Equities and the Economy

Good morning. This is probably old news to you by now but it was a horrible Friday for equities globally. Focusing on the U.S., the Dow fell 272 points, 1.7%, closing at 16,102, the S&P 500 lost 30 points, 1.53%, to 1,921 and the Nasdaq dropped 50 points, 1.1%, to 4,684. Friday’s price action capped off a horrific week for stocks with the Dow, S&P and Nasdaq down 3.3%, 3.4% and 3.0%, respectively. Last week was the Dow’s second worst week in 2015. The big data point on Friday was the Labor Department’s Employment Situation report showing the U.S. added 173,000 non-farm jobs in August which was below consensus but the good news was that the job gains in June and July were revised higher by 44,000. You regular readers know I pay extra special attention to revisions in data because in good times revisions are for the positive and in bad times the opposite. Notably, the unemployment rate fell to 5.1% which is the lowest level since April 2008. That’s more than 7 years ago! Additionally, average hourly earnings climbed more than forecast and workers put in a longer workweek. The takeaway, the labor market is clearly improving. So we have a pretty good jobs report and the stock market gets hammered. What’s up? The jobs report was simply not good enough to counter the concerns over China’s lack of growth and the trend around the world currently which is one of reducing leverage/risk. China by itself accounted for 17% of the worlds’ GDP in 2014 but for the first seven months of 2015 its demand for imports has fallen 14.6%.

This morning all eyes were on China’s Shanghai for it was closed for two days of holidays. It opened up unchanged and then started fading but fortunately rallied at the end finishing up 2.92%. Japan’s Nikkei however got hammered closing down 2.1%, marking fresh 7 month lows. European equities are firmly in the green this morning driven higher by a report economic activity in the Eurozone was more robust than the forecast of 1.2% rising 1.5% y-o-y for Q2. U.S. equities are following our friends across the pond lead with Dow futures up a nice 266 points, albeit it was up 300 earlier this morning.

Oil

Oil prices slipped Friday with WTI closing down 70¢ at $46.05 and Brent off $1.07 settling at $49.61. WTI fell despite a bullish report from Baker Hughes showing a decline of 13 rigs last week to 662. The drop in equities was just too much to overcome for the oil bulls. China’s growth may be slowing but they are taking full advantage of the cheap oil prices. Oil imports are up 5.6% y-o-y with a lot of it going into storage. Reports are that China now has 110 million barrels in storage compared to 65 million in 2014. This morning WTI is popping $1.10 on the coattails of stronger equities. However, the theme of weak demand and global oversupply remains with North Sea production estimated to hit a 2 year high in October, Iranian supply still to come on line, Saudi production remaining above 10 million barrels and U.S. shale production resilient.

Courtesy of MDA Information Systems LLC

Natural Gas

After climbing 7.7¢ on Thursday on a bullish EIA storage report natural gas prices fell almost the same amount closing down 7.0¢ at $2.655. Weather forecasts came in a little cooler in the morning and noon update feeding the bears. The morning natty is up 3.1¢ which I’m just going to call chatter. This market will likely be choppy and range bound until we start to see some fundamental change such as a material change in production or dramatic change in the weather. Regarding the weather, it looks like the MidAtlantic and Northeast are going to have a beautiful Indian summer with above normal temperatures forecast for 6-15 day period.

You folks in the Midwest and Northeast I’m sure know this but you just went through a major heat wave. Last Thursday Philadelphia hit a high of 96 degrees which was the high of the year. Cincinnati tied its high of the season at 92 degrees which was also seen on June 11th and July 28th. Chicago was a degree shy of its yearly high reaching of 91 degrees.

Elsewhere

If you were driving this past holiday weekend you probably moved slower than usual. Some 35.5 million Americans traveled 50 miles or more from home over the weekend. That’s the highest volume for the holiday since 2008 and a 13% increase since 2009, according to AAA. In 2008, before the Great Recession, Labor Day travelers hit 45.2 million, the highest number of drivers for the holiday weekend in the last 15 years. It could have even been worse. When the Labor Day weekend falls later in the calendar Americans have typically shown less inclination to travel. With Labor Day falling on September 7th this year, the latest possible day it can occur, overall travel numbers were lower than if Labor Day had been earlier in the month.

Why was traffic higher? Rising wages and falling gas prices. Gas prices have fallen to around $2.43/gallon, down from $3.70/gallon in early 2014, and the lowest Labor Day weekend price since 2004. Regionally, there was a wide spread in prices with California being that highest at $3.16/gallon to $2.20/gallon in the Gulf Coast. Gasoline prices could go even lower as refiners switch to less costly winter specification gas.

By the way, over 2.6 million folks travelled by air over the weekend, the greatest amount since 2007.

Have a good day.