Good morning. After two good days U.S. equities once again started their march south with the Dow losing a very material 171 points (0.95%). The S&P 500 fell 17 (0.84%) to 2,042 and the Nasdaq dropped 32 (0.68%) ending at 4,704. The Labor Department’s Employment report for December was the excuse. On the surface the report looked really good with the unemployment rate falling from 5.8% to 5.6% and a nice 252,000 jobs added but drilling down below the headline data people were discouraged and qui looking for jobs and hourly wages fell which was the first time in a year dampening investors spirits. Friday’s decline followed two days of more than 1% gains in the market fueled in part by the minutes of the last Fed meeting which assured investors the central bank was in no hurry to raise interest rates. Friday’s wage data will reinforce that notion. All the major indexes finished lower for the week with the Dow off 0.5% and the S&P down 0.7%.
When I came in this morning Dow futures were higher on the coattails of European equities which are trading higher on the belief the ECB will sooner rather than later do some sort of QE but unfortunately have sunk since then with the Dow getting clobbered 136 points this morning. I would be surprised though if the ECB did anything before the Greek elections on January 25th. Giving the central bank further justification to do QE was that eurozone consumer prices sand 0.2% last month which was the first decline in 5 years. I sure falling oil prices were the reason for the decline.
Oil fell back on Friday with WTI off 43¢ closing at $48.36 and Brent down 85¢ to $50.11 which in the big scheme of things is chatter. Goldman Sachs released a report this morning stating U.S. oil prices need to trade near $40 a barrel in the first half of the year to curb shale investments adding that it does not believe that OPEC will cut production. They forecast WTI will trade $41 and Brent $42 within 3 months. They forecast a 6 and 12 month price for WTI of $39 and $65, respectively, and Brent $43 and $70, respectively. This report has given the bears meat and they’re pushing WTI down a very material $1.78 this morning, a fresh 5.5 year low. A supply gut is the problem fueled by shale production with U.S. production the highest in 3 decades. Prices have to fall to sideline capital folks. Simple supply and demand economics.
Natural gas traded in a fairly tight range on Friday ending up 1.9¢ at $2.946. The bulls and bears were engaged in trench warfare with current natural gas cash prices in the double digits in the northeast fueling the bulls but the bears are pointing to the weather forecast and the very above normal temperatures. The entire U.S. will experience very warm temperatures for this time of year next week and the eastern half of the country will have warm temperatures in the 11-15 day time frame. It may get cold in the west but in the winter temperatures in the western half of the country have a very muted effect on natural gas futures. What matters is what temperatures are in the major gas consuming regions of the country and those are the upper Midwest, MidAtlantic and northeast regions.
The weather forecast is weighing on the natural gas market this morning with natty down 9.6¢.
I don’t envy Mario Draghi, the ECB President. He’s got a really, really tough job. If you were in his shoes how would you manage a QE program after receiving the following data that came out late last week. In Germany the unemployment rate in December fell to 6.5%. That’s a record low. In Italy the jobless rate hit 13.4%, a record high. Worse, the unemployment rate amongst Italy’s youth rose to, are you sitting down, a stunning 43.9%! How does one manage a situation like that?
Have a good day.