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Follow the Oil: Can Rising Crude Lift Equities Ahead of Friday Jobs Data?

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October 5, 2016

(Wednesday Market Open) Fed speakers and a hard-charging oil market took center stage early Wednesday, but the main event of the week remains Friday’s jobs report.

Oil continued its steady ascent early Wednesday, creeping within sight of $50 a barrel for U.S. crude. The oil rally appeared to lend stock futures some strength before the open.

Also before the open, investors received a potential preview of Friday’s Non-farm payrolls report when ADP released its National Employment report. The ADP reported 154,000 jobs created in September, a little below the 166,000 expected by analysts. The number is interesting to look at, but really pales in importance compared to Friday’s government figure.

In fact, most of the data this week can be viewed through that same prism. Unless something comes in way above or way below expectations, they’re just data points. The real number comes Friday, and that’s when investors get something major to trade on with the jobs report.

Fed speakers remain in focus today, as Richmond Fed President Jeffrey Lacker and Minneapolis Fed President Neel Kashkari are expected to speak. Hawkish remarks by various Fed members continue to filter through the markets, and CME Group futures now show about a 60% chance of a December rate hike. Still, volatility seems relatively muted, with CBOE VIX futures trading down early Wednesday at 13.23, not far above last week’s lows.

The crude oil market climbed to four-month highs early Wednesday and U.S. prices are approaching the $50 per barrel mark for the first time since June. Oil’s rally could be lending support to the stock market, as the correlation between oil and stocks appears to be in place, at least for now. Continued concern about possible production cuts by OPEC, as well as some technical action, seem to be driving oil prices, analysts said, as are falling U.S. supplies. The weekly government stockpiles report comes today, following the American Petroleum Institute (API) saying stockpiles fell more than 7 million barrels last week. Supplies have now fallen five-consecutive weeks. Fifty dollars a barrel remains the key figure to watch, so let’s see if oil can rise solidly above that, something the market hasn’t been able to do in some time.

While oil continued to climb, gold had a horrible day Tuesday, falling to three-month lows thanks in part to strength in the U.S. dollar. The weakness in gold, which eased slightly early Wednesday, put the materials sector into a free fall, sending it down more than 1.5% and putting it among the biggest sector losers of the day on Tuesday. Gold miners took the hardest hit. But it was far from the worst sector, with real estate, utilities, and telecommunication services all falling more than 1%.

Weakness across the markets Tuesday may also have stemmed from reports out of Europe that the European Central Bank was considering winding down quantitative easing (QE) efforts sooner than originally planned. A hawkish tone from some Fed speakers also contributed to pressure on stocks, and two more Fed speakers are scheduled Wednesday.

The only sector to rise Tuesday was financials, and that was just a smidgen. The widespread weakness across almost every sector of the market was enough to take the S&P 500 Index (SPX) down below key support at 2150 for part of the day, but the index did recover to finish right at that level, holding on by the skin of its teeth. So it’s safe to say the support there was bent but not broken. Let’s see if it can hold on to fight another day. Sometimes, when technical support is breached, it can set off increased selling, so it’s something to watch out for.

What’s giving the greenback strength here? It may instead be a question of what’s ailing other currencies, like the British pound, which remains at 31-year lows on worries about a possible early Brexit. The pound recovered slightly overnight but remains under pressure.

Factory orders are scheduled at 10 a.m. ET today, and the question is whether the number could build on the relatively strong manufacturing data from earlier this week. Wall Street analysts’ consensus is for a 0.1% rise in August factory orders, according to Briefing.com, a bit tepid after climbing 1.9% in July. The report isn’t likely to be a market mover, but it serves as a point of interest.

S&P 500

FIGURE 1: SUPPORT HOLDS FOR NOW.

The S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim® platform, fell below 2150 support at times Tuesday, but closed right at that level, perhaps suggesting that support there is relatively firm. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Survey Says! Early estimates are coming in ahead of Friday’s Non-farm payrolls report. Analysts polled by The Wall Street Journal landed at an average estimate for job growth of 170,000 in September; a little better than the below-expectations 151,000 figure for August, but not in the 200,000 or above area that we saw in June and July. The same analysts polled by the newspaper expect the unemployment rate to be unchanged at 4.9%. Analysts at Briefing.com are a bit more bullish, with a prediction of 190,000 new jobs. Briefing.com also sees wage growth picking up slightly to 0.2% in September, from 0.1% in August. Average weekly work hours may rise slightly as well, Briefing.com said.

Moving the Chains: Besides jobs data on Friday, the other report to watch later this week is chain store sales on Thursday. Last week’s earnings from Costco (COST) and Nike (NIKE) provided some early feedback on consumer health in the prior few months, and Thursday’s report may shed more light as the main part of earnings season draws close. Consumer confidence reached multi-year highs recently, so does that mean consumers flocked to the stores? We’ll see.

Pacing the Sidelines: Ah, pity the poor Fed presidents who sit on the sidelines at each Federal Open Market Committee (FOMC) meeting, perhaps muttering under their collective breath as voting members make the decisions. That could be an apt description of Richmond Federal Reserve President Jeffrey Lacker, a non-voting member this year, who said Tuesday that if he’d had a vote last month, he would have voted in favor of a rate hike. "I would have dissented," Lacker told reporters in Charleston, West Virginia, where he gave a speech on the economic outlook Tuesday, Reuters reported.

Lacker argued economic history suggests the fed funds rate might need to be higher than 1.5 percent at present. That compares to the current level of between 0.25% and 0.5%. He warned that keeping rates too low could lead to a rise in inflation and aggressive rate hikes, potentially causing a recession.

"This is the basis for the strong case I have articulated for raising our interest rate above its current low level," he said, according to Reuters. Lacker is scheduled to speak again Wednesday.

Several voting members seemed to agree with Lacker, voting to raise rates at the September FOMC meeting. But the majority decided to hold off. Even if rates do rise, as futures markets suggest they might by end of year, the market anticipates just a 0.25% increase, meaning rates would still have a long way to go to reach the 1.5% level Lacker referred to. Next Wednesday, Oct. 12, the release of the Fed’s minutes from the September meeting may provide investors with further insight into what drove the September decision.

Good Trading,
JJ
@TDAJJKinahan

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