Equities and the Economy

Good morning and happy National Barrier Awareness Day. It was the third straight of equities around the world selling off. Here in the U.S. where we care the most the Dow fell 86 (0.48%) to 17,842, the S&P 500 lost 9 (0.45%) to 2,080 and the Nasdaq closed down 19 (0.39%) to 4,920. A few “things” weighed on equities, a couple fundamental and one not. The fundamental one was ADP’s monthly private payrolls report showing private employers added 169,000 jobs in April. This is anemic. This was far below economists’ expectations of 198,000 and the fewest since January 2014. If that wasn’t bad enough, ADP revised downward their March number by 14,000 to 175,000. You regular readers know how important revisions are to me for in good times revisions are to the positive and vice versa. The ADP report is the prelude to Friday’s Labor Department employment report and I can guarantee analysts are lowering their forecasts.

The non-fundamental thing which certainly didn’t help equities was our top central banker’s, Janet Yellen, statement in her public conversation with the IMF’s Managing Director, Christine Legarde, regarding the global investment climate saying “I would highlight that equity market valuations at this point generally are quite high. There are potential dangers here.” Thanks for nothing Janet! You don’t get much clearer than that! Actually, this could be her “shot across the bow” letting the world know higher interest rates are coming, which are negative for equities.

Now I’m sure many of you follow U.S. equities but there is a massive shift going on at the global level. The money in the bond market dwarfs the money in the equities market and one of the key bond markets followed is Germany’s Bund market and bonds there have undergoing a massive sell off surprising investors and pushing yields to their highest level this year. It was only about a month ago when folks thought the short term Bund yield could go negative. It’s suggested that the outlook for inflation in the eurozone resulting from higher oil prices is the culprit. The fall in German bond prices is cascading around the world weighing on equity markets for higher yields are negative for equities. So why care about the German government bond market? Because next to U.S. bonds they are considered the safest in the world. Already this morning stock futures firmed up when bund yields retreated from their highs. The whole point of this discussion is that U.S. markets are not insulated from global turbulence.

This whole move comes with a weakening of the U.S. dollar on the heels of less than stellar fundamental economic data here in the states. In line with my last statement, the Labor Department reported yesterday worker productivity fell 1.9% in Q1 2015 which followed a 2.1% decline in Q4 2914. So what does this mean? Well apparently this is only the 3rd time in 25 years that productivity fell in back to back quarters. Additionally the report said that labor cost rose 5% in Q1 2015. Rising labor costs along with rising oil prices without growth is causing folks to start throwing around the word “stagflation” again. That’s a little premature but you get the idea.

Overnight the Asian markets got destroyed on the coattails of the European and U.S. markets with China’s Shanghai leading the way down off 2.77% and down 8% this week. European markets are trading mixed but when averaged are “red.” The Dow is taking a breather from the carnage of the last few days trading on either side of unchanged currently.

Oil

Oil prices continue to march higher with WTI adding 53¢ yesterday closing at $60.93. Brent added less, 25¢, closing at $67.77, both are fresh 5 month highs. WTI prices got a boost yesterday from the DOE’s weekly crude and products report showing a material decline in crude inventories, 3.882 million barrels, and the first weekly decline in 17 weeks. Additionally, aggregate inventories (crude, gasoline, products) declined 1.978 million barrels with the expectation going into the report of a 1.4 million barrel increase in stocks. Of note though, U.S. crude inventories are at an 85 year high and production is just below a 40 year high of 9.4 million bpd.

Let’s pay close attention to the rig count for WTI prices are close to or at levels where drilling for shale oil is once again profitable.

This morning WTI is retreating down $1.09.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices moved very little yesterday with the June Nymex contract closing down 0.4¢ at $2.776. Chatter. Today is EIA storage report day and as of late the only day we see price volatility. The market is expecting an injection of 73 Bcf with the 5 year average 68 Bcf and last year 75 Bcf. If you’re interested, tune in at 9:30 CDT for the action.

The weather continues to look nice for the Midwest and east over the next couple of weeks and being May this means not much A/C load. Traders are playing natty from the long side this morning with it being up 3.2¢ as I write.

Elsewhere

I’m short on time this morning and have to move on so I’ll leave you with a quote from Oscar Wilde, “The world is my oyster, but I used the wrong fork.” Have a good day.