Equities and the economy

Yesterday the major indexes posted small losses. The Dow fell 27 points closing back below 18,000 at 17,977, the S&P 500 fell 4 to 2,088 and the Nasdaq closed down 10 at 4,896. You should be happy about that performance for earlier in the day the Dow was down 148 points, the S&P was off by 14 and the Nasdaq traded 28 lower. The market is positioning itself for today and tomorrow’s April FOMC meeting and the Bank of Japan’s monetary policy meeting which begins tomorrow and ends Thursday, with the latter much more probably more important than the former. Regarding the Fed, don’t expect anything material to come out of this meeting. The market believes there’s only a 1% chance of the Fed raising interest rates. Additionally, there’s no post meeting press conference and generally speaking, the Fed does not make moves at meetings without a press conference. The next FOMC meeting is in June and there is a press conference so that one may be very interesting for that is the one with a very real chance the Fed raises rates. There’s a lot of time, and data, between now and then so we’ll see. As Janet Yellen has said innumerable times, the Fed is “data dependent.”

Going back to the BOJ, it really does find itself in an uncomfortable position for it must ease monetary policy further given the continued non-inflationary environment, but it’s a tad in a bind. The bank is running out of Treasury debt securities it can buy having bought far too much of the Japanese equity market via ETF’s already and so the question begs, just how much more money can it inject into a system without doing monumental long term damage to the economy as a whole. Also, although every central bank denies manipulating their currency, they do, and the bank must do something to stem the tide of the yen which has risen from about 125 yen to the dollar to about 111 currently making their exports more expensive. As I stated, the BOJ’s meeting is going to be much more interesting than the FOMC’s.

Returning to the U.S., the Commerce Department reported that new home sales fell 1.5% in March to an annualized rate of 115,000. This was a bit disappointing for the Street was looking for 520,000 in sales. But the emphasis is in “a bit.” The Dallas Fed released its General Activity Index for March and it was ugly at -14 but really no one was surprised for all we have to do is look at the price of oil and the rig count and figure out what’s going on here.

Today is starting out as a repeat of yesterday with the Asian market closing mixed and the European market trading flat to yesterday’s close. Locally, Dow futures are up 32 I believe solely based on oil prices which are up this morning.

Oil

Oil prices took it on the chin yesterday with WTI losing $1.09, 2.5%, closing at $42.54 and Brent fell 63¢, 1.4%, settling at $44.48. After last week’s strong performance there could be some profit taking going on here. Also, a private research service, Genscape, reported that crude inventories at Cushing, OK, the Nymex WTI physical delivery point (every commodity traded as a futures contract must have a physical delivery point) rose by 1.5 million barrels for the week ending April 22nd. This would definitely add weight to the bull’s yoke.

Of note, the contango is returning to the WTI price curve again with the June ‘16/June ’17 spread moving out form $3.29 a week ago to $3.78 this morning, despite the fact that the front month price is about $1/bbl higher than a week ago. Normally, with a rising front month price one expects the contango to narrow. Got to keep an eye on this to see if this is more than just randomness.

This morning WTI is working a bit higher being up 59¢.

Saudi Arabia announced a major economic reform yesterday saying it wants to make the kingdom less dependent on oil revenue and it will invest materially in other sectors. The Saudis have their work cut out for them for currently over 70% of their revenues are oil based. I have a saying. “The Middle East oil producers only have two things to sell: oil and sand. And nobody wants the sand.” Maybe they could build more ski slopes.

Natural Gas

The Monday morning weather forecast weighed on natural gas prices with the May contract settling 7.7¢ lower at $2.063. The aforementioned forecast came in much more benign than it was last week, i.e., much less heat in the southeast in the 6-15 day time frame. This morning’s forecast is little changed from yesterday’s and traders are hitting it with the May contract down 3.9¢. That being said, production is down about 2.5 Bcf/d from its peak in February which will put a floor in the market. Today May options expire and tomorrow the May futures contract expires.

The EIA just released its analysis of this past winter’s heating demand and fuel prices noting that residential electricity demand was down 6% for the months of November 2015 through March 2016 and propane and heating oil demand was off 16% and a whopping 45%, respectively. The lower demand was tied directly to the strong El Nino which resulted in last year’s winter being 15% warmer than the prior year’s. HDD’s were 18% less in the winter of ’15-’16 than the prior year resulting in a 5.6% reduction in the demand for residential space heating with the result being natural gas storage levels exited the winter at record highs.

Courtesy of MDA Information Systems LLC

Elsewhere

As I’m sure you know, Prince died last week at the age of 57. The man was truly an artistic genius. Here is just a sample of some of his eye popping accomplishments.

Released 39 albums
Won 7 Grammy awards
Sold over 100 million albums worldwide
His classic “Purple Rain” and “Graffiti Bridge” grossed $73 million worldwide
He had an incredible 40 top 100 hits including 5 number 1 songs
He played during the halftime at the 2007 Super Bowl which drew 140 million viewers

He died too young.