So far this weeks macroeconomic data from around the world has been mixed and as such we have had several equity markets starting to show the early signs of losing some of their upside momentum. January was simply a great month for most risk asset markets (see below for more details) for example WTI was up about 6.1% while the US Dow gained 5.78% (and who said oil and equities are not linked anymore?). Almost every day there have been data released that suggests the economic recovery is picking up speed as well as data pointing to a slowing of the economic recovery.
For example yesterday in the US the income data was very supportive while initial jobless claims surged higher and well above the expectations. Overnight China's PMI came in at 50.4 for January compared to 50.6 in December. The data is still above the expansion threshold but below last month. However, the China National Bureau of Statistics and China Federation of Logistics and Purchasing also said today that they more than tripled the number of companies they surveyed for the January number which means that the comparison to last month is not exactly on the same basis... so yes mixed data once again.
In my view the single biggest surprise this week (so far) has been the relatively muted reaction by the markets to the negative fourth quarter GDP number in the US. There was more dancing around the number by the many analysts and pundits hitting the media hitting airwaves after the number was released including the President of the US than I have ever seen. To me for whatever the real reason the US economy turned into negative territory... that is the story line ... growth at least based on this measure of the economy is slowing to a halt. I recognize this was only the first of three readings for Q4 GDP and they normally get revised... but it could get revised lower. One thing I have learned over many years is that one should never completely discount any signal... whether positive or negative like the market has done with the Q4 GDP number. It remains on my radar and one that may still come around and impact the market at some point.
This morning the always important and potentially market moving US nonfarm payroll number and headline unemployment rate will be released at 8:30 AM EST. The market consensus is looking for about 160,000 to 180,000 new jobs created (depending on which media poll you follow) with the unemployment rate dropping by 0.1% to 7.8%. The forecasts for today's number have been steadily increasing since the release of the much better than expected ADP private sector jobs number on Wednesday which showed 192,000 new private sector jobs created versus an expectations for about 175,000 new jobs.
The US nonfarm payroll data has always been an important number for the market. However, it has been elevated in importance since the US Fed has directly linked its accommodative monetary policy to a published unemployment threshold of 6.5%. They have indicated that they will continue printing money until the unemployment level drops below the 6.5% threshold. Chairman Bernanke has stated publically that he does not think that will occur until 2015.
That said with the equity market and many other risk asset markets approaching overbought conditions this data point could be a catalyst for a market correction. In fact we could see a market correction whether the data is good or bad. If any combination of the nonfarm payroll number underperforming versus the expectations (and last month) and/or a big increase in the headline unemployment rate would likely be interpreted as a sign that the US economic recovery could be stalling and thus result in a round of equity selling.
On the other hand if the data comes in better than expected the market will likely interpret it as a sign that the US economic recovery is growing at a faster than expected pace and thus a signal to the US Central Bank that they may have to begin to think about changing their very accommodating monetary policy including the massive amount of quantitative easing that is now in play including raising short term interest rates. So buckle up for a potentially volatile ride in the markets after the number is released this morning.
The big winner (on a percentage basis) of the risk assets listed in the EMI Investment Leader Board (table shown below) is RBOB gasoline for the month of January. In fact the oil complex fared pretty well in January gaining across the board with the spot WTI contract coming in a close second to RBOB gaining 6.13%. The Brent/WTI spread narrowed across with month (by about $1.18/bbl) as the spot Brent contract gained just 4%. The laggard in the oil complex was the heating oil contract as the winter heating season of 2012/2013 is once again warmer than normal for the second year in row... although not nearly as warm as last year's heating season.
Nat Gas was also a victim of warmer than normal temperatures across major portions of the US losing about 0.45% of its value in January. Although Nat Gas was relatively flat in a month that represents the heart of the winter heating season it certainly has performed much better than it did last January when the temperatures in many locations were considerably warmer than this year.
On the agricultural front corn was the big gainer as prices continue to benefit from the drought that hit the US this past year. That said the main ag market commodities have been moved to more of a downward trading channel during the last half of January.
Metals were mixed with gold losing ground for the month but silver gaining almost 4%. Precious metals traders and investors are still basing their long positions on the fact that massive amounts of easing are continuing from developed countries around the world and inflation may not be too far into the future. On the base metal side Copper gained a tad over 2% for the month as China... one of the largest consumers of copper has been showing signs that its economy may be starting to grow at an faster pace than last year.
Equities gained across the board with the US Dow gaining 5.77%. Investors have moved money back into equities in January for several reasons... decent macroeconomic data and thus a view that the global economy has turned the corner as well as decent corporate earnings with the expectation for earnings to continue to grow. Of interest the US Dow gained 5.77% for January while WTI gained 6.1% suggesting that the link between equities and oil prices seems to be back in play.
Finally the two big features in the currency markets have been the devaluing of the Japanese Yen (down 5.4% versus the US dollar) versus most currency pairs as Japan aggressively tries to inflate its way out of the deflationary state it has been in for decades. Also the euro gained 2.8% versus the US dollar as many traders and investors are starting to believe that the European sovereign debt issues that have plagued this region for over four years may finally be moving to the background.
Finally a good month for most risk asset markets but as I have already discussed in the newsletter many of these markets are currently overbought and susceptible to a round of profit taking selling at anytime. This is only the first month of the year and the gains experienced in some of these markets are not going to be repeated month in and month out without an interruption of selling and thus a downside correction. The higher these markets go the more important it is for you to protect your profits accumulated during the month of January.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a continued move to the upside now that the spot WTI contract has breached its upper resistance level once again. That said I am raising the caution flag that an equity market correction will impact oil prices in much the same way... round of profit taking selling.
I am keeping my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.
Yesterday's Nat Gas inventory came in below the market consensus but still above both last year and the five year average for the same week (see below for more details on the inventory report). The market viewed the data as bearish in that the market sold off about 2% shortly after the data was released. It also supports my view that I have discussed in the newsletter that this week's gain in prices were mostly driven by a short covering rally ahead of the expectation for a bullish inventory report today. Another way of looking at the reaction is a buy the rumor, sell the fact pattern.
Next week's inventory report is going to be based on a period that has experienced very warm weather over a major portion of the eastern half of the US and thus the inventory withdrawal is likely to underperform versus history. The latest NOAA six to ten day and eight to fourteen day forecasts remain bearish as they are both projecting above normal temperatures over a major portion of the US for the period Feb 4th through the 13th. Inventory withdrawals are likely to underperform versus history during the aforementioned timeframe. With the longer range forecast projecting March to experience above normal temperatures over most of the US... a sort of early spring... that does not leave much potential for a sustained winter cold spell. The fundamentals remain bearish and are likely to stay bearish based on the current weather forecasts for the rest of the official heating season which end at the end of March.
Markets are mixed heading in the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.