Equities and the Economy

It was a tough day on Wall Street yesterday with the Dow falling 158 points, 0.89%, closing at 17,730, the S&P 500 down 23, 1.08%, to 2,080 and the Nasdaq fell 33, 0.65%, finishing at 5,123. You can blame the energy sector for dragging the indexes lower, specifically oil prices which is discussed below. Energy stocks in the S&P sank 3.1% compared to 1.1% for the broader market.

Turning to the economic data, the report of most significance to U.S. investors and traders yesterday was ADP’s private payroll report which showed employers added 217,000 new jobs in November. This compares to economists’ forecasts of 190,000, so indeed this was a good report. Per Mr. Mark Zandi, Moody’s Analytics’ Chief Economist, “The current pace of job creation is twice that needed to absorb growth in the working age population.” Investors use ADP’s report as an indicator of what tomorrow’s Labor Department’s report will show. Can you say interest rate increase?!

The Labor Department did release a report yesterday which was on U.S. productivity stating it grew at an upwardly revised rate of 2.2% in Q3. This was at expectations and nicely up from the initial estimate of 1.6%. It also noted that unit labor costs rose form 1.4% to 1.8%, and this is a number the Fed looks at for it is a reflection of inflation. Wage growth, which has been anemic for years and is now increasing, is a primary driver of inflation.

Janet Yellen spoke before the Economic Club of Washington yesterday and everyone was tuned in for when, not if, interest rates will be raised. She said that two requirements for a rate increase, job growth and higher inflation, are being met. The consensus is now the Fed will raise rates at its December 15 & 16 meeting. Although she didn’t unequivocally say a rate increase was imminent that’s a pretty clear signal to me, especially when it comes from the Fed Chairperson.

By the way, gold got knackered as well yesterday with gold futures falling 1.03% settling near a 6 year low.

Today the ECB meets at its regularly scheduled meeting and everyone is expecting a continuation of its bond buying program, if not an expansion. 21 months ago it took $1.39 to buy a euro. Now it takes $1.06. Par is in the future.

This morning Dow futures started out higher but are now up marginally (Dow futures up 46) following European stocks which were materially higher but in just the last 30 minutes prior to this writing the latter have collapsed to unchanged. Will need to investigate further.

Oil

Oil prices got bludgeoned yesterday with WTI losing $1.91/bbl, a whopping 4.6%, closing at $39.94 which is the first time it’s settled below $40 since August. The driver here was the DOE’s weekly crude and products report which showed crude stockpiles rose 1.2 million barrels last week when historically they’ve fallen for this week and analysts were forecasting a drop for the week. This is the 10th straight week crude inventories have increased. Additionally, the U.S. dollar strengthened, on Yellen’s comments, and as you all should know by now, all things being equal, a strengthening U.S. dollar weighs on commodities priced in U.S. dollars. Brent fell about the same amount, $1.95, settling at $42.49.

OPEC meets tomorrow which follows the news today from Russia that it is now producing oil at a new record high, 10.779 million bpd in October. The Russian oil ministry stated production for the first 11 months of the year has averaged 10.716 million bpd which is a 1.4% increase from this time last year.

Courtesy of MDA Information Systems LLC

Natural Gas

I’m not sure if it was the weather forecast or the oil price getting crushed or the general liquidation of commodities by hedge funds but the result was like everything around it, natural gas prices sunk. Yesterday the January contract fell 6.6¢ closing at $2.165/MMBtu. The weather forecast continues to show impressive warmth for the primary natural gas consuming regions of the country with little snow anywhere, other than the ski resorts in the Rockies which are loving it! Regarding the forecast this morning, it’s Bill Murray’s Ground Hog day with solid red across the eastern half of the country. Natty is basically unchanged down a half cent.

Today is EIA storage day and we should get our first withdrawal of the season with the market expecting 45 Bcf.

Elsewhere

Have you ever wondered why a barrel of oil is 42 gallons? Kind of a strange number isn’t it? Why not 40, or 50? The measurement of an “oil barrel” originated in the early Pennsylvania oil fields. In the early 1860s, when production began, there was no standard container for oil, so oil and petroleum products were stored and transported in barrels of different shapes and sizes. Some of these barrels would originally have been used for other products, such as beer, fish, molasses or turpentine. Both the 42 U.S. gallon barrels (based on the old English wine measure), the tierce (159 liters) and the 40 U.S. gallon (151.4 liter) whiskey barrels were also used. The 40 gallon whiskey barred was the most common used size by early oil producers because they were the most readily available at the time.

The origins of the 42 gallon oil barrel are obscure, but some historical documents indicate that around 1866 early oil producers in Pennsylvania came to the conclusion that shipping oil in a variety of different containers was causing buyer distrust. They decided they needed a standard unit of measure to convince buyers that they were getting a fair volume for their money. They agreed to base this measure on the more or less standard 40 gallon whiskey barrel, but, as an additional way of assuring buyer confidence, they added an additional two gallons to ensure that any measurement errors would always be in the buyer’s favor. By 1872, the standard oil barrel was firmly established as the 42 U.S. gallons.