Equities and the Economy

Good morning and happy National Chili Dog Day. U.S. stocks rallied for a second day in a row yesterday with the S&P 500 leading the way gaining 16 points, 0.75%, to 17,751 followed by the Dow which posted a 121 point rise, 0.68%, closing at 17,751 and the Nasdaq in third place up 0.45%, 23 points, to 5,112. Global equities are recovering from their losses over the last couple of weeks, with Monday’s slide being the worst, as commodities and Chines equities have stabilized and oil prices rising over the last couple of days which pushed energy equities higher. Yesterday energy shares jumped more than 1% to lead all 10 sectors of the S&P 500 higher.

The major domestic economic news was the release of the FOMC’s post meeting communique after ending its two day meeting. There was no press conference so parsing the communique was the order of the day. As I expected, there was nothing new in the communique. In fact, there wasn’t even one dissenter. The Fed reiterated for the umpteenth time they are data dependent. The bottom line is Fed left the door open for raising rates in September. The market has the odds at 50-50 for that. So the FOMC’s next meeting in September followed by Dr. Yellen’s post meeting news conference will garner way more than the usual attention from investors and traders.

Outside of the Fed’s post meeting communique the only domestic economic data worthy of discussing is the National Association of Realtors report showing pending home sales which in June fell 1.8% with its index falling to 110.3. However, for the last 12 month period ending in June the index is up 8.2%. I’m sure your immediate reaction is the report is negative, and factually it is, but the reason pending homes sales were down is not what one would think. Per NAR, competition for existing homes remained “stiff” in June with low inventories pushing prices above some buyers comfort level. The demand is there but buyers appear to be holding off on purchases betting on supply improving and price growth slows.

Moving on to this morning, for the last few months the first thing I look at is how China’s Shanghai did for that market has been a big driver in global equity performance. Quite frankly, that scares the heck out of me because the Chinese equity market is being supported/manipulated by the Chinese government meaning the index is not indicative of the performance of the stocks comprising that index. Anyway, the Shanghai Composite closed down 2.20% overnight which for that index is chatter. The major European indexes are all currently trading nicely in the green being up between 0.38% and 0.8%. Although U.S. equity futures were in the green when I came in this morning they have since turned negative with the Dow down 77 points. The reason for the drop is GDP for Q2 was just released by the Commerce Department showing a 2.3% rise. Additionally, Q1 GDP was revised from negative 0.2% to a positive 0.6%. So why are equities turning negative? It’s the old “good news is bad news” thing. This latest GDP data will increase the chances of the Fed raising rates in September. If you recall back in 2011 and 2012 when we were coming out of the recession a lot of the fundamental economic data was bad but the stock market was soaring. Why? The Fed was “accommodative,” which is another word for QE. That QE money went into equities. Raising interest rates is a “contraction” if monetary policy making less money available to invest in equities. It will be very interesting to see how the market responds to a rise in interest rates because the Fed has done everything it can to tell the world an interest rate rise is coming. Even with the rise, money is still extremely cheap.

Oil

As mentioned above, oil prices rose yesterday with WTI climbing 81¢ closing at $48.79 while Brent barely budged adding 8¢ settling at $53.38. We came “blame” the rise in the WTI price on yesterday’s DOE report. Going into the report the expectations were for an aggregate build of 2.4 million barrels with the 5 year history showing an aggregate build of 4.33 million barrels. The actual number was a 1.97 million barrel withdraw. Obviously, a bullish number. I think if this had been a few years ago we would have seen prices rise more but the U.S. currently has inventories that are massively larger than last year and about 100 million barrels more than the 5 year average. Clearly, there is no shortage of crude. This morning WTI is very, very quiet being down a meaningless penny.

Courtesy of MDA Information Systems LLC

Natural Gas

Yesterday the August Nymex natural gas contract “rolled off the board,” i.e. expired, up 6.5¢ at $2.886. This sets the price of electricity for those of you on a floating heat rate product and natural gas for those on a Nymex + basis product. We’ve spent 2 months now pivoting around $2.80. Today the EIA releases its weekly storage report with the market expecting a 55 Bcf injection. This compares to last year’s injection for this week of 88 Bcf and a 5 year average of 48 Bcf. As you can see in weather forecast in this report temperatures will be turning markedly cooler for the eastern U.S. in the 6-15 day time frame which will be killing A/C load. You’ll be able to hear the peaking plants wind down (just kidding). Considering that we’re currently in the historically warmest time of year, the upper Midwest and northeast are going to have some fabulous weather!

This morning the September contract becomes the front month and is trading 4.6¢ lower. 1.7¢ away from, guess where. $2.80

Elsewhere

The growth in natural gas production from the Marcellus and Utica shale formations is nothing less than amazing. Since January 2012 these two regions have accounted for 85% of the increase in U.S. natural gas production. In January 2012 the average new Marcellus well produced 3.2 million cubic feet per day. In July, 2015 the average new well produced 8.3 million cubic feet per day. In January 2012, the average Utica natural gas well produced 0.31 million cubic feet per day. In July 2015 the average Utica well produced 6.9 million cubic feet per day. Those are increase of 259% and 2,225%! EIA’s latest data now shows U.S. shale basins now account for 56% of U.S. dry natural gas. Truly amazing!