Equities and the economy

Our Fed Chairperson, Janet Yellen, spoke yesterday painting a mostly upbeat picture of the economy conceding that the May payrolls data was disappointing but adding it is only one data point which does not make a trend. She stated interest rates are forthcoming but gave no clue as to when. All told its was more of the “talk hawk, walk dove” M.O. Investors liked what they heard pushing U.S. equites to their best levels of 2016 and close to record highs. The Dow gained 113 points, 0.64%, closing at 17,920, the S&P 500 added 10, 0.49%, to 2,109 and the Nasdaq climbed 26, 0.53%, finishing at 4,969. Stocks have now rallied 15% from their mid-February low which market the bottom of a sharp New Year pullback. The S&P is now within 1% of its all-time high set last May. The Dow has gone 41 straight trading days without a loss of 1% or more. This is the second longest since a 66 day stretch from April 11th to July 16, 2014.

Returning to the interest rate discussion, as a result of the poor jobs report on Friday Fed funds futures are pricing in only a 2% chance there will be a rate hike in June down from 21% just one day before the jobs report was released. The probability the Fed will raise rates in July has fallen to 22% from 58%.

There were no economic reports of significance released yesterday so let’s move on to this morning. We’re getting a little legs from yesterday’s price action with the Dow up 70 this morning which is mostly on the heels of higher equities in Asia and Europe which are up on the heels of yesterday’s U.S. price action. Bottom line, it’s early so let’s see how the day unfolds. That said, it certainly has been a “buy the dip” mode since February.

Oil

We can talk fundamentals all we want but the primary driver of oil prices the last couple of months has been equities. The correlation remains strong. So knowing what stocks did yesterday you can predict what oil prices did. The only question is the magnitude. WTI closed up a hefty $1.07 at $49.69 and Brent rose $0.91 settling at $50.55. That being said, fundamentals are supporting the market. The Saudis raised their price to U.S. and Asian customers over the weekend for July deliveries and Nigeria is a mess. Crude production in the African nation has fallen by more than 500k bpd with Boko Harem in the north and the Niger Delta Avengers in the south. Keep in mind that not long ago the country was Africa’s leading oil producer.

So the Dow is up 70. Guess what WTI is doing? Up 46¢.

Courtesy of MDA Information Systems LLC

Natural Gas

The front month continues its march higher adding 6.8¢ yesterday closing at $2.466 and are now up 85¢, 54%, from March’s 18 year low. The forecast continues to marginally trend warmer and the power sector is burning record amounts of gas and the cash market is much stronger than most folks thought. This price run-up began the Tuesday after the Memorial Day weekend when electric utilities came in short from the long holiday weekend and needed incremental supplies for Tuesday, called “same day gas,” and there just wasn’t much available which bid up the cash market. This set a new tone in the market and it has continued at least through yesterday. The bottom line is the spread between the cash market and winter prices need to narrow. This morning the forecast is little changed with some warmth coming into the eastern part of the nation in the 11-15 day time frame and natty is flat to yesterday’s close.

Tropical Storm Colin hit Florida with 50 mph winds ripping up trees and causing property damage. The storm is now centered on the North and South Carolina coastline

Elsewhere

We’re all very familiar with that famous document penned by our Founding Fathers called the Declaration of Independence. The document we see is printed on fine quality parchment. But I bet you didn’t know that the first couple of drafts were on hemp paper. This was not an unusual event being that 75% of all the world’s paper at the time was made from cannabis hemp fiber. The democratic delegates wrote the document’s first and second drafts, completed on June 28th and July 2nd 1776, respectively, on Dutch hemp paper. I don’t want any emails about our forefathers’ state of mind when they drafted the Declaration of Independence!