Equities and the Economy

Top of the morning to ya!  Yesterday was a great day with all the major U.S. indexes (and the European as well!) shot skyward closing more than 1% higher as the U.S. dollar marginally retreated. The Dow jumped 228 points (1.28%) closing at 17,977, the S&P 500 popped 28 (1.20%) to 2,081 and the Nasdaq was the winner of the day adding 58 (1.34%) finishing at 4,930. (I can see you checking your 401K. Or have you already done that?!) All the major indexes are again back in the black for the year. The excuse for the surge was that the U.S. dollar which finally retreated (about 1%) vs. a basket of currencies, which our U.S. multinationals will take all day (although it doesn’t explain why Germany’s DAX went apogee gaining 2.24% which is about 400 Dow points!).

There was some fundamental economic data released yesterday. The Fed reported that industrial production rose an inordinately large 7.3% in February but that was due to utility production which was due to the cold February. Drilling down in the numbers factory output actually decreased 0.2% which was a “miss” for economists who were forecasting a rise of 0.1%. The National Association of Home Builders’ Confidence Index fell to 53 in March from February’s 55 with The Street looking for a 56 so this was a bit of a disappointment. The drop was due to lot and labor shortages which is a lot better than a drop due to expectations of a weaker economy.

The primary focus today and tomorrow is the FOMC meeting and Janet Yellen’s press conference afterward. All the world wonders if “patient” will be dropped from the post-meeting communique, and if it is, what language, if any, replaces it. Apparently, one now must be a linguist rather than an economist when it comes to accessing Fed policy.

This morning Dow futures are retreating somewhat being down 47 points. Early morning traders are not getting clear signals from the overseas markets for the Asian markets closed mixed and the European ones are doing the same. That being said, both France’s CAC 40 and Germany’s DAX are down materially, the latter 1.25.%, which is weighing on U.S. equities. The DAX sure has been volatile of late.

Oil

Both WTI and Brent continue their slide with WTI falling 96¢ closing at $43.88 and Brent fell more, $1.23, to $53.44. WTI’s is closing in on its previous recent low of $43.55 set in late January, which was a 6 year low. And this morning that low is being tested with WTI down 57¢. Numerous factors are weighing on the oil market. First, and in all the blogs and business articles of late, is the talk of oil storage capacity around Cushing, OK, the WTI Nymex delivery point, running out. Forecasts are for storage there to be filled in late April or early May. If that happens it would put material price pressure on front month oil relative to the deferred contracts steepening the contango. Second, Libya’s oil exports (400,000 bpd) are double what they were a few weeks ago. And third, word is the U.S. and Iran are inching toward a landmark nuclear agreement that would lessen or remove sanctions allowing Tehran to increase output (I wonder how the Senate Republicans feel about that?!) What folks may be missing here though is there is a large amount of storage capacity located away from Cushing, such as the Gulf Coast, and no one really knows its magnitude. So although bearish front month prices, it may not be as dire as some think. By the way, the April Nymex gasoline price was down 2% yesterday.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas seems to be finding support in the $2.70 area with $2.90 on the top side ($3.00 on a wider range). In fact, we’ve spent about a month and a half waffling around the $2.75 number. Yawn. Support is coming from a cool 11-15 day weather forecast (which hasn’t changed in a week), natural gas capturing the electric generation market from coal and now we have maintenance season beginning for nuclear power plants which will be replaced with natural gas fired generation. This morning the 6-10 day forecast has moved colder with cash prices higher pushing around futures prices up 11.6¢.

Elsewhere

Per the EIA, last year most residential electricity customers in the country experienced a fairly large increase in their residential electricity price with an average rise of 3.1% compared to 2013. The increase is the highest annual growth rate since 2008. The price jump is attributed to 1) rising wholesale prices, 2) increased investment in transmission and distribution infrastructure (you folks in PJM sure saw that!), 3) rising requirements to generate electricity from renewable energy sources and 4) utility investment in demand-side efficiency. It’s worthy to note though that historically electricity prices have risen at a lower rate than the general inflation rate and the real price of electricity is lower than it was prior to 1995. Pressuring prices to go higher will be continuing investment if transmission and distributions systems in coming years as well as an expansion of renewable generating capacity (just ask California where they have to buy renewable generation that costs 12¢-15¢/kWh!). Offsetting some of the price increase is that fuel costs, especially natural gas, have fallen in recent months. The EIA is forecasting residential rates to rise on average 1.0% in 2015 which would be the lowest increase since 2010. Have a good day.