Gold, Oil, U.S. Equities, Data And The Fed Digestive Track

As markets continue tor respond to yesterday’s Federal Reserve press release and comments, they also are digesting data that said the U.S. economy grew at a 2.3% rate in the second quarter. The anemic growth in the first quarter was revised slightly upward. But, at the same time, growth in the three previous years was revised down.

Jobless claims increased modestly by 12,000 to 267,000 in the period ending July 25, up from 255,000 the prior week. That was the lowest since November 1973, a report from the Labor Department showed Thursday. The median forecast of 46 economists surveyed by Bloomberg called for 270,000 new jobless claims. The less-volatile measure of job cuts – the four-week moving average – declined.

Dismissals holding below 300,000 plus sustained hiring would help convince Federal Reserve policy makers that the economy can withstand an increase in the benchmark interest rate.

Gold reacted to the Fed statement with a mild case of the willies. It was down as low as $1081 per ounce and rose as high as $1095. Atr 3PM, New York time, gold is trading down about $8.00 at 1087.

Crude oil also fell, mostly on renewed vigor in the U.S. dollar. (The dollar is up about 0.65% against the euro.) A month ago a barrel of West Texas Intermediate was trading around $60. Today it is under $49 and tending lower. WTI has fallen by almost 50% in the last twelve months, as well. Brent North Sea has been following WTI in a virtually identical trend, although as usual it is trading at a $4 to $5 premium above Texas.

There are countless wild predictions about crude right now, estimates ranging from $30 on the low end to $100 on the high end. We don’t think much will be settled until after the summer driving season in the northern hemisphere ends, particularly in the U.S. and Canada. Demand for gasoline and therefore oil will diminish early in September. Till then, predictions of any extreme price points are useless. 

We see crude moving lower but not without many pauses and reverses of direction. $50 to $51 looks solid on fundamentals while $45 to $43 looks possible on the downside. 

U.S. equities were weighed down by poor earnings results from P&G, Cigna and InBev. As we’ve said before, though, we consider these to be hiccups and earnings growth should turn more positive for Q3. For a while the Dow was down over 100 points. As the afternoon wore on, however, it has recovered to near even. The NASDAQ was down initially on strange news from Facebook, which showed top and bottom line growth but also said expenses were outlandishly high. The FB news pushed NASDAQ down about 4% at one point but it is in positive territory as we approach 3 o’clock.

Of great interest to those of us watching the Fed is a report that says new housing is not being built at nearly a fast enough pace. This is driving up existing home prices precipitously. That sounds like hawkish news for Fed reckoning of interest-rate-rise timing. We think it’s actually dovish because at some point the pent-up demand will be satisfied by the construction sector and millions of new homes will enter the marketplace. Presumably, that will drive housing costs off their lofty perch.

Bond yields have taken a middle of the road approach to the Fed news and other data. The yield on the 10-year benchmark is down practically imperceptibly (0.002).
Look for more digestive gas tomorrow and into next week. We think there will be volatility, but within a well-defined range.