Equities and the Economy

Good morning and happy National Watermelon Day. U.S. equities ended the week on a weak note with all three major indexes posting marginal losses. The Dow ended down 56 points, .032%, the S&P 500 fell 5, 0.22%, to 2,104 and the Nasdaq was off a single digit to 5,128. Energy stocks were the big losers, down 2.5%, pushed lower on falling oil prices. For the week the Dow posted a gain of 0.7% and for the month a 0.4% rise. The S&P posted a nice gain for the week, 1.2%, and booked a 2% rise for the month. The Nasdaq recorded 0.8% rise for the week and a very healthy 2.9% gain for the month.

The big news of Friday was the Employment Cost Index (ECI) report, a report that is only released quarterly, noting costs rose a scant 0.2% in Q2 coming in well below economists’ forecasts of 0.6% and after a rise of 0.7% in Q1. Q2’s rise was an all-time low for the index dating back to 1982. Wages, some 70% of employment costs, rose only 0.2% in Q2 after a 0.7% rise in Q1. This report is telling us that currently there’s very little wage pressure in the U.S. economy. I guarantee you this lowered the odds of the Fed raising interest rates next month.
Contrary to the negative ECI report, the Chicago PMI came in at 54.7 for July which is the highest reading since January. The University of Michigan released its closely watched consumer sentiment report with the index coming in at 93.1 and down from June’s 96.1. I think the worries over Greece weighed in here.

By the way, Gold ended Friday up $6.50 for the day to $1,094.90/oz. but that is small consolation after logging a loss of 6.% in July, the biggest one month slide since June 2013 when it fell 12%.

Greece’s stock market opened today after a 5 weeks of being closed. Local investors will still face restrictions aimed at stemming capital flight.

This morning things are mixed with the Dow down 58 points but the Nasdaq up 3. Investors are getting mixed signals this morning for Asian stocks all closed lower but European stocks are all trading nicely in the green. Dragging Chinese shares, and all Asian shares lower for what happens in China affects all its neighboring economies, was the release of the Caixin/Markit Manufacturing Purchasing Managers index for July and with it a rather ill reading of 47.8 which is down sharply from June’s 49.4. This is the 5th month in a row the index has been below the all-important 50 level separating growth from contraction. Worse for the Chinese government, stunningly, this is the 21st consecutive month that companies there have cut staffs. Things are not going so well in the world’s second largest economy.

Oil

Oil is just getting knackered. On Friday WTI lost $1.40, 2.9%, closing at $47.12 and Brent was off $1.10 to $52.21. WTI had it biggest monthly percent drop last month since 2008, down 21%, and is at its lowest level since February. Brent’s monthly decline was 18%. On the heels of the aforementioned negative Caixin/Markit Manufacturing report oil prices are lower this morning with WTI trading 95¢ lower hitting 4 month lows and Brent is off $1.40. Worries of oversupply and belief that Saudi Arabia and other key members of OPEC will continue to focus on maintaining market share vs. a higher price is feeding the bears. On the bearish side, a report just came out that OPEC production in July was the highest in recent history.

Amazing to me, even with the horrible performance of oil prices recently, Baker Hughes reported on Friday the number of oil rigs actually increased last week by 5 to 664. That being said, the lower rig count, 909 less than this time last year, just may be having an impact on production for U.S. oil production has declined over the past couple of months.

Courtesy of MDA Information Systems LLC

Natural Gas

After giving up 9.6¢ as its first day as the prompt month on Thursday natty fell another 5.2¢ on Friday settling at $2.716. It’s somewhat surprising to me prices are still so low considering how much natural gas is being burned in the power sector. Last week on July 29th the amount of natural gas burned by electric generation plants hit an all-time record at a whopping 38.4 Bcf/d surpassing the previous record by more than 0.6 Bcf/d. Interestingly, no single region set an individual daily record for power burn. It was a matter of getting hot across a broad swath of the country and rampant coal-to-gas switching. As natural gas becomes a larger part of the overall electricity stack, new daily records could be in the future as long as the weather is hot. Speaking of the weather, it’s going to be hot in the south for the next couple of weeks and natty will be flying through the pipes to generating plants there. However, temperatures will be fairly normally to below normal in the all-important upper Midwest and Northeast. This morning natty is quiet up 1.6¢.

Elsewhere

I bet you didn’t read this anywhere but a major milestone occurred last April in the electricity market. In that month, which is traditionally the month when total U.S electricity demand is the lowest, generation of electricity fueled by natural gas exceeded coal-fired generation for the first time since the EIA began keeping track of monthly generation data, which was way back in 1973. The anomaly only lasted one month for in May 2015 coal once again took its normal top spot surpassing natural gas in the electric generation market. The last time natural gas generation got close to surpassing coal-fired generation was back in 2012, and that was when natural gas spot prices were materially lower, near $2.00/MMBtu, than prices are today. Coal began losing market share to natural gas in the electric generation in 2007 when increased U.S. production of natural gas, particularly from shale, led to a sustained downward shift in natural gas prices. For all of 2015 coal’s share of U.S. generation is expected to average 36%, down from 39% in 2014, while the average fuel share of natural gas in 2015 is expected to be 31%, up from 27%. Also pressuring coal’s market share are EPA regulations such as its recently implemented Mercury and Air Toxins Standard (MATS) rule which has resulted in coal plant retirements. Folks, there is definitely a structural and permanent change going on in the fuel sector in the electric generation marketplace.

Have a good day.