pace over the first half of the year; however, C&I loan growth from the fourth quarter of last year through August remained significantly lower than over recent years.

    Gross issuance of municipal bonds was strong in August, and spreads of yields on municipal bonds over those on comparable-maturity Treasury securities increased a bit over the intermeeting period. The credit quality of state and local governments improved overall, as the number of ratings upgrades notably outpaced the number of downgrades in August.

    The growth of commercial real estate (CRE) loans on banks’ books continued to moderate in July and August, reflecting a slowdown in lending both for nonfarm nonresidential units and for construction and land development; nonetheless, CRE financing appeared to remain broadly available. Issuance of commercial mortgage-backed securities (CMBS) so far this year was similar to that in the same period a year earlier. Spreads on CMBS over Treasury securities narrowed a little over the intermeeting period and were near the bottom of their ranges of the past several years. Delinquency rates on loans in CMBS pools declined slightly but remained elevated for loans that were originated before the financial crisis.

    Interest rates on 30-year fixed-rate residential mortgages moved lower over the intermeeting period, in line with comparable-maturity Treasury yields. Growth in mortgage lending for home purchases picked up in July and August compared with its pace over the second quarter. However, credit conditions remained tight for borrowers with low credit scores or hard-to-document incomes.

    Consumer credit continued to be readily available for most borrowers, and overall loan balances rose at a moderate pace in the second quarter, reflecting further expansions in credit card, auto, and student loan balances. Issuance of asset-backed securities remained robust over the year to date and outpaced that of the previous year, providing support for consumer lending. However, standards and terms on auto and credit card loans were tighter for subprime borrowers, likely in response to rising delinquencies on such loans. Subprime auto loan balances have declined so far this year, partly reflecting the tighter lending standards, and the average credit score of all borrowers who obtained an auto loan in the second quarter remained near the upper end of its range of the past few years.

    Staff Economic Outlook

    The U.S. economic projection prepared by the staff for the September FOMC meeting was broadly similar to the previous forecast. Real GDP was expected to rise at a solid pace, on net, in the second half of the year, and by a little more than previously projected, reflecting data on spending that were stronger than expected on balance. The short-term disruptions to spending and production associated with Hurricanes Harvey and Irma were expected to reduce real GDP growth in the third quarter and to boost it in the fourth quarter as production returned to its pre-hurricane path and as a portion of the lost spending was made up. The hurricanes were also expected to depress payroll employment in September, with a reversal over the next few months. Beyond 2017, the forecast for real GDP growth was little revised. In particular, the staff continued to project that real GDP would expand at a modestly faster pace than potential output through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff’s estimate of its longer-run natural rate over this period. Because of continued subdued inflation readings and, given real GDP growth, a larger-than-expected decline in the unemployment rate over much of the past year, the staff revised down slightly its estimate of the longer-run natural rate of unemployment in this projection.

    The staff’s forecast for consumer price inflation, as measured by the change in the PCE price index, was revised up somewhat for 2017 in response to hurricane-related effects on gasoline prices. The near-term forecast for core PCE price inflation was essentially unrevised. Total PCE price inflation this year was expected to run at the same pace as last year, with a slower increase in core PCE prices offset by a slightly larger increase in energy prices and an upturn in the prices for food and non-energy imports. Beyond 2017, the inflation forecast was little revised from the previous projection. The staff continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee’s longer-run objective in 2019.

    The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated with the foreign outlook still appeared to be less than last year; on the other hand, uncertainty about the direction of some economic policies was judged to have remained elevated. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation were also seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged down or that the recent run of soft inflation readings could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

    Participants’ Views on Current Conditions and the Economic Outlook
    In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.6 The longer-run projections represented each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.

    In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had remained solid in recent months, and the unemployment rate had stayed low. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.

    Participants acknowledged that Hurricanes Harvey, Irma, and Maria would affect economic activity in the near term. They expected growth of real GDP in the third quarter to be held down by the severe disruptions caused by the storms but to rebound beginning in the fourth quarter as rebuilding got under way and economic activity in the affected areas resumed. Similarly, employment would be temporarily depressed by the hurricanes, but, abstracting from those effects, employment gains were anticipated to remain solid, and the unemployment rate was expected to decline a bit further by year-end.

    Based on the estimated effects of past major hurricanes that made landfall in the United States, participants judged that the recent storms were unlikely to materially alter the course of the national economy over the medium term. Moreover, they generally viewed the information on spending, production, and labor market activity that became available over the intermeeting period, which was mostly not affected by the hurricanes, as suggesting little change in the outlook for economic growth and the labor market over the medium term. Consequently, they continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. In the aftermath of the hurricanes, higher prices for gasoline and some other items were likely to boost inflation temporarily. Apart from that effect, inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appeared roughly balanced, but participants agreed to continue to monitor inflation developments closely.

    Consumer spending had been expanding at a moderate rate through the summer, and reports on retail activity from participants’ contacts were generally positive. Participants expected some fluctuations in consumer spending to result from the hurricanes, but they generally judged that consumption growth would continue to be supported by still-solid fundamental determinants of household spending, including the income generated by the ongoing strength in the labor market, improved household balance sheets, and high levels of consumer confidence. Sales of autos and light trucks had softened over the summer, leading producers to slow production to address a buildup of inventories, but a couple of participants noted that automakers expected to see a temporary increase in demand as households and businesses replaced vehicles damaged during the storms.

    Incoming data on business spending showed that equipment investment had picked up during 2017 after having been weak during much of 2016. Shipments and orders of nondefense capital goods had been on a steady uptrend over the first eight months of 2017. A number of participants reported that their business contacts appeared to have become more confident about the economic outlook, and it was noted that the National Federation of Independent Business reported that greater optimism among small businesses had contributed to a sharp increase in the proportion of small firms planning increases in their capital expenditures. A couple of participants commented that competitive pressures and tight labor markets were increasing the incentives for businesses to substitute capital for labor or to invest in information technology. In contrast, reports on the strength of nonresidential construction were mixed. And in energy-producing regions, the count of drilling rigs in operation had begun to level off before the onset of Hurricane Harvey.

    Participants generally indicated that, before the recent hurricanes, business activity in their Districts was expanding at a moderate pace. Although industrial production in areas affected by the storms was estimated to have declined in August, a number of participants from other areas reported further solid gains in manufacturing activity in their Districts. Participants from the regions affected by the hurricanes reported that businesses in their Districts anticipated that the disruptions to business and sales would be relatively short lived. In the energy sector, Hurricane Harvey had shut down drilling and refining activity, but by the time of the meeting, these operations had substantially resumed. And many business contacts in the affected areas reported that they expected their operations to return to normal before the end of the year. Farming in some parts of the country had been affected by drought, and income in the agricultural sector was under downward pressure because of low crop prices.

    Overall, the available information suggested that, although the storms would likely affect the quarterly pattern of changes in real GDP at least through the second half of the year, economic activity would continue to expand at a moderate rate over the medium term, supported by further gains in consumer spending and the pickup in business investment. In addition, improving global economic conditions and the depreciation of the dollar in recent months were anticipated to result in a modest positive contribution to domestic economic activity from net exports. In contrast, most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus.

    Labor market conditions strengthened further in recent months. The increases in nonfarm payroll employment in July and August remained well above the pace likely to be sustainable in the longer run. Although the unemployment rate was little changed from March to August, it remained below participants’ estimates of its longer-run normal level. Other indicators suggested that labor market conditions had continued to tighten over recent quarters. The labor force participation rate had been moving sideways despite factors, such as demographic changes, that were contributing to a declining longer-run trend. In addition, the number of individuals working part time for economic reasons, as a share of household employment, had moved lower. The job openings rate, the quits rate, households’ assessments of job availability, and the labor market conditions index prepared by the Federal Reserve Bank of Kansas City had returned to pre-recession levels. However, some participants still saw room for further increases in labor utilization, with a couple of them noting that the employment-to-population ratio and the participation rate for prime-age workers had not fully recovered to pre-recession levels.

    Against the backdrop of the continued strengthening in labor market conditions, participants discussed recent wage developments. Increases in most aggregate measures of hourly wages and labor compensation remained subdued, and several participants commented that the absence of broad-based upward wage pressures suggested that the sustainable rate of unemployment might be lower than they currently estimated. Other factors that may have been contributing to the subdued pace of wage increases reported in the national data included low productivity growth, changes in the composition of the workforce, and competitive pressure on employers to hold down their costs. However, reports from business contacts in several Districts indicated that employers in labor markets in which demand was high or in which workers in some occupations were in short supply were raising wages noticeably to compete for workers and limit turnover. It was noted that the expected increase in demand for skilled construction workers for reconstruction in hurricane-affected areas would likely exacerbate existing shortages. Most participants expected wage increases to pick up over time as the labor market strengthened further; a couple of participants cautioned that a broader acceleration in wages may already have begun, consistent with already-tight labor market conditions.

    Based on the available data, PCE price inflation over the 12 months ending in August was estimated to be about 1½ percent, remaining below the Committee’s longer-run objective. In their review of the recent data and the outlook for inflation, participants discussed a number of factors that could be contributing to the low readings on consumer prices this year and weighed the extent to which those factors might be transitory or could prove more persistent. Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term. In addition, many judged that at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time. However, other developments, such as the effects of earlier changes to government health-care programs that had been holding down health-care costs, might continue to do so for some time. Some participants discussed the possibility that secular trends, such as the influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying. It was noted that other advanced economies were also experiencing low inflation, which might suggest that common global factors could be contributing to persistence of below-target inflation in the United States and abroad. Several participants commented on the importance of longer-run inflation expectations to the outlook for a return of inflation to 2 percent. A number of indicators of inflation expectations, including survey statistics and estimates derived from financial market data, were generally viewed as indicating that longer-run inflation expectations remained reasonably stable, although a few participants saw some of these measures as low or slipping.

    Participants raised a number of important considerations about the implications of persistently low inflation for the path of the federal funds rate over the medium run. Several expressed concern that the persistence of low rates of inflation might imply that the underlying trend was running below 2 percent, risking a decline in inflation expectations. If so, the appropriate policy path should take into account the need to bolster inflation expectations in order to ensure that inflation returned to 2 percent and to prevent erosion in the credibility of the Committee’s objective. It was also noted that the persistence of low inflation might result in the federal funds rate staying uncomfortably close to its effective lower bound. However, a few others pointed out the need to consider the lags in the response of inflation to tightening resource utilization and, thus, increasing upside risks to inflation as the labor market tightened further.

    On balance, participants continued to forecast that PCE price inflation would stabilize around the Committee’s 2 percent objective over the medium term. However, several noted that in preparing their projections for this meeting, they had taken on board the likelihood that convergence to the Committee’s symmetric 2 percent inflation objective might take somewhat longer than they anticipated earlier. Participants generally agreed it would be important to monitor inflation developments closely. Several of them noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.

    In financial markets, longer-term interest rates and the foreign exchange value of the dollar declined over the intermeeting period, and equity prices increased. It was noted that U.S. financial conditions recently appeared to be responding as much or more to economic and financial news from abroad as to domestic developments. Many participants viewed accommodative financial conditions, which had prevailed even as the Committee raised the federal funds rate, as likely to provide support for the economic expansion. However, a couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability. In contrast, a few participants cautioned that these financial market conditions might not deliver much impetus to aggregate demand if they instead reflected a more pessimistic assessment of prospects for longer-run economic growth and, accordingly, a view that the longer-run neutral rate of interest in the United States would remain low.

    In their discussion of monetary policy, all participants agreed that the economy had evolved broadly as they had anticipated at the time of the June meeting and that the incoming data had not materially altered the medium-term economic outlook. Consistent with those assessments, participants saw it as appropriate, at this meeting, to announce implementation of the plan for reducing the Federal Reserve’s securities holdings that the Committee released in June. Many underscored that the reduction in securities holdings would be gradual and that financial market participants appeared to have a clear understanding of the Committee’s planned approach for a gradual normalization of the size of the Federal Reserve’s balance sheet. Consequently, participants generally expected that any reaction in financial markets to the start of balance sheet normalization would likely be limited.

    With the medium-term outlook little changed, inflation below 2 percent, and the neutral rate of interest estimated to be quite low, all participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate at this meeting, and nearly all supported again indicating in the postmeeting statement that a gradual approach to increasing the federal funds rate will likely be warranted. Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted. A few of these participants thought that no further increases in the federal funds rate were called for in the near term or that the upward trajectory of the federal funds rate might appropriately be quite shallow. Some other participants, however, were more worried about upside risks to inflation arising from a labor market that had already reached full employment and was projected to tighten further. Their concerns were heightened by the apparent easing in financial conditions that had developed since the Committee’s policy normalization process was initiated in December 2015. These participants cautioned that an unduly slow pace in removing policy accommodation could result in an overshoot of the Committee’s inflation objective in the medium term that would likely be costly to reverse or could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind.

    Consistent with the expectation that a gradual rise in the federal funds rate would be appropriate, many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged. Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective. A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist and that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective over the medium term. All agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate.

    Committee Policy Action

    In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in July indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had remained solid in recent months, and the unemployment rate had stayed low. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.

    Members noted that Hurricanes Harvey, Irma, and Maria had devastated many communities, inflicting severe hardship. Members judged that storm-related disruptions and rebuilding would affect economic activity in the near term, but past experience suggested that the hurricanes were unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Members saw near-term risks to the economic outlook as roughly balanced, but they agreed to continue to monitor inflation developments closely.

    After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 1¼ percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

    Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Members also again stated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Some members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium term.

    Members agreed that, in October, the Committee would initiate the balance sheet normalization program described in the June 2017 Addendum to the Policy Normalization Principles and Plans. Several members observed that, in part because financial market participants appeared to have a clear understanding of the Committee’s plan for gradually reducing the Federal Reserve’s securities holdings, any reaction in financial markets to the announcement and implementation of the program would likely be limited.

    At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:

    “Effective September 21, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1¼ percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

    The Committee directs the Desk to continue rolling over at auction Treasury securities maturing during September, and to continue reinvesting in agency mortgage-backed securities the principal payments received through September from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities.

    Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable.

    The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

    Federal Reserve, “Minutes of the Federal Open Market Committee Meeting of 19-20 Sep 2017“, 11 Oct 2017 Full Record

    flag_japan Japan update

    Currency: USD/JPY

    JPY movements
    ^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

    Stockmarket: Nikkei 225 (21 year high)

    Japanese shares advanced, with the Nikkei 225 Stock Average closing at its highest since Dec 1996, bolstered by companies in industries ranging from technology to retail.

    Machinery maker Fanuc Corp., Recruit Holdings Co., FamilyMart UNY Holdings Co., SoftBank Group Corp. and Terumo Corp. were the biggest contributors to the Nikkei 225’s gain, while scandal-whipped Kobe Steel Ltd. was the worst performer, falling a record 36% over two sessions. Railway companies and insurers propelled the benchmark Topix index to a decade-high for a second straight day.

    “Expectations for upward revisions in local companies’ annual profit targets are pretty high ahead of the earnings season kicking off later this month,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. in Tokyo. “It also reflects anticipation of a victory for the Abe administration in the upcoming election.”

    Japan’s stock market has been buoyed by a series of upbeat economic data. A Cabinet Office report released before the market opened Wednesday showed Japan’s core machinery orders for August climbed more than analysts expected. The yen’s weakness against the dollar has further fanned speculation for robust growth in quarterly earnings.

    Japanese voters will head to the polls on 22 Oct 2017 for a general election in which Prime Minister Shinzo Abe’s Liberal Democratic Party will be challenged by Tokyo Governor Yuriko Koike’s new Party of Hope. Support for the LDP was up marginally to 31.2% in an opinion survey conducted 7-9 Oct 2017, compared with a poll from last week, according to public broadcaster NHK.Bloomberg

    N225 movements
    ^ Nikkei N225 movements over the past week Chart: Google Finance

    flag_china China update

    Currency: USD/CNY

    CNY movements
    ^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

    Stockmarket: CSI300

    CSI300 movements
    ^ Shanghai CSI300 movements over the past week Chart: Google Finance