March 10, 2017

Stocks opened higher this morning, but quickly faded. The Dow is up 36 pts and the SPX is up .27%. Semiconductors (+1%) and gold miners (+.5) are up the most in early trading. Banks, biotechs and retailers are essentially flat, and energy stocks continue to slide. The VIX Index continues to languish under 12. The dollar is lower today and commodities are mixed. Gold is flat, copper is up .5% and WTI crude oil is down a bit to trade under $49/barrel. Bonds sold off immediately in response to the jobs report (see below), but since then have turned around. The 5-year Treasury yield is actually down a basis point to 2.11%. Ditto for the 10-year Treasury yield at 2.59%.   

The CEO of Royal Dutch Shell (RDSA) has just called peak demand in oil. “We have to acknowledge that oil demand will peak, and it could already be in the next decade.” Of course, the primary reason is that the cost of renewable energy is falling rapidly toward parity with fossil fuels. However, he also noted a cultural shift that threatens his industry. “Social acceptance” of fossil fuels is disappearing. “We’re under a lot of scrutiny and pressure. It is not a rational discussion anymore, it’s emotional.” And that means regulators and lawmakers around the world will over time make it tougher (i.e. more expensive) to produce fossil fuels. Shell is selling nearly all of its Canadian oil sands assets, and moving more into natural gas. 

Jim Cramer, on his show Mad Money last night, spent some time debunking the theory that this 8-year stock market rally has been primarily about the Federal Reserve’s easy money policies. He says the rally has instead fed on successes in corporate America and he pointed out specific innovations and strategies at companies like Alaska Air, Regeneron, CBS, Netflix, etc. Yes, the government did intervene to bail out some banks and they can probably now declare victory. 

According to the Bureau of Labor Statistics, the US economy generated 235,000 new jobs in February. That is significantly higher than economists were anticipating, even though the ADP report earlier this week was also outsized. January payrolls were revised slightly higher to 238,000. So the labor market has really strengthened so far in 2017. The unemployment rate (“U-3”) ticked down to 4.7% from 4.8% in the prior month. And the under-employment rate (“U-6”) fell to 9.2%, the lowest rate since April 2008. In addition, the labor participation rate, which has been falling steadily since 2000, actually picked up to 63.0%. The participation rate has been improving since November. And finally, we learned that wage inflation is accelerating. Average hourly earnings rose 2.8% y/y and that’s right up near the high end of the range we’ve seen over the last two years. Goldman Sachs’ Chief Economist Jan Hatzius acknowledged this is a very strong report, even though some of the payroll gains were probably weather related. Obviously, improvement in the labor market will encourage the Federal Reserve to normalize interest rates. He thinks the Federal Reserve will raise interest rates three times this year: March, June, and September.  

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