3/3/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.
Oil prices are down about 1% overnight after the Arab League reported that a Libyan peace plan was being considered. The market is understandably skeptical for a prompt resolution to the conflict, limiting oil declines and keeping U.S. crude over $100. Nonetheless, the drop is being well received by market participants, as are lower jobless claims and mostly better-than-expected same-store sales from 23 reporting retailers. European markets are solidly higher in mid-day trading on some positive corporate news despite tough talk on inflation by ECB Chief Trichet, while the Japanese and Hong Kong indexes closed higher on the welcomed oil relief. Elsewhere in the commodity complex, gold and silver are down about 1% as some unwind profitable safe-haven trades. Copper is up about 1% on economic optimism, while agriculture commodities are broadly higher.
Looking back at Wednesday, stocks rose as good jobs news outweighed higher crude. The broad U.S. stock averages finished Wednesday’s session marginally higher despite another jump in oil prices. There wasn’t a ton of news to turn the market’s attention away from the turmoil overseas, but a strong ADP jobs report helped. The Fed’s Beige Book offered no surprises, which helped keep stocks in positive territory through the end of the day. Sector differentiation was minimal, with eight sectors up between 0.2% and 0.5%, led by Technology, Industrials and Energy. Consumer Staples and Financials finished in the red, with weakness concentrated in Food & Staples, Retail, Beverages, Insurance and REITS.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
What about the recent oil spike and its impact on the economy and your job? Generally speaking, rising oil prices reflect buoyant demand growth rather than threaten it. It is worth noting that the last five oil price spikes were all followed by global recessions. However, when looking at these periods relative to today, it appears that growth may slow modestly, but it does not look as if a recession is likely to follow the run up in crude. This oil spike has been much smaller than the past five episodes when the average gain was about 150% over six months. By comparison, oil has risen about 38% in the past six months. It would take a more substantial advance in oil prices to threaten growth. Also, the oil price spikes of the 1970s were the result of OPEC oil embargoes which shut off oil to the United States rather than merely making it more expensive. Supply shocks pushing up prices have a far more negative economic effect than rising prices that reflect buoyant global demand.
The February jobs report is due out tomorrow. The market is looking for a gain of 200,000 jobs in February after weather held employment to a gain of just 36,000 in January. Markets will likely average the January and February job counts to get a better sense of the underlying health of the job market in early 2011. A two-month average above 200,000, or below 100,000, would likely be market-moving.
Treasuries sold off after the release of yesterday’s Beige Book, which highlighted building inflation pressures. Yields increased by 5 to 6 basis points across the curve, primarily as a result of an increase in inflation expectations. Treasury yields continued to move higher this morning, following better-than-expected jobless claims data, with the benchmark 10-year note yield up to 3.52%, its highest level in two weeks. Later today the Treasury will announce sizes of next week’s 3-,10-, and 30-year auctions. Spain today successfully auctioned 3.8 billion euros of government bonds, with increased demand and lower yields versus a month ago. European Union leaders will meet at the end of the month to address the debt crisis. Greece and Ireland appealed for a reduction in the interest rates of their emergency loans, but Germany appears unwilling to make concessions.
The decline in weekly filings for unemployment insurance is another sign that the labor market is improving. 368,000 individuals filed for unemployment insurance in the week ending February 26th, the fewest number of filings in a week since May 2008 when the unemployment rate was around 5%. This week’s initial claims data appear to be relatively free of distortion from holidays and/or weather. Claims in the 325,000 to 350,000 area are consistent with job growth in the 200,000+ range, so claims still have a bit further to fall to convince markets that the labor market is fully healed.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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