May 13, 2011

Oil, The Dollar, and Weak Economic Data

May 12, 2011

Please note that this was originally posted May 12, but due to technical issues with Blogger I have reposted it on May 13, 2011.

Today is macro Thursday, with a slew of economic reports coming out. In aggregate the reports were in line to slightly worse than expected. Equity futures are down this morning after a rough market yesterday culminated in a 1.5% selloff. APAC markets were hit hard last night after the big selloff in the US, and EMEA markets are following suit today. Commodities are also off again today as the markets continue their defensive rotation.

Initial jobless claims were slightly higher than expected, still well above 400K at 434K. The producer price index spiked up on higher fuel costs, rising by 6.8% vs. expectations of 6.5%. Advance retail sales were slightly less than expectations at 0.5% vs. 0.6%, but ex-auto and gas rose only 0.2% vs. expectations of 0.5%. CPI and the Michigan Consumer Sentiment indicator will both be released tomorrow.

Oil has pulled back over the past two weeks, from a peak of almost $114 (WTI) on April 29 to $97.50 today. Unfortunately consumers still aren’t seeing much relief at the pump as gasoline prices have spiked in recent weeks (until yesterday) over flooding concerns along the Mississippi. Flood waters are threatening major refining facilities, keeping upward pressure on the price of US gasoline. The gasoline pressure should be temporary, and if the oil pullback holds, we should begin to see some relief at the pump. Yesterday gasoline futures plummeted almost 8% after a government report showed that Americans have cut back on their driving and demand fell by 2.4%.

I have looked at various historical market patterns to get an idea of what market environment our present situation best represents. I am biased towards the ‘70’s as an economic and market analogy for today’ environment, however, Ron Geiss at posted the chart below comparing our present situation to that of 1907-1911. The market action has been similar to date, let’s hope that the future doesn’t mirror the past.

The IMF issued its semiannual report, and one quote was quite disturbing. “Strong policy responses have successfully contained the sovereign debt and financial sector troubles in the euro area periphery so far, but contagion to the core euro area, and then onward to emerging Europe, remains an tangible downside risk.”

The dollar has been week all year, and really weak going back to the middle of 2010. As the chart below (courtesy shows, the dollar’s recent rally has put it up against a falling channel, a very powerful technical pattern utilized by currency traders. How the dollar acts as it bumps up against this resistance will more than likely determine how the equity, commodity, and bond markets act over the second half of 2011.

News from Japan has been rather muted as the cleanup begins and companies attempt to get back to full operation. Yesterday TEPCO reported that the fuel rods at its #1 reactor are fully exposed, and the company isn’t sure how long they have been uncovered but indications are that they have been uncovered since the crisis hit. In this state the rods are probably in full reaction as officials reported that melted fuel has dropped to the bottom of the pressure vessel. They are hoping to shut down the #1, #2 and #3 reactors by October.

Raj Rajaratnam was found guilty on 14 counts of securities fraud and conspiracy charges in an insider trading case. Raj faces up to 20 years in prison when he is sentenced. Shameless greed like that of Raj and his conspirators give our business a bad name, and I’m glad to see he was duly prosecuted, even though the whole situation is unfortunate.

Have a great day


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