Equities and the Economy
Good morning. It was looking pretty good yesterday for most of the day with U.S. stocks trading nicely in the green, and then the bottom fell out. The FOMC finished its regularly scheduled two day meeting yesterday and released its post-meeting communique at around 2 PM Eastern and the market didn’t like what it read. Now as a matter of background, the “results” of this FOMC meeting was the least anticipated in 6 years which is when we were in the depths of the Great Recession. Indeed, the post-meeting was pretty much as everyone anticipated and the minor deviations were positive. For example, in yesterday’s communique the FOMC stated that “economic activity has been expanding at a solid pace” whereas the previous communique stated the economy was “improving at a moderate pace.” To you this may not seem much of a change but I’ve been following the FOMC and its meetings, communiques and news conferences for a long time and this a material change. Importantly, the Fed reiterated it was going to be “patient” about when it would raise interest rates. So with the neutral to good news why did the stock market drop like a rock in water after the release of the communique? Because investors viewed the strength that with all things being equal (which they never are!) the propensity for the Fed to raise interest rates would be sooner rather than later. Now I really question the “sooner” because with the rotation of the voters this year the 2015 Fed is markedly more “dovish” toward monetary policy than the 2014 Fed. Hence, the 2015 Fed should tend to lean more toward delaying a rate increase than the 2o14 Fed.
What I really think spooked investors was the positive news from the FOMC would be further support of the U.S. dollar vs. foreign currencies (U.S. dollar is at an 11 year high vs. the euro) which will put further pressure on corporate earnings. This earnings season more than one multinational company has stated the stronger dollar is negatively impacting their results and they are lowering future revenue forecasts which obviously is not good for stock prices. So at days end the Dow had lost 196 points (1.1%) closing at 17,191, the S&P 500 fell 27 points (1.4%) ending at 2,002 and the Nasdaq turned a big opening advance on Apple’s earnings report, into a 44 point loss (0.9%) to 4,638. By the way, if you haven’t refinanced your home mortgage you should look at doing so for the 30 year Treasury bond is back at its record low.
This morning is starting out sedate with the Dow 8 points which is somewhat bucking the trend of global equities. The major Asian markets all closed materially down but this is more of playing “catch up” to U.S. equities and the European markets are trading lower. Forgive the redundancy, but closes are much, much more important than opens.
Oil prices fell yesterday on the DOE’s weekly crude and inventory report noting crude oil stocks rose by almost 9 million barrels last week to nearly 407 million. I pay attention to the crude inventory number but I pay more attention to the aggregate number, the sum of inventories of crude, gasoline and distillates, which was a rise of almost 2.4 million barrels and compares to a 5 year average of about 2.0 million increase. Bottom line is that both numbers were bearish. So after rising on Tuesday on a weaker U.S. dollar WTI and Brent sold off yesterday with the former closing down $1.78 at $44.45 and the latter at $48.47, down $1.13.
As I mentioned, WTI stocks are now over 400 million barrels which is the first time since April 1931 and are at their highest level, 406.7 million barrels, since January 1931. Here’s some stuff that was going on the last time crude inventories were this high. Time Magazine nominated Mohandas Gandhi as its Man of the Year. The Dow Jones closed at 169.34. Thomas Edison submitted his last patent.
This morning WTI is bouncing a bit up 17¢. Chatter.
The February Nymex natural gas contract “rolled off the board” yesterday settling at $2.866, down $0.115/MMBtu. Those of you not hedged and on the applicable product can now pull out your calculators and figure what you will be paying for electricity and natural gas for February. Let’s take that as it is and move on to today for it is Thursday and you regular readers know that means its EIA natural gas storage report day. The market is expecting a withdrawal of 90 Bcf which is substantially below last year and the 5 year average. If you recall, it was wonderfully warmer than normal in the eastern half of the country last week.
The weather forecast is little changed from yesterday. There is some bitterly cold weather hitting the upper Midwest, Mid-Atlantic and northeast next week followed by some “only” below normal temperatures. This will definitely pop the EIA storage withdrawal numbers. Traders don’t seem to be worried at all about this cold weather for the March contract, which is now the prompt month, is down 1.6¢. Chatter. What we very well could have next month is a big spread between the cash price (high) and the March futures contract price (goes nowhere).