Equities and the Economy

Good morning and happy National Tuba Day. It was a second consecutive bad day for stocks all around the world yesterday with the Dow falling 195 points (1.08%) and once again below 18,000 to 17,841. The S&P 500 lost 21 (0.99%) to 2,086 and the Nasdaq got pounded like Mayweather and Pacquiao are going to be tomorrow night falling 83 points (1.65%) to 4,941. The latest batch of lackluster corporate results is weighing on shares. The biggest losers were the high flying tech and biotech sectors with the latter falling 3.2% and down more than 8% in a week.

No one was spared yesterday. Even Apple, considered one of the “generals,” aka leaders of the market, got hit falling 2.71% on reports a component of the Apple Watch is defective. With Apple being in the Dow and Nasdaq (yes both!) and its size, it was the biggest drag on those indexes.

By the way, you know that professional networking company we’re all listed on, LinkedIn? It got destroyed falling, drum roll please, 25% yesterday! That is not a flesh wound!

You wouldn’t have known it by the performance of equities yesterday but the fundamental economic data released yesterday was good. The Labor Department reported first time jobless claims fell 34,000 to a seasonally adjusted 262,000 for the week ending April 25th. That number itself probably doesn’t mean much to you but this will ring with you. It was the 8th straight week claims remained below 300,000, which is usually associated with a strengthening labor market and, get this, it’s the lowest level in 15 years!

The Labor Department also reported the Employment Cost Index, the broadest measure of labor costs, advance 0.7% in Q1 which is the largest gain since Q3 2014. In the 12 months through March labor costs have jumped 2.6% which is the largest rise since Q4 2008. That’s still below the 3% threshold economists state is needed to bring inflation closed to the Fed’s 2% target, but we’re getting closer and the Fed knows it. What has been missing from the inflation equation for 7 years is wage price pressure on inflation and the Fed is watching this cost closely with respect to raising interest rates.

Additional data came from the Commerce Department stating consumer spending rose 0.4% in March with households stepping up purchases of big-ticket items like automobiles. This increase followed a 0.2% gain in February and is indicating consumer spending picked up at the end of Q1 which bodes well for Q2 (remember Q1 GDP came in earlier this week at an abysmal 0.2%).

The Chicago Purchasing Managers Index was also positive coming in at 52.3 for April up from March’s 46.3 and once again above the important 50 level. A double digit gain in the new orders component led the advance. As Martha Stewart says “This is a good thing.”

Today is May Day and a holiday in many parts of the world with many stock exchanges closed including Hong Kong, Shanghai, Taiwan, Germany and France. The U.S. market is open and we’re getting a bounce from yesterday’s bloodletting with Dow futures up 115. I sure do hope the adage “Sell in May and go away” (until Q4) doesn’t apply this year.

Oil

Oil is has been a-rock’n the last 6 weeks up a huge 42% over that time period including yesterday’s price action when WTI added $1.05 to $59.63 and Brent gaining 94¢ to $66.78, both fresh 2015 highs. Oil price gains are on track for their largest monthly rise in 6 years. Forget that crude inventories in the U.S. are at 80 year highs and Saudi Arabia is producing at record levels and Iraq and Libya are marginally increasing production. It’s about the future and that’s what traders trade, futures, and the declining rig count and production decline curves are trumping current conditions.

Certainly helping oil is the U.S. dollar which sank to a fresh 9 week low against a basket of currencies and is on track for its worst monthly performance in years. That’s what shaky corporate earnings and a 0.2% Q1 GDP will do.

This morning WTI is down 74¢ after Iraq reported its crude oil exports hit a record in April. All the factions in Iraq fight over which patch of sand they want to dominate but they all know one thing: keep the oil flowing for it funds their operations.

Courtesy of MDA Information Systems LLC

Natural Gas

The EIA released its weekly natural gas storage report yesterday showing the U.S. injected 81 Bcf into storage last week which was materially below market expectations of 92 Bcf. The market was already short from grinding prices lower over the previous 2 weeks and the EIA report sent the bulls stampeding and bears stopping out with natty ending the day up a big 14.5¢ (5.6%) settling at $2.751. And look where we’re at. Back close to that $2.70 number I’ve been stating has the gravity of a black hole. Current storage levels are 741 Bcf higher than last year (which I don’t believe is a good comparison because the cold winter of 2014 left the U.S. with very low inventories coming out of winter) The more important data point I am using is the 5 year average with is now 75 Bcf below the 5 year average which is 26 Bcf less than last week.

The weather forecast looks wonderful for most of the U.S. the next 2 weeks so enjoy spring, and this weekend! Natty is doing nothing chopping around unchanged as I write.  Have a good weekend.