Equities and the Economy

Whoo-hoo! Yesterday we had our first three day win streak in 2016, and biggest three day gain since August, with all the major indexes materially rising helped by stronger oil prices and some encouraging economic news. The Dow screamed higher by a big 258 points, 1.59%, to 16,454, the S&P 500 popped 31, 1.66%, ending at 1,927 and the Nasdaq flew higher by 2.21%, 98 points, to 4,534. Since last Friday the Dow has gained almost 800 points! With respect to the economic data, the Federal Reserve reported that Industrial Production rose 0.9% in January which is the largest increase in 14 months and much, much better than expectations of a 0.4% increase. Manufacturing output, which has been a laggard, rose 0.5% well above the 0.2% forecast. The Labor Department then released its Producer Price Index noting a rise of 0.1% which was materially better than Wall Street’s expectation of minus 0.2%. Core PPI, which excludes the volatile food and energy, rose 0.4% in January vs December and 0.6% on an annualized basis. Below the Fed’s target but moving in the right direction. Speaking of the Fed, the minutes of the FOMC’s January 2016 meeting were released yesterday and, in summary, it stated policy makers are worried that tighter global financial conditions could hit the U.S. economy and considered changing their planned path of interest rate hikes in 2016. Investors correctly interpreted this as a dovish move by the Fed, later to raise interest rates, which also brought in buyers of equities yesterday.

Overnight Japan’s Nikkei and Hong Kong’s markets rocked higher by 2.28% and 2.32%, respectively, while China’s Shanghai closed virtually flat to Wednesday. In Europe the major bourses are mixed with Germany’s DAX up a healthy 1.52% but London’s FTSE is off 0.48%. Locally, we’re beginning the day much more quietly than the last three sessions with the Dow flat to yesterday’s close. Let’s see how we close.

Oil

Oil prices closed higher yesterday with WTI rising $1.62, 5.6%, closing at $30.66 and Brent up $2.32, 7.2%!, settling at $34.50 with the latter recouping all of Tuesday’s losses. The focus continues to be the talks between OPEC and Russia regarding freezing production at January’s levels. By the way, and I’m not sure if you’ve noticed, these talks are causing more volatility in Brent than WTI for while the two oils are definitely linked, the OPEC/Russian talks affect oil prices in Europe, i.e., Brent, more than WTI.

Iranian Oil Minister Bijan Zanganeh met counterparts from Venezuela , Iraq and Qatar yesterday. After the meeting Iran stated they whole-heartedly supported the production freeze by Saudi Arabia and Russia, but didn’t commit to capping production. Don’t you just love it! “I fully support you limiting your production so I can get a higher price for my product, and oh, by the way, I’m going to increase my production!” As a matter of background, Iran produced 2.2 million bpd before the sanctions which dropped to 1.1 million bpd after the sanctions.

What fundamentally is supporting WTI prices is the surprising API report released yesterday after the close (a day delayed due to the holiday) noting crude inventories unexpectedly fell 3.3 million barrels. Forecasts were for an increase of 2.4 million barrels. Somewhat offsetting that though was gasoline inventories increased 800,000 bbls with expectations of a decrease of 100,000 bbls.

This morning WTI continues to grind higher being up 92¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Colder changes in the back end of the weather forecast brought in some buyers yesterday and natural gas closed 3.9¢ higher settling at $1.942. We’ve now spend nearly a week trading below the egregiously low number of 2 dollars. The EIA releases its weekly storage report today with the market looking for a withdraw of 155 Bcf which compares to last year’s 117 Bcf and the five year average of 170 Bcf.

This morning the weather forecast looks pretty much like a repeat of yesterday’s with slightly below normal temperatures east of the Appalachians with above normal temps Chicago and west for the 11-15 day time frame. For the next 5 days though the east, after getting frozen out last weekend, will have some great weather melting any snow. With the current warm temperatures the cash market is weak which is pushing natty down 6.3¢ this morning.

Elsewhere

Here’s what you get with a government like Spain’s (or Italy’s or Greece’s). Joaquin Garcia, 69, was a Spanish government employee receiving $41,500 in annual salary. His 20 year anniversary was coming up and he was scheduled to get an award for his dedicated service. However, it was as a result of him receiving this prestigious award it was discovered that Mr. Garcia hadn’t shown up for work in the last six years! According to deputy mayor Jorge Blas, it wasn’t until Garcia was due to be recognized for his hard work that authorities realized his office was sitting vacant. Mr. Garcia was supposed to be supervising the construction of a water treatment plant. The water department thought the city council was supervising the plant and the city council thought the water department was supervising it. People close to Garcia said that instead of working he had dedicated himself to reading philosophy. Mr. Blas said he called Mr. Garcia and asked him, “What did you do yesterday? The month before, the month before that?’ He didn’t know what to say.” The government fined Garcia $30,000 for the extended paid vacation, the maximum allowed by law. Garcia’s attorney, speaking on his client’s behalf, reportedly blamed bullying at his workplace, and the fact there was no work for him to do! In the end the court sided with the government. Garcia has since petitioned the deputy mayor not to pay the fine and have the judgement reviewed.