US markets were closed for Presidents Day. From the standpoint of the economic calendar this week, Thursday should provide the lion’s share of the economic data investors are most eager to see (aside from the release of the FOMC minutes on Wednesday afternoon).
Durable goods for the month of December are due out at 8:30 am. Econoday consensus is +1.2% versus November’s +0.8%. Ex-transportation, Dec. +0.3% versus Nov. -0.3%, core capital goods Dec. +0.1% versus Nov. -0.6%. Clearly, Econoday consensus is calling for a rebound in the durable goods vertical in December versus November. Given that durable goods orders represent orders placed with domestic manufacturers for factory hard goods, this data point is very central to the current thesis that the US economy is continuing to expand at a healthy pace.
Weekly jobless claims for the week ending 2/16 are expected to reflect continued tightness in the job market. Econoday consensus is 225k, which is a tick lower than the previous week’s partial federal government shutdown influenced 239k.
Also on Thursday, the US existing home sales data for January is due out. In December, the report reflected softening demand with the M/M reading coming in at -6.4%, while the Y/Y reading was a more dramatic -10.3%. In large part, the softness that was reflected in the M/M reading has to do with the seasonal demand weakness – which is historically slow during the post-holiday season. Additionally though, reflected in the data was a continued slowdown in home sales on a Y/Y basis due to the interest rate landscape, product pricing, and supply constraints.
Leading Indicators for January is arguably the most forward-looking release of the week. According to Econoday, “Leading indicators is a composite of 10 forward-looking components including building permits, new factory orders, and unemployment claims. The report attempts to predict general economic conditions six months out.” Econoday is calling for January’s reading to be 0.2% versus December’s -0.1%.
What’s the deal with crude oil?
As we have discussed in recent posts, the EIA petroleum status report has reflected relative equilibrium between production and consumption, as measured by the moves in weekly inventories of WTI crude, distillates, and gasoline. Last week, crude inventories rose by 3.6M bbl, gasoline inventories were flat, and distillate inventories rose by 1.2M bbl.
Since reaching a 52-week high of $76.42/bbl on October 3, 2018, crude has seen a reversal of fortunes. In the months leading up to October, I frequently called for crude to rally to the $70/bbl level and fail. Though WTI crude did in fact rally to that $70/bbl price point, it also traded higher as the chart above illustrates. Ultimately the rally stalled, reversing to December 24th’s 52-week low of $42.53/bbl. It has subsequently moved higher — seemingly in lockstep with US equities. The rebound in WTI pricing is likely to be range-bound in the near term.
Several factors will have a dampening impact on crude prices in coming quarters. As has been evidenced by recent industrial production data releases from most industrialized global economies — China, Japan, Germany, and the EU, broadly speaking — global industrial production and global GDP have been under pressure in recent quarters. That global slowdown will negatively impact crude oil demand and pricing. Ultimately, however, potentially the largest impact on global crude oil pricing will come from the US.
US shale production is on the verge of increasing dramatically again, according to Investors Business Daily. The Permian basin in Texas is about to become the beneficiary of massive vertical integration, including refining on the part of big oil – specifically Chevron and Exxon. That integration will lead to increased efficiency, lower production costs, and increased output. A strategic component of that shift is due not only to integration, but also to pipeline production that is on the cusp of coming in line. Increased US shale oil production will again put downward pressure on crude prices – though not the to the extent we saw in 2014.
Equities leg up:
US equity markets were led higher last week and on Friday in particular, by the Dow Industrials. Interestingly, the Russell also provided leadership. On Friday, the Dow and Russell both rose 1.7%. That is not common. Either the dividend-heavy Dow leads the market (which has been the case over the past eight weeks), or the small-cap dividend sparse Russell leads. That barbell of leadership between the Dow and Russell will likely lead to more upside this holiday-shortened trading week. Another interesting point to consider is that Fridays tend to be trading sessions that reflect the predominant outlook for the street. Fridays generally see risk-off in times of uncertainty. The opposite is also the case. Risk-on dominates Fridays in the event traders are inclined to have a more constructive outlook over the near term.
Sectors that have continued to provide leadership for the broader market include financials.
The move higher posted by the financial sector on Friday can most easily be seen in the performances of Goldman Sachs, Bank of America, Bank of New York Mellon, and Morgan Stanley. Another standout sector for the week came from energy/oil.
This week’s earnings calendar will have a decidedly energy-centric focus, though as we move deeper into earnings season reports become increasingly more diffuse and less sector-focused. Continental Resources (CLR), Transocean (RIG), and Diamondback Energy (FANG) report.
Flickr photo: camaroeric1
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