Fed Puts Fewer Interest Rate Hikes in Wall Street’s Stocking

The stock market rallied strongly on Nov. 28 as Federal Reserve Chairman Jerome Powell made a dovish comment. Powell said that rates are “just below” the Fed’s targeted neutral level, which most Fed watchers consider to be 3%. This came after Powell called rates a “long way from neutral” on Oct. 3, provoking a major reaction in the financial markets.

Wall Street read his latest remark as a signal that the once-a-quarter rate hikes will stop sooner than expected. The Fed plan was to raise rates four more times. We expect hikes for sure in December and March, and likely in June. But the September 2019 hike looks to be off the table. Continue reading “Fed Puts Fewer Interest Rate Hikes in Wall Street’s Stocking”

Making Sense of Energy Market Turmoil

I don’t know how else to say this: Energy markets are going a little crazy. First, crude oil prices plummeted, turning an earlier autumn rally into a bear-market rout. From its high of about $76 per barrel on Oct. 3., benchmark West Texas Intermediate plunged to about $55 in only five weeks. Then, natural gas prices went haywire, with the benchmark gas futures contract leaping from about $3 per million British thermal units to nearly $5 in a span of days, only to plunge back to $4 today. What exactly is going on?

It appears that certain market expectations about future energy supply and demand are getting violently recalibrated. Oil rallied through most of autumn on expectations that the return of U.S. sanctions on Iran would crimp its oil exports at a time when the strong global economy needed more crude. But production ramped up elsewhere; the Trump administration granted temporary waivers to a few countries that buy Iran’s oil; and now there are signs that global economic growth is slowing. Suddenly, many bullish bets on crude oil needed unwinding. Oil prices fell for 12 consecutive trading days, a new record.

Natural gas prices soared when weather forecasts showed cold air poised to spread over the heavily populated Northeast and Midwest and traders suddenly noticed that the amount of gas in underground storage is low for this time of year. In a matter of days, gas prices shot up 50%, before giving back much of those gains today, when the Department of Energy reported that stockpiles grew modestly last week.

Here are the two main points that I take away from this volatility:

First, oil markets remain well supplied, largely thanks to the U.S. American oil production hit another record high this week, with output of 11.7 million barrels per day. That’s the most of any country in the world. And production should keep growing briskly next year, especially after new pipelines in Texas are completed, allowing producers to ship more crude to refineries and export terminals on the Gulf Coast. (Think about that for a moment: Texas is producing so much oil that it’s gotten difficult just to move it.)

Other countries stepped up their production in advance of the Iran sanctions taking effect, too. Just Russian and Saudi Arabian output combined more than offset the lost Iranian production. Granted, the Saudis said they will pull back, and OPEC may choose to do likewise when its members meet in Vienna next month. But that the cartel feels the need to close the taps a bit again shows that the world has plenty of oil.

Second, natural gas prices figure to be volatile throughout the winter, and the risk of sustained price hikes is real if the winter ends up being colder than normal. As with oil, the U.S. is producing record amounts of natural gas. But consumption is high, too. Utilities now generate more electricity from gas than they do from coal, and U.S. exports of natural gas are on the rise. Add in heavy demand during a sustained cold snap, and the gas distribution network will struggle to get enough gas everywhere it needs to go. Plus, extreme cold can cause gas wells to freeze up, cutting into supply when it’s needed most.

Consumers can look forward to bigger savings at the gas pump. The national average price of regular unleaded gas now stands at $2.67 per gallon, down from almost $3 earlier this fall. Prices should slip further as the big drop in oil prices filters through to the retail level. The drop in oil prices is also good news for propane and heating oil users. Prices of those two fuels started the heating season well above their levels of the prior year. And the unseasonably cold weather hitting much of the country means heavy demand. But with crude prices down, propane and heating oil should ease, too, or at least hold steady.

If you heat with natural gas, budget for higher bills than last winter. Even before this week’s spike in gas futures prices, residential prices were running higher than last year. The Department of Energy recently forecast that U.S. households that heat with gas would pay about 5% more this winter they did last year. But that’s assuming a near-normal winter. In a colder scenario, the department projects those customers’ heating bills would jump by 16%.

Still, don’t worry too much about actual shortages. Although supplies of gas in storage are below average, output will keep growing at a steady clip as energy companies get ever more efficient at tapping into America’s sprawling gas reservoirs. It’ll probably cost more than last year, but barring a new ice age, there will be enough gas for everybody to stay warm.

McConnell Big Midterm Winner

There is no savvier, effective politician in Washington than Senate Majority Leader Mitch McConnell. The Kentucky Republican masterfully orchestrated a midterm campaign strategy for the Senate that not only stymied a nationwide Democratic surge, but led to his party gaining at  least one seat in the chamber, all while his party lost control of the House by a healthy margin.

The Senate map favored the GOP all along. Democrats defended a whopping 26 seats, compared with only nine held by Republicans. And eight of those GOP seats were in states President Trump won in 2016, while 10 of the Democratic ones were in Trump territory. Continue reading “McConnell Big Midterm Winner”

Taking Stock of the 2018 Midterms

Another Election Day has come and gone after the American people rendered a split decision on the Republican Party’s total control of Washington. As expected, the House of Representatives will be in Democratic hands for the first time since 2011 come January. Republicans managed not only to keep, but expand their Senate majority, knocking off a least three vulnerable Democratic incumbents in states that voted for President Trump in 2016.

What does this election cycle portend for Congress and the future of America’s two major political parties? Here are a few key takeaways:

Gridlock will almost certainly increase on Capitol Hill, perhaps as early as next week when lawmakers return to hold a lame-duck session of Congress to dispense with unfinished business. Although Trump and House Democratic Leader Nancy Pelosi said on Wednesday that they will pursue a bipartisan agenda and could possibly work together on an elusive national infrastructure plan, any initial comity is unlikely to last. Just hours after praising Pelosi, Trump upped the ante by firing Attorney General Jeff Sessions.

And once they assume the majority next year, Democrats will investigate everything from Trump’s tax returns to his business and possible political ties to Russia. Thorny immigration issues will inevitably arise, possibly as soon as next week. Plus, any bill passed by a Democratic-run House can easily be stopped by a Republican-led Senate.

More Republicans in the Senate means Trump—and GOP Leader Mitch McConnell of Kentucky—can push even harder. Despite the loss of Dean Heller in Nevada, the party picked up seats in Indiana, Missouri, North Dakota and possibly Florida as well.

Undecided Senate races aside, Trump and McConnell should have no problem accomplishing their top priority: confirming conservative judges to federal courts. A larger GOP majority also gives the president more power to overhaul his cabinet, which he wasted no time setting to with Sessions’ dismissal. He also won’t have to contend with internal naysayers as Sens. Jeff Flake and Bob Corker, two vocal Trump critics, are retiring at year’s end.

2016 foretold the future: Democrats continue to gain strength in urban and suburban areas, Republicans in rural ones. These electoral shifts may not amount to a “realignment,” as some observers are suggesting. But the trend lines are clear.

Take Minnesota, where on election night Democrats flipped two Republican-held districts in the Minneapolis suburbs, but lost two rural-based seats. Indeed, of the 32 seats Democrats definitely flipped (ballots are still being counted in some states), 31 are considered urban or suburban; some were represented by a Republican for decades. Contrast that with the 2006 midterms when Democrats took back the House by winning many of the districts that propelled Trump to victory in 2016.

The Senate tells largely the same story. Many forecasters thought incumbency might save such vulnerable red-state Democrats as Joe Donnelly in Indiana and Claire McCaskill in Missouri. Instead, both lost handily, thanks in part to Trump’s ability to juice GOP turnout in the party’s rural strongholds.

Last but not least, both parties set themselves up well for 2020, with Republicans winning statewide races in Florida and Ohio, both presidential bellwethers, and Democrats showing renewed strength in Michigan, Pennsylvania and Wisconsin, longtime blue strongholds that Trump won narrowly in 2016.

The joke around Washington is that the 2020 presidential campaign officially began as soon as the 2018 midterm results were in. Thankfully, that contest is far enough away Kiplinger need not offer a forecast just yet.

Congress Readies for ‘Lame Duck’ Session

Lawmakers will return their attention to governing, starting next week. Congress reconvenes on Tuesday to wrap up unfinished business before the new Congress is seated in January. Despite losing control of the House in Tuesday’s midterm elections, Republicans still run the show on both sides of Capitol Hill. They intend to take full advantage of their fleeting power during the lame-duck session that could run through the holidays.

Keeping the federal government open is the most pressing issue. Numerous agencies’ funding runs out Dec. 7. If lawmakers and President Trump can’t agree on how much money to appropriate each, the departments of Homeland Security, State, Justice, Interior, Agriculture and others would have to halt most operations come Dec. 8. Continue reading “Congress Readies for ‘Lame Duck’ Session”