Equities and the Economy:
• More records!
• House passes 2018 budget.
U.S. stocks continue to set record highs! Yesterday the Dow posted a hefty gain of 114 points, 0.5%, finishing at its 46th record close at 22,775. The S&P 500 rose even more on a percentage basis, 0.6%, up 14 points to 2,553, it’s 8th straight day of higher closes. The benchmark notched its 6th straight record close marking the longest streak since the 8 consecutive record highs in 1997. The index has notched 43 record closes in 2017. The Nasdaq Composite advanced the most of all 3 indexes logging a 0.8%, 51 points, to finish at 6,585.
Two fundamental events pushed the markets higher. One was the Commerce Department’s factory orders report for August showing that orders for nondefense capital goods excluding aircraft, a proxy for business spending plans, rose a hefty 1.1% for that month. Very strong. But the primary driver was the announcement that the House passed a budget for 2018 overcoming months of disagreements and taking the first concrete step toward passing tax reform by year’s end. Now this isn’t a done deal for the Senate passed their own budget and the two bills will now go to a reconciliation committee to work out the differences, but this was a big step toward tax cuts and importantly, avoiding a Senate filibuster.
Today brings the “big” report which is the Labor Department’s Employment Situation Report for September. It was just released and the headline is that the economy lost 33,000 jobs in September. This is the first time the U.S. economy showed job losses since September 2010. The unemployment rate fell to a post Great Recession low of 4.2%, the lowest level since February 2011. Investors are taking the report with a grain of salt because the data was skewed by Hurricanes Harvey and Irma.
This morning the Dow is down 45. Repeating, use caution in the short term. CNN’s Fear & Greed Index is at 95 (Extreme Greed), the highest level in a decade. The boat is heavily listing to the long side.
• Tropical Storm Nate forcing evacuations.
• Oil prices close higher.
After falling for three sessions WTI prices popped with the November Nymex contract yesterday closing up 81¢ at $50.79. Prices got a boost on reports that offshore Gulf of Mexico producers have cut about 15% of output, ~254,000 bpd, due to Tropical Storm Nate. Nate is expected to become a hurricane on Saturday (yes another hurricane, ugh!) and pass through the center of the Gulf making landfall on the Louisiana coast Sunday morning.
Saudi King Salman is currently in Moscow, the first time ever a Saudi monarch has visited Russia. He and President Putin will discuss extending the current 1.8 million bpd production cut beyond March 2018.
Limiting price gains is U.S. production growth. On Wednesday the EIA said U.S. oil production hit 9.56 million bpd, the highest since July 2015.
This morning the bears have emerged in force. WTI is down $1.26. Not helping oil prices, the U.S. dollar hit a 6 week high against a basket of major currencies.
Courtesy of MDA Information Systems LLC
• EIA reports injection of 42 Bcf.
• Price close little changed.
The EIA reported yesterday in its weekly storage report that 42 Bcf was injected into U.S. storage fields last week. This was a somewhat bullish number being the market was looking for a 47 Bcf injection. Prices initially popped but selling came in at the $3.00 level and at the closing bell Nonmember gas settled 1.7¢ lower at $2.923. The calendar strip prices didn’t move.
Current storage levels are 4.4% below last year at this time. All summer storage levels have been above the 5 year average. That changed yesterday. With yesterday’s report they are now at the 5 year average.
Nate is also affecting GOM natural gas production. About 206 million cf/d is shut-in, 6.4%.
This morning it’s quiet. Natty is down 1.5¢.
Ever since the central banks have been embarking on “accommodative monetary policy” i.e. QE, and driven interest rates to literally zero (negative in Europe’s case!), investors have been on a massive hunt for “yield,” i.e., interest rates to earn at least something on their money. As a rule of thumb, interest rates rise the further you go out in time with the belief that over time the current accommodative monetary policy will eventually end and “normal” interest rates will be the order of the day. This is reflective in the “yield curve.” (this is also why virtually all banks lend longer term and borrow short term to satisfy those debts thereby capturing the yield spread, and carrying risk!).
Well the hunt for yield has been taken to a whole new level. As high as the Alps, literally. Recently investors placed almost 11 billion euros in a bond offered by the country of Austria. The yield is 2.1%. The term: 100 years! It was in fact Austria’s first century bond. It also begs the question why would investors invest in such long-dated bonds when most economists say that we’re on the verge of entering a period of rising interest rates? The reason is that even though investors expect central banks to exit their loose policy stance, they still see low yields for many years. Why? Persistent deflationary pressures along with tepid forecasts for global economic growth which are keeping a very heavy lid on sovereign debt interest rates.
I understand the hunt for yield, but 2.1% for 100 years?!