Equities and the Economy:

The dog days of summer are in full swing with another lackluster day for U.S. equities. The Dow fell 23 points to 18,529, the S&P 500 lost a single point to 2,183 and the Nasdaq posted a gain of 6 to 5,245. All three indexes chopped around between positive and negative territory throughout the session. Also, there were no major economic reports yesterday. Average volume the last five sessions has been 50% of the average of the last 200 days.

The big report today is New Home Sales for July but what the market is really talking about is Janet Yellen’s speech this Friday at Jackson Hole and hints on interest rate policy. Over the past 10 days various Fed officials, including Fed Vice Chairman Stanley Fischer, have suggested a rate increase is on the table but there’s a big chasm between “on the table” and actually raising the rate. Hawkish talk is not changing the markets perception of a rate hike. Fed fund futures reflect only an 18% probability of a rate hike next month and 50% in December.

This morning the Dow is up a very nice 97 points getting a boost from European equities which are all trading significantly higher on positive PMI data with Germany’s DAX leading the way up 0.90%.

Oil

The short squeeze last week ended yesterday with oil prices got whacked yesterday with WTI falling $1.47, 3.0%, closing at $47.05. Brent lost $1.72, 3.4%, settling at $49.16. However, this is coming off intraday highs on Friday which was the highest price since mid-June. The supply dynamics are skewed toward record levels of output by a few key producers and global energy growth subdued on top of record oil inventories. From a fundamental perspective, fiscal pressures are likely to keep key countries like Saudi Arabia, really the only country that will think about managing production, from limiting production. Additionally, even if Saudi Arabia or Russia limit production resulting in a price increase U.S. producers will be happy to step up and fill the gap. Remember, even at current prices the rig count has risen for 8 consecutive weeks now. Here’s the paradigm change that the economic production of U.S. shale oil has made: the U.S. producer is now the global marginal producer. Historically, Saudi Arabia played this role. Saudi Arabia knows this which is why two Thanksgivings ago they announced they were going to focus on market share as opposed to price, and prices plummeted. By the way, according to Bloomberg OPEC’s output is currently at its highest level since the 2008 financial crisis. Not helping the refined products (gasoline and diesel) bulls, China just reported their exports of these products soared in July with gasoline exports up 145% and diesel exports up 182% from a year ago. Over the past couple of years China has been building refineries to meet the needs of its growing middle class which are purchasing automobiles.

This morning the bears continue to pressure the market with WTI down 70¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices popped yesterday with the September contract closing 9.5¢ higher at $2.679. No doubt the driver here: the weather forecast. Yesterday’s forecast was materially warmer than Friday’s showing widespread above normal temperatures across almost the entire U.S., including the south, Midwest and east. This change increases demand by about 20 Bcf. That’s significant amigos. The September contract has rallied more than 20¢ over the past two weeks and back to that $270ish number. We always seem to come back to the $2.70-$2.80 range. In about a month load across the U.S will begin to materially decrease and let’s see if prices will hold up. We have to get through a few EIA storage reports between now and then which have the potential to materially impact prices. This morning today’s forecast is a repeat of yesterday’s and natty is up 2.3¢.

Elsewhere

It’s been a hot August in ERCOT. The grid hit three record demand levels this month.

August 8th: 70,169 MW
August 10th: 70,572 MW
August 11th: 71,197 MW

Wholesale power prices during these periods while higher remained reasonable due to Texas’ growing renewable resources capacity, primarily wind. Texas produces more electricity by wind generation than any state in the union. And 5,000 more MW’s are being added in 2016.