Equities and the economy

Yesterday we saw a third day where U.S. equities open lower only to rally back to close flat to higher. Stocks continue to grind higher approaching May 2015 record highs. The S&P 500 closed up 6 at 2,105 breaking the 2,100 level which we’ve not seen since April 20th and ending at its highest since November 3, 2015 and within 1.5% of its 52 week intraday high. The Dow, which was down as much as 86 points, added 49 to 17,839 and within 2% of its 52 week intraday high. The Nasdaq climbed 19 closing at 4,971 after being down 28 points earlier. As I’ve said twice this week, this is bullish price action amigos. The gains have been small but we’re up against previous highs which is technical resistance and it’s always a grind getting through major resistance. If, and when, we do get through this major resistance we’ll get some real good traction taking us to significantly higher levels.

Regarding fundamental news, the only report of significance, and it is very significant, was ADP’s private payroll report. The reason investors look closely at this report is because ADP is the largest private payroll company in the world and, therefore, has the best U.S. employment data available next to the U.S. government. ADP stated private employers added 173,000 which was bang-on expectations. Investors look to the ADP report as insight into today’s Labor Department Employment Situation report.

This morning is the day of the granddaddy of monthly reports, the aforementioned employment report, and to say it was a shocker is an understatement. While ADP showed 137,000 new jobs were created, the Labor Department said only 38,000 jobs were created last month. This is the lowest monthly number in more than 5 years. The unemployment rate dropped to 4.7% from 5.0% to its lowest level since November 2007 which is the month before the Great Recession began. So you’re saying “How can all this be???” Well firstly, I don’t think it’s Armageddon. There was the huge 35,000 Verizon worker strike last month which materially affected the jobs number. New job creation would have been double the reported number if not for the strike. Regarding the 4.7% number, more people were considered to be not looking for a job therefore they are considered to have dropped out of the work force and hence are no longer officially counted as unemployed.

The market is definitely not liking the data with the Dow down 51 which is much better than earlier when it was down 95. My bet is we bounce back from this sell off. Now the question is how’s the Fed going to react to this data and let’s not forget to add in the Brexit vote on June 23rd. Sure gives them fodder to wait until July to raise interest rates.

Oil

Oil prices ended little changed yesterday with WTI closing up 16¢ at $49.17 and Brent settling up 32¢ at $ 0.04 closing above the all-important $50 handle for the first time in 7 months. OPEC ended its meeting yesterday and as expected there was no agreement on pretty much everything. Flow baby, flow! The DOE released its weekly crude and products report, a day late due to the holiday, noting the aggregate sum of inventories of crude oil, gasoline and products fell 2.8 million barrels which was much more the API’s number the day before and the five year average which actually has been an increase in stocks of 1.56 million barrels. This data would normally have sent WTI prices materially higher but traders know this week’s data was affected by the Canadian wildfires that, while still burning, are now to the east and south of the oil sands and no threat.

The correlation between equities and oil remains strong and WTI is down 50¢ and like equities, up from down 60¢ earlier.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices crept higher with the July contract closing up 2.4¢ at $2.405. Prices were not affected by the EIA’s weekly storage report which noted 82 Bcf was injected last week which was almost dead-on expectations. Last weeks’ injection is materially less than the 5 year average, and it needs to be. Due to the extremely warm winter storage levels at the end of March were at record highs and we just simply cannot inject amounts equal to the 5 year average. We don’t have enough storage capacity. So expect more of this in future reports. Storage levels are currently still 32% above last year and 35% above the 5 year average. The forecast is the same as yesterday, and so are natty prices with July literally flat to yesterday’s close.

Elsewhere

For those of you old enough to have used a fax machine (the 25ers in my office don’t even know how to work one!) you might be surprised to know that the fax machine is not a relatively new device. The fax machine was invented in 1843 by Alexander Bain, a Scottish mechanic, the same year as the Oregon Trail! The early model used a combination of synchronized pendulums, electric probes and electrochemically sensitive paper to scan documents and then send the information over a series of wires to be reproduced. The “Great Migration” on the Oregon Trail began the same year when a wagon train of about 1,000 migrants attempted to travel west.