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And Crude Comes Tumbling Down: Weak Oil, ECB In Focus Ahead of Jobs Data

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March 9, 2017

(Thursday Market Open) Plunging crude oil prices and European central bank policy take center stage today as the market once again looks ready to post a slightly lower open. Still, trading may be a bit dull as everything comes down to tomorrow’s employment report.

U.S. crude oil prices fell below $50 a barrel to their lowest levels since mid-December early Thursday after the Energy Information Administration (EIA) reported an eight million-barrel rise in U.S. stockpiles last week. That was about four times as much as analysts had expected, and marked the ninth week in a row of inventory gains. As supplies keep posting new record highs, energy sector stocks now bring up the rear in sector performance year to date, down more than 6%. And crude prices fell 5% Wednesday, their sharpest daily decline in 13 months. Crude was down an additional 2% by early Thursday as many investors appeared to be unwinding their bullish bets.

The question is whether oil price weakness becomes prolonged and starts to affect energy companies’ 2017 earnings hopes. The sector, which saw earnings crumble last year, is widely expected to have earnings recover this year, as oil prices have doubled since a year ago and many big companies have easy comparisons to last year. Generally, analysts believe most U.S. oil companies can profit with crude above $50, but below that and the proposition may become dicier.

Also getting attention early Thursday was the European Central Bank’s (ECB) decision to leave rates unchanged at 0.0%. The ECB also said it would increase its quantitative easing program should the region's economic outlook worsen, and indicated the program has helped preserve favorable conditions.

Beyond rates, many investors may be watching to see whether ECB President Mario Draghi suggests eventual removal of accommodative policies given that Europe’s inflation rate has returned to its 2% target for the first time in four years, TheStreet.com reported. The central bank previously said it would reduce its monthly bond purchases to 60 billion euros in April from the current level of 80 billion. Draghi speaks in a press conference this morning. Europe’s economy represents a huge trading partner for the U.S., meaning policies and economic developments there can have a big impact on the U.S. stock market.

Tomorrow morning’s February Non-farm payrolls report is the last big data dump before next week’s Fed meeting. Odds of a rate hike stand at 88%, according to CME futures trading. While the wage component of the report bears watching (see below), it’s the headline jobs number that likely takes the spotlight, and Wall Street analysts’ consenus predicts that 188,000 jobs were created, Briefing.com said. That’s in line with recent months, though below January’s 227,000.

While the Fed tends to watch these jobs reports closely, it’s unlikely that any data, barring an absolute disaster, would change the Fed’s thought process about a rate hike at this late date. The hawkish signals heard last week from a number of Fed presidents and from Fed Chair Janet Yellen seem pretty convincing.

Crude Oil

FIGURE 1: CRASHING CRUDE.

The oil market, plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, took a big step back, falling 5% to its lowest levels since mid-December. Growing U.S. stockpiles have put pressure on crude, and on the energy sector as well. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Bond Fire: U.S. Treasury bonds, which had held stubbornly high over the last few weeks considering increasing odds of a March rate hike, finally retreated on Wednesday. Yields, which move in the opposite direction from the underlying bond, jumped to 2.56% for 10-Year Treasury notes by early Thursday. That’s near the post-election highs for yields and well above recent lows near 2.3%. Yields may have been somewhat depressed before Wednesday due in part to foreign bond buying, analysts said, with U.S. yields offering some of the best bang for the buck compared to yields overseas. Additionally, relatively low estimates for Q1 gross domestic product (GDP) growth may have helped support bonds. But Wednesday’s private sector jobs growth number from ADP, which reached nearly 300,000, may have changed some perspectives regarding the strength of the economy, despite some other less than stellar data recently.

Happy Birthday to the Bull… and Many More? Today is the eighth anniversary of the March 9, 2009, market low in the depths of the Great Recession. That was also the day that the current bull market began, and it’s now one of the longest bull markets in history. Valuations have gotten a bit stretched, but it looks like this bull may have more room to run, says Sam Stovall of CFRA. “Despite its age and rich valuation, this bull market does not appear to us to be ready to throw in the towel,” Stovall wrote this week in a research note. “Emergence from last year’s EPS recession, a still-attractive dividend-to-bond-yield relationship, subdued inflation-growth expectations, a Fed that is attempting to recalibrate the relationship between Fed funds and inflation but not restrain GDP growth, and the prospect for a substantial boost to GDP and EPS growth from tax reform should still allow this bull to gallop ahead, but at a reduced rate of speed, while also stumbling occasionally along the way.”

Watch Those Wages: Though the first number people tend to look at in a Non-farm payrolls report tends to be the headline jobs data, tomorrow’s report may be more notable for what it says about wages. Analysts’ consensus is for a 0.2% rise, Briefing.com said, but what could be interesting is if wages come in well above or well below expectations and how the market would react to that. A large gain in jobs that’s not accompanied by a big jump in wages could send a signal that the job market may not be tightening as much as might be expected. Normally, when the unemployment rate falls under 5%, that causes the workforce to tighten, forcing wages higher and putting more money in peoples’ pockets. It would be good to see wage growth of around 0.3% or higher, which would likely be a sign that employees are enjoying the benefits of the growing economy and have more purchasing power to keep the economy humming along.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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