Equities and the Economy

Good morning and happy Paperclip Day (I guess it’s only fair paperclips have their day being cellophane had its day on Wednesday).  U.S. stocks ended slightly lower yesterday with the Dow falling 37 points to 18,126, the S&P 500 lost 2 to 2,121 and the Nasdaq was off 9 to 5,098.  Folks, we dodged a big bullet made in China for as I mentioned the Shanghai index there closed down 6.5% before the U.S. markets even opened.  So folks, things could have been a heck of a lot worse folks.  Another Fed official, John Williams, President of the San Francisco Fed, spoke yesterday in Singapore saying the Fed is likely to raise interest rates this year.  Now this comes on the heels of Janet Yellen saying pretty much the same thing last Friday.  Mr. Williams comments really carry weight with me for one big reason.  He’s a monetary dove meaning he sides toward looser monetary policy.  If he’s talking about interest rates rising then just about everyone at the Fed is probably on board.  The only question is whether it will be in September, October or December.  My bet is not October for there is not a press conference after that meeting and the Fed tends to favor making material moves in policy when a press conference is schedules so they can explain the move.

The Labor Department released its usual weekly unemployment claims report yesterday.  It showed the number of people who applied for first time benefits last week rose 7,000 to a five week high and a seasonally adjusted 282,000.  However, the important four week trend remains lower so that is good. But the weekly data was indeed much less than stellar.

Stellar was though the National Association of Realtors report yesterday on April Pending Home Sales which rose a huge 13.4% and well above analysts’ expectations.  And this was on top of March’s surprisingly strong 13.5%.  Pending home sales have risen four months in a row and the index is at its highest since before the recession, May 2006.  The much better job environment is boosting consumer confidence translating into folks feeling more comfortable committing to a 30 year mortgage.  Things should only get better for if you recall last week I reported building permits soared.

This morning the Asian markets closed pretty much unchanged with China’s Shanghai stabilizing closing down 0.18% after getting absolutely and unadulteratedly destroyed Thursday when it fell 6.5%.  I’ve never seen a daily loss, and certainly never a gain, of this magnitude in the 7 years I’ve been writing this report.  The European markets are getting hit today especially Germany’s DAX and France’s CAC which are both down over 1%.  Here in the states the Dow is being dragged somewhat lower, 55 points, on the release of the revised Q1 GDP figures which was revised from +0.2% down to -0.7%.  A larger trade deficit and smaller accumulation of inventories by business than previously thought accounted for much of the revision.  Economists, however, caution against reading too much into the slump in output. They argue the GDP figure for the first quarter was held down by a confluence of temporary factors, including a problem with the model the government uses to smooth the data for seasonal fluctuations.

Oil

Oil prices yesterday closed marginally higher responding to a slightly weaker U.S. dollar with WTI gaining 17¢ to $57.68 and Brent climbing 52¢ to $62.58.  Actually, the gains were really pretty pathetic considering how bullish the weekly DOE crude and products report was.  The estimate was for an aggregate (crude, gasoline, products) gain of 1.0 million barrels and the actual was an aggregate decline of 4.49 million barrels.  A drop in gasoline inventories was the big “miss” coming in 4 x greater than estimates.  I guarantee you it was the other data the DOE reported that held prices down and that was that despite a 50% drop in rig count over the last 7 or so months U.S. crude oil production rose 0.3 million bpd last week to 9.566 million bpd, the highest level since 1983.  Responding to the 40% drop in prices E&P companies are becoming increasingly efficient.  Expect this to continue.  Helping them is that serviced costs, such as rig and fracking costs, have fallen 20% to 30%.  This isn’t the first time E&P companies have seen times like this.  As is said in Texas “This isn’t my first rodeo.”  This morning WTI is up 83¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Yesterday the EIA released its always much anticipated weekly storage report.  Setting the stage, the last couple of reports came in marginally bullish so that bias was built into the market.  The market was expecting an injection of 101 Bcf.  The actual number was 112 Bcf.  Yesterday’s reported injection was only 1 Bcf less than the greatest injection for this week with the average of the 5 years only 95 Bcf.  The bulls horns were immediately sawed off.  Natty got hit hard closing down 14.1¢ at $2.706.  Storage levels are now 54% above last year at this time and basically flat (-0.8%) to the five year average.  This year is so far above last year at this time because we had the infamous Polar Vortex in January 2014.  This morning natty is down 3.1¢.  Interesting that prices are marginally lower for the weather forecast came in warmer in the 6-15 day time frame this morning.  We’re still in the $2.50 to $3.10 range we’ve been in since April.

Elsewhere

The effect of the stronger U.S. dollar and weaker euro is having its intended effect.  Europe is on sale with tourism there absolutely skyrocketing!  Cruise ships have sold 50% more tickets this year than last year.  Viator, a tour booking company, reports that ticket purchases for the Sistine Chapel and the Louvre are up 60% over last year.  The Eiffel Tower is up 170%!  Asians are flocking to Europe with the Chinese outnumbering British visitors at the Louvre and Italians at Versailles.  Ground zero is the Mona Lisa.  Her smile is attracting as many as 40,000 visitors a day. So how bad is it?  Italian student Paolo Orifice, 19 years old, struggled to get near it and finally gave up.  Then there is the folks at the Palace of Versailles.  Instead of posting a recommendation on its website to buy tickets in advance or arrive early due to the large crowd, the Palace posted the following “If possible, we advise you to postpone your visit of the Palace.”  I like what one tourist said regarding the huge crowds “Avoid as a Frenchman heading for the guillotine!”

See you on the other side of the weekend.