Equities and the economy

The risk-off sentiment continued yesterday with commodity prices falling, bond and gold prices rising and equity prices falling. Yesterday the Dow fell 35 points, closing at 17,640, the S&P 500 lost 4 to 2,072 and the Nasdaq settled down 9 at 4,835. Similar to Tuesday, the losses yesterday were marginal but it was the 5th consecutive day when equities closed lower which hasn’t happened since February 11th , which was a very lousy month. The big event of the day was the conclusion of the FOMC’s two day meeting and Dr. Janet Yellen’s press conference. As expected, the Fed did not change interest rates noting a slowing in the labor market. Just to remind you, at the beginning of this month the market was expecting the Labor Department’s employment report to show an increase in employment in the order of 140,000. The actual number was an abysmal 38,000. The Fed didn’t mention anything about international events affecting their decision but I guarantee you the Brexit vote next week is on their minds. The market sentiment is now that instead of seeing two interest rate increases this year we may only see one, and that’s a maybe.

The Fed has often said that their monetary decisions will be “data dependent” but I am beginning to question whether they can see anything beyond the tip of their noses. In April their communique said “labor market conditions have improved further even as growth in economic activity appears to have slowed.” Yesterday’s communique said just the opposite, “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” What a flip-flop! These people are supposed to be establishing long term monetary policy for our economy and they completely change their rhetoric over a two month period?! Where’s’ the vison?! That’s doesn’t inspire confidence in me.

This morning the Dow is getting hammered being down 125 points.

Oil

After posting 2016 highs last week oil prices have been in a free fall as risk aversion prevails which means sell oil. Yesterday WTI fell 48¢ closing at $48.01 and Brent lost 86¢ settling at $48.97. And let’s not forget about the oil/equity correlation which is holding strong. Equities down 5 days. Oil price down 5 days. Oil prices have fallen more than $4.00, ~8%, in a week. The DOE released its crude and products report and although it was bullish the fall in equity prices dwarfed the bullishness. The report noted an aggregate decrease of crude and product inventories of 2.7 million barrels which was much greater than expectations of a 400k barrel decline. WTI prices rallied immediately after the report but a tsunami of selling came in.

Production in the prolific Bakken basin is beginning to wane as drilling activity dramatically dropped. North Dakota officials reported yesterday crude oil production in the state fell to 1.04 million bpd in April down from 1.11 million bpd in March. They added that production will most certainly fall below 1.0 million bpd in the coming months and it will “be almost impossible” to rise above that level through the end of the year.

Thor is at work hammering not just in equities but all WTI with it trading down a whopping $1.42 this morning.

Courtesy of MDA Information Systems LLC

Natural Gas

Equities and oil prices may be falling but natural gas prices aren’t. Yesterday natty held firm at $2.595, down 0.9¢. Prices have spent a week pivoting around $2.60. The cash market has been very strong lately with electric generators sucking hard on the pipes making electricity for A/C needs with elevated temperatures encompassing most of the country. Usually the cash market trades at a material discount to futures prices. Not currently. Today the cash market traded $2.60 which is flat to July futures.

Today the EIA releases its weekly storage report. The report aways garners close attention but today’s report will get even more being forecasters missed last week’s number by a big 10 Bcf. The market is looking for a 66 Bcf injection. Natty prices are currently flat to yesterday’s close but that’ll change after the report is released.

Elsewhere

As we are all well aware the presidential election campaigns are in full swing. We all know the symbol of the Democratic Party is the donkey and the Republican Party is the elephant, but do you know how this came to be? Both symbols emerged less from political tact and more in jest and retribution. The Democratic Party’s donkey symbol was adopted in 1828 during the election when Andrew Jackson’s opponents called him a jackass. The Republican Party’s elephant symbol was adopted in 1874 after satirical cartoonist Thomas Nast drew an elephant labeling it “the Republican vote.”

Bob Shiring
Vice President