Equities and the Economy

U.S. equities continue to climb the wall of worry posting a second consecutive day of gains with the Dow closing up 80 points, 0.49%, at 16,417, the S&P 500 up 2 to 1,915 and the Nasdaq up 6 to 4,510. All rose in the face of marginally declining oil prices. I only mention that because for the last couple of months you regular readers know their correlation has been high. It was the materials sector that investors were buying with the S&P 500 materials index up 2.8%. So why were investors buying material? Because the dollar has been getting unadulteratedly hammered this week making commodities priced in the greenback cheaper relative to other currencies. The dollar index fell for a 4th consecutive day on the latest batch of soft U.S. data. On Wednesday the dollar posted its largest one day drop vs. the euro in two months after a disappointing report on the U.S. service sector. The multi-national corporations are smiling a little. They’ve been stating in their quarterly earnings reports this month that their Q4 2105 income was hurt by the strong dollar.

Yesterday’s fundamental economic data did nothing to strengthen the dollar. First, and this was the most noticed data point, a report showing nonfarm productivity fell in the 4th quarter noting unit labor costs rose 4.5%. This is the fastest pace in more than a year putting serious pressure on producers of goods. So that’s the expense side of the equation. What about the revenue side? Not good news there either for the Commerce Department reported new orders for U.S. manufactured goods fell 2.9% in December, that’s the most in a year. So the producer is in a vice of rising wage pressure and stagnant sales. The other important data point was the weekly jobless claims which came in at 285,000 up from the previous weeks 277,000. Now this is still a relatively low number but of note weekly unemployment claims have now risen for 14 weeks. So what’s the good news? This data will delay an interest rate increase by the Fed.

Stocks have been climbing from their January 20th low but something’s not adding up to me. Capital is very liquid and usually flows back and forth between riskier assets (equities) and safe havens (gold and U.S Treasuries) depending on investors perception of the economy. As I mentioned, stocks have been rising since January 20th so one would rationally conclude safe haven values would be decreasing. But yesterday gold closed at $1,157.50 an ounce, its highest close since October 28th, and the 10 year U.S. Treasury yield is 1.84%, a fresh trend closing low (lower bond yields mean more demand for bonds). So why are both riskier assets AND safe havens increasing in value? I’m not sure, but my antennae are raised.

The Labor Department just released (7:30 AM CST) its ever so closely watched Employment Situation Report for January and the headlines are that non-farm payrolls increased by 151,000 and the unemployment rate fell to 4.9%, the lowest since way back in February 2008. A key data point the Fed watches, hourly earnings, increased 12¢, 0.5%, with the y-o-y gain in earnings being 2.5%. I’ll comment more on this report on Monday.

This morning investors are digesting the jobs report and Dow futures are down 42.

Oil

As mentioned above, oil prices slipped yesterday, despite the weaker dollar, with WTI closing down 56¢ at $31.72 and Brent off 58¢ settling at $34.46. There’s lot of rhetoric lately regarding a meeting of OPEC and non-OPEC members (Russia) to discuss production cuts with the ever hawkish Venezuela and its oil minister carrying the banner. He will be meeting the Saudi Arabian oil minister this Sunday. So they’re talking about production cuts, eh? Well somebody better tell the Saudis. They just cut their price of oil for March delivery to Asian customers, that would be China. China has been a big buyer of Iranian oil because they did not agree to the sanctions on Iran. Looks like China will be the benefit of a price war between the two Arab enemies.

Yesterday the Obama administration announced they will be including in their final budget request to Congress a $10 per barrel fee on the production of oil. The White House said the tax would be phased in over 5 years and provide $20 billion per year and provide long-term solvency of the Highway Trust Fund and create a clear incentive for the private sector to reduce the nations reliance on oil and rive investments in clean energy technology. The API projects the fee would raise the cost of gasoline by 25¢ per gallon. This will flow to prices at the pump but note it’s not directly a tax on gasoline. This will make the U.S. oil producers $10/bbl less competitive in the global market.

This morning WTI is down 52¢.

Courtesy of MDA Information Systems LLC

Natural Gas

The EIA reported in its weekly storage report yesterday that 152 Bcf of natural gas was withdrawn from storage last week. This was slightly more than the 145 Bcf the market was looking expecting. If you had bought the bullish news you would have been run over for natty closed down 6.6¢ and below $2.00 at $1.972. The bullish storage report is being dwarfed by the weather forecast which is showing the whole country to have above normal temperatures come the middle of February. Folks I’ve been watching these weather maps for literally decades and very rarely does the entire country experience either above or below normal temperatures. Usually the jet stream either dips in the west or dips in the east with the opposite ends of the country experiencing opposite temperature anomalies. The fact the entire country will be experiencing above normal temperature is truly unusual. And a bull killer. This morning natty is rallying a little being up 7.2¢ on some short covering ahead of the weekend after prices traded below $2.00.

Elsewhere

Hmmm, what’s happening this Sunday? The Super Bowl! Whoo-hoo!!! Just what I need. Another excuse to eat and drink. Did you know the Super Bowl is the second largest day of the year for food consumption in the U.S? Here are some game day food numbers to chew on. According to the National Chicken Council (I’m sure they’re very serious but you got to love that name!) more than 1.3 billion chicken wings are expected to be devoured during the game. Almost 57% of Americans who eat wings will dip them in ranch dressing, 35% go for the blue cheese. Don’t forget the pizza. According to the National Restaurant Association this Sunday will be the busiest day of the year for pizza! Pizza Hut is anticipating it will sell more than 2 million pizzas and Dominos is expecting to sell 12 million slices. Sunday will also be the second biggest grilling day next to July 4th. Not bad for a winter day! 14 billion (with a “b”) hamburgers will be served during the big game. And what will we wash all that food down with? Beer. Lots of it! Like 51.7 million cases!

Have a great weekend and fun Super Bowl Sunday!