Equities and the economy

After falling a couple of days global equities posted solid gains yesterday aided by a jump in oil prices. The Dow rose 113 points, 0.64%, to 17,716, the S&P 500 gained 22, 1.05%, ending at 2,067 and the Nasdaq added 77 points, 1.59%, finishing at 4,921. A very nice day. The S&P is currently just 3% off its record high and is up 13% from its February low. Commodities rallied yesterday, which obviously helps U.S. commodity stocks which helps the major indexes, aided by a quite weak U.S. dollar which hit a 17 month low vs. the yen. Now the yen isn’t as important as the euro when it comes to influence on commodities priced in U.S. dollars but the yen is the second most important currency. The dollar has been dropping like a rock since Janet Yellen’s dovish comments last week, which is old news, but the new news was the release yesterday of the March 15-16 FOMC meeting minutes. The FOMC minutes are important to get the “flavor” of the voting members, i.e., although interest rates weren’t raised last month, was there a lot of dissent meaning there could be momentum toward raising interest rates? The March minutes noted that “several” officials argued against an interest rate increase in April, saying such a move “would signal too much urgency they didn’t think appropriate.” This is in line with Janet Yellen’s opinion. She is in the dovish camp and she’s not going to raise interest rates until she sees the whites of the eyes of inflation. Stocks rallied after the minutes.

There were no economic reports of significance released yesterday so let’s move on to today. Overnight the Asian markets didn’t do much closing mixed and the major European indexes are currently trading marginally lower which is putting some downward pressure on U.S. equities with the Dow down 86 points.

Dr. Yellen will be speaking at The International House in New York City tonight and the event will include Dr. Bernanke, Dr. Greenspan and Mr. Volker. This is the first time that all the Fed “Chairs” have appeared together. Pretty cool.

Oil

Oil prices soared yesterday with both WTI and Brent closing up 5.2%. WTI settled up $1.86 at $37.75 and Brent rose $1.97 at $39.84. Prices got a boost from two events. First, the weekly DOE crude and products report confirmed Tuesday’s API report of a drop in crude inventories. Crude stocks dropped 4.9 million barrels with expectations of a build of 3.1 million, gasoline supplies rose 1.4 million counter to expectations of a decline of 1.3 million and distillates (which is primarily diesel) increased 1.8 million barrels with a draw of 900,000 expected. The all-important aggregate number was a 1.5 million barrel drop in stocks compared to a 5 year average of a build of 3.97 million barrel. Take that bullish data and add in a weaker U.S. dollar and you have a recipe that’s very tasty to the bulls. That being said, WTI have been trading in the $30 to $42 for 3 ½ months. I said this before but it seems the market is content to hang around $37 + or – $5.

This morning WTI is down 65¢ simply following the momentum of the equity market.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices slipped 4.3¢ yesterday closing at $1.911 with the 11-15 day weather forecast coming in slightly warmer than the previous day. That being said, the dated calendar strips, which I closely follow for that is where your electricity price is set, closed flat. As you well know, I follow the weather forecast closely and I’ve noted that the current cold blast this Midwest is experiencing, dare I say mini-polar vortex for it is positioned exactly where the previous polar vortexes were positioned, is sticking around longer than originally thought. Now we’re in April and the low temperatures aren’t anywhere near where they would be if this hit in January or February but Chicago and Cincinnati are going to be 15 to 18 degrees below normal this weekend. The forecast is supporting prices and natty is up 5.9¢ as I write.

Elsewhere

An interesting thing is happening in gasoline sales. Premium gasoline sales are rising as a percentage of total sales. Per the EIA, since 2013, the share of premium sales in total motor gasoline sales has steadily increased to 11.3%, the highest share in more than a decade. And the reason is not what you might think. My first though was that the lower price of gasoline might be the reason, but it’s not. The major driver is the need for automakers to meet Corporate Average Fuel Economy regulations. To meet the standards automakers have implemented a wide range of technical solutions. One being engine downsizing coupled with turbocharging. Turbocharging can lead to an increased risk for engine knock (the premature combustion of fuel) which can damage an engine. Gasoline’s octane rating is an indicator of its resistance to spontaneous combustion. The higher the rating, the greater resistance to preignition, the fundamental cause of engine knock. In model year 2009 turbocharged vehicles accounted for 3.3% of new gasoline light duty vehicles sales. In 2014 that share increased to 17.6%. And automakers are requiring those turbocharged engines to use premium fuel.