by Shawn Narancich, CFA
Vice President of Research
Paying up for “The Scream” When payroll processor ADP releases its monthly tally of net job changes for private sector clients, Wall Street reacts to the data as an advance read on the Labor Department’s more widely followed payroll report. The ADP number often misses the mark substantially, but in April, the softer labor market predicted by the measure was spot-on and contradicted an encouraging drop in weekly unemployment claims. Perhaps it was fitting that a painting dubbed “The Scream” garnered a record high $120 million winning bid in a week when investors were disquieted by a payroll report showing a second consecutive month of weaker job growth, with the reported 115,000 gain in net non-farm jobs only 3,000 off the number reported by ADP. Government job cuts again dampened job creation and one also has to wonder if the unusually warm winter pulled forward the demand for labor into January and February. In either case, investors took little solace in the unemployment rate dropping a tenth of a percent to 8.1 percent because evidence indicates the drop was caused by discouraged job seekers exiting the workforce. The cyclical energy and technology sectors led the way down in a sell-off to conclude a week when bonds rallied and stocks fell by over 2 percent. If not for a surprisingly strong uptick in the monthly Purchasing Managers Index gauging the level of domestic manufacturing activity, losses would likely have been worse.
Markets Working Their Magic Amidst the decline in risky assets, natural gas stands out, and this time it isn’t for being pilloried by Wall Street for its ubiquity, but for the fact that it has now rallied 20 percent in the past eight trading days during a time when worries about an economic slowdown have pushed benchmark crude prices down by over 4 percent. On Tuesday, the cleaner burning commodity responded to a Department of Energy report showing that production in the lower 48 states declined by 0.6 percent in February when compared with the previous month, the largest such decrease in a year. Anecdotal evidence of a tightening market came from gas production leaders Exxon Mobil and EnCana, which reported voluntary cutbacks in output while at the same time adding to the cacophony of producers telling investors that their capital spending budgets are going almost entirely to finding and developing crude oil and natural gas liquids. On the demand front, usage is skyrocketing as utilities mothball coal-fired power plants and crank up their natural gas-fired generators that in many cases were used only to serve peak loads. Accordingly, February data showed that natural gas used to generate electricity rose by 35 percent. Two other demand sources loom large: natural gas used to fuel commercial trucks and export demand for liquefied natural gas (LNG). Judging by the jockeying we’ve seen by companies ranging from Cummins, which has successfully developed a compressed natural gas engine for Class 8 trucks, to large utilities like Sempra Energy and Dominion Resources that are already lining up LNG customers for new export facilities, these emerging markets should help tighten the supply-demand equation more than is commonly presumed by $2.38 gas.
Closing the Door on Another Earnings Season Nearly 85 percent of the S&P 500 has now reported what has turned out to be another strong quarter of earnings, with upper single-digit profit growth accompanied by earnings estimates that have gravitated upward on the encouraging numbers. Investors will now begin to focus more on the continuing flow of economic data and geo-political developments to gauge whether corporations can continue to drive the type of profit growth demonstrated in the first quarter. In this environment of heightened economic uncertainty, one factor looms large—the approach of what has been deemed the “Fiscal Cliff” whereby the Bush tax cuts, the payroll tax cut, and sequestration-driven spending cuts threaten to ding the economy by as much as 3 percent of GDP next year.
Our Takeaways from the Week
- Stock prices have softened with the labor markets amid less favorable economic data
- Natural gas is bucking the trend of lower commodity prices