Equities and the economy
Lockhart and Williams scared the crap out of investors yesterday. Dennis Lockhart and John Williams are the presidents of the Atlanta and San Francisco Fed’s, respectively, and in separate statements said there could be 2 or 3 interest rate hikes this year with June being a meeting where action could be taken. Importantly, neither man is a voting member of the FOMC but the fact both sent the same message the market paid attention which mean investors sold stocks. The Dow closed down 181 points, 1.02%, at 17,530, the S&P 500 lost 19, 0.94%, ending at 2,047 and the Nasdaq finished at 4,716, off 60 points, 1.25%. Prior to yesterday the market had been discounting a rate hike this year based on the generally weak earnings posted by companies for Q1.
Fundamentally the economic news was quite positive yesterday. The Labor Department reported that its consumer price index rose 0.4% in April m-o-m which is the fastest pace in 3 years driven primarily by gasoline and rents. The annual inflation rate is now 2.1%. Remember, the Fed’s target is 2%, and with the employment rate at about 5% along with upward hourly wage pressure this give credence to the aforementioned Fed presidents’ comments. More good news came from the Commerce Department which reported housing starts rose 6.6% in April to an annualized rate of 1.13 million units and better than economists’ expectations. Additionally, building permits were stronger rising 3.6%. So the housing market, which has been the backbone of this multi-year recovery, continues to remain healthy. Finally, the Federal Reserve stated that Industrial Production in April was up 0.7% which was much greater than expectations of 0.3%.
So if the fundamental news is so good why do equities fall? Because investors are first and foremost focused on interest rates. If interest rates rise it makes debt more expensive which means it cost companies more to borrow.
The three major Asian bourses closed lower overnight and the European markets are currently trading marginally lower both of which are putting some mild pressure on stocks this morning with the Dow down 29 points. Keep an eye on the Dow 17,500. That’s support.
Traders eyes are peeled toward Canada, specifically the wildfires that rage there. As of last evening the fire covered 875,000 acres, or about 25% more than it covered Monday evening! Yesterday Alberta’s Premier said westerly winds were expected to push the fire closer to facilities operated by Suncor Energy, Inc., one of the area’s biggest operators. At this point the fire is still 25-25 miles south of the oil sands facilities but this obviously is not good news for the people living in the region. The fires are estimated to have shut-in 1 million bpd of production accounting for a whopping 25% of Canada’s total output. The fire has caused the WTI/Brent spread to dramatically decrease. A month ago the front month spread was $1.25 favoring Brent. Last night’s close was 97¢. Specifically, WTI closed at $48.31, up 59¢ and Brent settled at $49.28, up 31¢. New 2016 highs have been posted for both oils the last 2 days.
The API released its crude and products report noting that crude stocks fell 1.1 million barrels last week which was below forecasts of a drop of 2.8 million barrels. In aggregate, inventories fell 5.0 million barrels which compared to a history of 1.45 million barrels is demonstratively bullish. If not for the weakness in equities I believe WTI would have settled higher. There’s still a lot of folks playing that equity/oil correlation.
Today the DOE releases its crude and products report which carries more weight than the API being reporting is mandatory for the former and voluntary for the latter. WTI is up 30¢ this morning.
Courtesy of MDA Information Systems LLC
It was a quiet day for natural gas with the June contract closing up 1.9¢ at $2.048 while the calendar strips fell almost as much. Chatter. Natty prices have now fallen 9% of the past couple of weeks. You poor folks in the northeast are going to have to wait until next week to get some nice spring weather for this week temperatures are going to be 4-8 degrees below normal. Next week and through the remainder of the month it looks like you’ll get some great weather. Fingers crossed for you for you’ve been waiting too long for some nice weather.
This morning the bears are continuing to pressure natty with it down 3.8¢ trading a penny shy of $2.00. The next big event will be tomorrow’s EIA storage report.
The EIA reported that shale gas production, which is the marginal gas production, is expected to drop in June marketing the 6th consecutive monthly decline. Total natural gas output in the 7 regions is expected to drop by 463 MMcf/d, 1%, from May. The largest decrease is expected to be in the Eagle Ford.
Our kissing cousins to the north just got displaced by the Chinese in a very important U.S. market segment, residential real estate. According to a study co-authored by The Asia Society and Rosen Consulting group Chinese buyers spent at least $93 billion on homes and condos for living and investment purposes between 2010 and 2015 surpassing the Canadians. The most popular locations are New York, San Francisco and Los Angles with 70% of the sales in these cities. One of the primary reason for the concentration is the access to flights to China. But there’s also another reason. The EB-5, aka the immigrant investor program. In 1990 Congress created the program which gives foreigners who invest capital in the U.S. a fast track to get a green card. The program has resulted in $11 billion of investment from the Chinese representing about 70% of the EB-5 investments from all countries. The primary motivation for Chinese buyers is to manage their investments or to bring their families and consider moving. Buyers view the U.S. to be one of the best, if not the most, stable economy in the world and where your assets are safe. I’ll second that.