Podcast: Play in new window | Play in new window (Duration: 13:16 — 6.1MB)
DOW – 130 = 17,371
SPX – 17 = 2002
NAS – 59 = 4592
10 YR YLD – .08 = 1.96%
OIL – 2.23 = 47.81
GOLD + 14.20 = 1220.30
SILV + .36 = 16.65
The 114th Congress convened Tuesday for the first time. Mitch McConnell was selected as Senate Majority Leader. John Boehner was elected to a third term as Speaker of the House. The good news is that it won't take much effort to outperform the 113th Congress; that bar was set pretty low.
Let's quickly cover the economic data. Commerce Department report factory orders dropped 0.7% in November. Orders for durable goods fell 0.9%, while orders for non-durable goods fell 0.5%. The setback was paced by declining demand for business equipment such as electronics and industrial machinery.
The Institute for Supply Management said its nonmanufacturing index fell to 56.2% from 59.3% in November. Yet readings over 50% signal that more businesses are expanding instead of contracting and the index is coming off a nine-year high, so some cool down might be inevitable. Retailers, hotels and restaurants topped the list of the 12 non-manufacturing industries that reported growth in December, another sign that gains in employment and cheaper gasoline are giving American households a boost. Cheaper fuel helped drive down the index of prices paid at service providers to 49.5, the first time since September 2009 that more companies reported costs were falling than rising.
Cheaper fuel doesn't really describe what is happening with oil prices; it's more like a collapse, or a meltdown, at least for the past few days. Yesterday WTI crude dropped about 5%, and today almost 5%.
Tuesday, Saudi King Abdullah said his country would deal with lower prices with a “firm will”, meaning they have no plans to cut production to prop up prices. Other oil producing countries such as Russia, Venezuela, and Libya can't afford to unilaterally cut production; same deal for frackers and oil shale players in the US.
Lower fuel prices are deflationary, as confirmed Tuesday by the prices paid index, and that was reflected in the bond market, as the 10-year treasury yield dropped below 2% for the first time since May of 2013. Lower bond yields translate into higher bond prices and carry some benefits for the economy. Lower bond yields mean lower mortgage rates, a boon for homeowners looking to refinance their home loans at lower rates, and lower rates on other loans to consumers and businesses. Lower yields are not so great for banks, which face a tighter margin on their loans, and today the shares of major bank stocks moved lower. Also, lower rates are a challenge for savers and people on fixed incomes.
