Closing Market Summary: Investors Hit Pause on ThursdayInvestors took a breather on Thursday, pulling the S&P 500 and Nasdaq away from their freshly-minted record highs after seven consecutive advances. The pullback was modest in scope, leaving the S&P 500 and the Nasdaq lower by 0.2% while the Dow (unch) resisted, eking out a slight gain.
The Treasury market, which had posted six consecutive losses coming into Thursday, also reversed its recent ways. Treasuries finished higher across the board with shorter-dated issues showing relative strength in a yield-curve steepening trade. The benchmark 10-yr yield closed five basis points lower at 2.45% while the 2-yr yield finished lower by seven basis points at 1.20%.
The recent losing streak aside, the Treasuries' uptick was somewhat surprising given today's strong economic data; Housing Starts (1246K; consensus 1220K), Initial Claims (239K; Briefing.com consensus 245K), and the Philadelphia Fed Index (43.3; consensus 17.5) all surpassed estimates.
However, the hotter than expected readings turned out to be a non-event, at least for now, considering the market's updated rate hike expectations. The fed funds futures market is once again pointing to June as the most likely time for the next hike to be announced. The implied probability of a June hike sits at 73.9%, down from yesterday's 76.2% while the implied likelihood of a hike in May is down to 47.1%.
Earnings news was relatively quiet today as nearly 80.0% of S&P 500 components have already reported their results. However, Cisco Systems (CSCO 33.60, +0.78) did make a splash with its latest report. CSCO shares jumped 2.4% after the company raised its dividend and reported better than expected earnings.
Cisco's upbeat performance supported a modest gain in the technology sector (+0.2%), which finished with industrials (unch) as the only cyclical spaces to close in the green.
Utilities (+1.0%) closed at the top of the leaderboard, thanks to the downtick in Treasury yields and a positive reaction to Duke Energy's (DUK 78.90, +2.12) latest earnings report. Shares of DUK climbed 2.8% despite the company's earnings per share miss.
Real estate (+0.4%), telecom services (+0.5%), and consumer staples (+0.1%) also finished higher, while health care (-0.1%) could not keep up with its countercyclical peers.
The remaining sectors—financials, consumer discretionary, materials, and energy—finished with losses between 0.1% (materials) and 1.4% (energy).
The energy space's slip came despite crude oil's 0.6% advance. The commodity closed at $53.41/bbl after news that OPEC is mulling a production cut extension & could potentially cut more than previously expected.
Today's economic data included January Housing Starts, Initial Claims, and the Philadelphia Fed Index for February:
- Housing starts decreased to a seasonally adjusted annualized rate of 1.246 million units in January, down from a revised 1.279 million units in December (from 1.226 million). The consensus expected starts to decrease to 1.220 million units. Building permits increased to a seasonally adjusted 1.285 million in January from a revised 1.228 million (from 1.210 million) for December. Th consensus expected a reading of 1.230 million.
- The key takeaway is that, absent the December revision, starts would have increased month-over-month, which is to say the headline decline isn't as disappointing as it might sound at first bl
- The latest weekly initial jobless claims count totaled 239,000 while the consensus expected a reading of 245,000. Today's tally was above the unrevised prior week count of 234,000. As for continuing claims, they declined to 2.076 million from the revised count of 2.079 million (from 2.078 million).
- The key takeaway from the report is that initial claims continue to be stuck at low levels historically, which is a good portent for nonfarm payroll growth.
- The Philadelphia Fed Survey for February rose to 43.3 from an unrevised 23.6 in January while economists polled by had expected a reading of 17.5.
- The key takeaway from the report is that manufacturing activity is proceeding at a healthy pace in the Philadelphia Fed region.
Friday's lone economic report, January Leading Indicators (consensus 0.5%), will be released at 10:00 am ET.
- Nasdaq Composite +8.0% YTD
- S&P 500 +4.8% YTD
- Dow Jones Industrial Average +4.3% YTD
- Russell 2000 +3.1% YTD
How Saudis Cut Oil Output Without Really Cutting
Saudi oil output has been cut but so has consumption, making their cuts less costly
Saudi Arabia has led the way among major energy exporters in cutting oil production. At the same time, the kingdom is adding to global supply in a surprising way.
The deal to cut oil output has been a success, at least for its first month, largely because there was little cheating and because Saudi Arabia cut production by 500,000 barrels a day.
Don’t ignore the other side of the ledger, though: the Saudis, huge consumers of energy themselves, are economizing. That could allow them to export more.
In 2015, the average Saudi resident used 50 barrels of crude or some five times more than a slightly wealthier Swiss. Oil consumption jumped 77% for Saudi Arabia in the 10 years through 2015, topping even China, which grew 72%, according to data from BP.
Saudi Arabia is far less populous but, even in absolute terms, those incremental barrels were the equivalent of adding another France’s worth of oil demand.
Per capita oil consumption is a function not only of wealth but also local incentives. Petrostates have some of the lowest pump prices in the world because local populations view cheap fuel as a birthright. As a result, Kuwait, which is about as wealthy as South Korea, uses nearly four times as much oil per capita. Gasoline retail prices are just a fourth as high.
But, in the case of Saudi Arabia, it goes beyond motor fuels. For example, the country has long flared off huge quantities of gas and left untouched reserves that could more easily be used to generate electricity. The Saudi Energy Efficiency Center says fuel consumed for power has grown by 135 million barrels of oil equivalent annually over the past eight years.
The latter is changing as part of the country’s “Vision 2030” initiative. One big gas and power project that came online in 2016 helped reduce demand for oil to generate electricity last summer by the equivalent to Ireland’s daily crude demand. Solar projects are also taking off in the sunny country with the goal of meeting 20% of power needs in 15 years. Local demand for motor fuel may moderate following a 50% gasoline price increase, freeing up more Saudi crude and crude products for export.
Add it all up and in the first 11 months of 2016 Saudi Arabia’s actual domestic consumption of unrefined crude oil and its increase in production left a combined 3.5 million additional barrels available for refining or export compared with 2015, according to data from the Joint Organisations Data Initiative.
No wonder the Saudis are so enthusiastic about cutting output to support prices.