Equities and the economy

Yesterday was a repeat of Tuesday with stocks beginning the day lower and clawing back to close pretty much unchanged. The Dow closed up 2 points at 17,790, the S&P 500 added the same ending at 2,099 and the Nasdaq finished up 4 at 4,952. As I’ve stated too many times, it’s the closes that matter. Folks, I like this price action. Bull markets open lower and close higher. Bear markets do the opposite. Being it was a lot of nothing yesterday (but good price action!) let’s move on to the fundamental data.

The Fed released its Beige Book yesterday. The Beige Book is a collection of anecdotes about the economy and always released before a Fed meeting with the next one beginning June 15th. The Book indicated that most Fed districts were seeing moderate performance and that consumer spending and employment posted mostly moderate growth. Knowing how Fed President Janet Yellen focuses on the labor market perhaps the most important sentence in the entire document was “Employment grew modestly since the last report, but tight labor markets were widely noted; wages grew modestly, and price pressure grew slightly in most districts [my emphasis].” With inflation currently near the Fed’s target of 2% this is fodder for the Fed to raise interest rates. As I mentioned previously, the only question is whether it will be in June or July and with the Brexit vote too close to call and after the Fed’s June meeting they may wait until the July meeting.

The Commerce Department’s construction spending report yesterday was disappointing noting spending fell 1.8% in April. The significance? This was the single, largest monthly decline in 5 years. The Institute of Supply Management released its manufacturing index showing U.S. manufacturing expanded in May but at a very slow pace which suggests the sector is unlikely to speed up soon.

Today in addition to the regular weekly first time unemployment claims we have the very important ADP monthly employment report which gives us a clue into the big daddy report released tomorrow which is the Labor Department’s Employment Situation Report for May. Also, the ECB meets today with the market not expecting any changes but again hearing the words “we’ll do everything at our disposal to support the economy.”

This morning Dow is down 47 points.

Oil

Oil prices yesterday exactly followed the equity price action with WTI trading as much as $1.35 lower than Tuesday’s closing price with the low being hit in the morning and corresponding to the low in the Dow. At the day’s end WTI did nothing, just like equities, finishing down 9¢ at $49.01. Brent’s price action was similar settling 17¢ lower at $49.72. The API released its crude and products data last evening noting the aggregate sum of crude oil, gasoline and products fell 0.4 million barrels which is modestly supportive with the 5 year average of a 1.56 increase. The operative term here is “modestly.” Today the DOE releases its crude and products report.

OPEC meets in Vienna today (can I go?!) and there’s rumors of discussions to establish an output ceiling, but that ain’t gonna happen. Saudi Arabia is not going to limit production as long as its arch enemy Iran is producing everything it can.

Husky Energy yesterday reported it has resumed producing limited volumes of oil at its Sunrise oil sands project north of Fort McMurray now that the wildfires are no longer a threat.

Guess what? WTI is down 91¢ (see equities).

Courtesy of MDA Information Systems LLC

Natural Gas

The July Nymex natural gas contract skyrocketed higher for a second consecutive day with a gain of 9.3¢ settling at $2.381. In just the first 3 days as the front month July has exploded more than 30¢, or 15%. As mentioned yesterday, a combination of increased, i.e. record setting, use of natural gas to produce electricity, a warmer weather forecast and the EIA reporting lower U.S. production has given the bulls a power pill. That being said, storage levels are still at record highs which will limit the move higher. Speaking of storage, the EIA releases its storage report today and the market is expecting an injection of 81 Bcf.

The weather forecast is a repeat of yesterday and traders are eating their bagels waiting for the storage report at 9:30 CDT with natty up a meaningless 1.1¢.

Elsewhere

Yesterday marked the official beginning of the hurricane season which will last until November 30th. Although it began yesterday, we’ve already had two named storms: Alex and Bonnie. Alex was a freak hurricane because it occurred in the middle of winter, specifically January 13 to the 17th. The east coast just experienced tropical storm Bonnie which dumped rain on the eastern seaboard last weekend. Technically Bonnie lasted from May 17th to the 30th. All the hurricane forecasters are predicting a much more active season this year than last year, albeit normal. Last year we had the strong El Nino and one of the effects of an El Nino is strong trade winds which shear the hurricanes impeding development. NOAA is forecasting there’ll be a total of 10 to 16 named storms with 4 to 8 of them to be hurricanes and 1 to 4 to be major hurricane which is a category 3 or higher (winds at least 111 mph).