Equities and the Economy:

• Stocks push marginally higher.
• FOMC minutes suggest Fed wrestling with low inflation.

The major news yesterday was the release of the FOMC’s July meeting minutes. As I’ve stated many times, investors look to the minutes for insight into the Fed’s thinking on monetary policy. There were two significant take-aways. First, recent weak inflation data is making the Fed cautious about raising interest rates, and second, they’re ready to begin unwinding their massive $4.2 trillion portfolio of Treasury bonds and mortgage backed securities built up over the past 9 years of QE. Regarding inflation, the Fed’s target is 2.0% but at the July meeting “many participants…saw some likelihood that inflation might remain below 2% for longer than currently expected… and the risks to the inflation outlook could be tilted to the downside.” So this means they’ll be slow to increase interest rates, which is good for equities. In fact, although the Fed has signaled one more interest rate hike is on the table before the end of the year, the market is currently pricing in only a 35% chance of that happening, which is down from 45% prior to the release of the minutes.

Regarding their massive balance sheet, the minutes strongly implied they’ll announce at their September meeting (19th & 20th) their plan to begin reducing their balance sheet. This means that they’ll allow the assets (bonds T-bills) they bought as a result of their QE efforts to expire and not reinvest the proceeds into new assets. This is a form of monetary policy tightening because it will result in less demand for bonds and T-bills which will push interest rates higher. This is not good for equities.

Ultimately the minutes had little effect on the major indexes with the Dow gaining 26 points and back above the psychological level of 22,000 to 22,0025. The S&P 500 rose 4 points to 2,468 and the Nasdaq finished up 12 to 6,345. Trading volume was again below average.

This morning the Dow is down 47. It sure seems like the market is in the “dog days of summer.”

Oil

• DOE weekly inventory report bullish.
• U.S. production continuing to climb.

The DOE released a very bullish weekly crude and products report yesterday showing crude inventories last week fell by 8.9 million barrels, much greater than forecasts of a 3.4 million barrel decline. Additionally, gasoline inventories rose by 22,000 barrels which was also below expectations of a rise of 300,000 barrels. So what did crude oil prices do? They fell. WTI closed down 77¢ at $46.78 and Brent lost 53¢ settling at $50.27. Why? Two reasons. First, the report also showed that U.S. oil production rose above 9.5 million bpd for the first time since July 17, 2015 and is currently only 108,000 bpd below the 9.61 million bpd peak. U.S. production has increased an average of 20-25,000 bpd per week this year, and there’s no indication that’s going to change. Doing some simple math, that means U.S. production will hit a new record next month or October.

The second reason prices didn’t increase was a Bloomberg report that compliance by OPEC’s members to the production cut agreement slipped to below 90% for the second consecutive month. While that is still strong compliance, “leaks are springing in the dam.”

This morning WTI is down 28¢, near 4 week lows.

Courtesy of MDA Information Systems LLC

Natural Gas

• Prices continue to slip.
• EIA storage report today.

Yesterday’s noon update weather forecast fed the bears. Even with recent forecasts of above normal temperatures natural gas prices have been on the defensive and when the noon update came out the bears piled on. The forecast showed the entire eastern half of the country going from above normal temps to normal in the 6-10 day period. At day’s end the September contract was down 4.5¢ at $2.880. Natty prices have now fallen from a 3 week high at the beginning of the week of above $3.00 and have given up more than half of the past couple of week’s near 10% rally.

Today our EIA releases its weekly storage report. The market is looking for a 47 Bcf injection. Last year for this week we saw a 23 Bcf injection and the 5 year average is 50 Bcf.

This morning’s weather forecast is similar to yesterday’s noon update, and traders are uninterested waiting for the storage report at 9:30 CDT. Natty is down 1.2¢.

Elsewhere

Beginning in about 10 days the Atlanta Falcons football team will be playing in a beautiful new stadium. The stadium cost $1.6 billion and is called Mercedes-Benz stadium (not to be confused with the Mercedes-Benz Superdome). There’s going to be lots of great concessions and I’m sure those concession spaces cost a pretty penny. One company that leased space is Chick-fil-A. But wait a second! Chick-fil-A’s are closed on Sundays! The result is the franchise famous for its chicken sandwich will be open for only one of the Falcon’s home games, a Thursday night game vs. the New Orleans Saints. The stand will also be open for two college football games, the Alabama/Florida State game on Saturday September 2nd and the Georgia Tech/Tennessee game which is two days later.

Now luckily for chicken sandwich loving fans there are plenty of other vendors selling chicken sandwiches in the stadium, including former “Top Chef” contestant Kevin Gillespie with his fried chicken on a roll with mayo, honey butter and a pickle that he’s dubbed the “Closed on Sundays” chicken sandwich.

I guess Chick-fil-A thinks it makes enough money that it can sacrifice Sunday sales at the stadium. And it does! Earlier this month, restaurant trade publication QSR Magazine named Chick-fil-A the highest grossing franchise in the U.S. estimating that each store pulled in an average of $4.4 million in annual revenues, $1.7 more than the next highest grossing chain, which is Whataburger at $2.7 million.

Here’s another quirk associated with the Falcons. Zaxby’s, a chain of fast food restaurants offering chicken wings, chicken fingers, sandwiches and salads, recently signed a 5 year deal to be the official chicken of the Falcons, but Falcon fans looking for Zaxby’s chicken at the stadium will be looking a long time. Zaxby’s didn’t lease any concession space in the stadium.