Last Week’s Highlights:

Stocks:                               Crushed on employment           

VIX                                   Higher at 23

Bonds:                               10-yr rally to 3.95%

Oil:                                    New highs - $138

Regular Gas                     National average now above $4 per gallon

Dollar:                               Weakness on employment – 1.59 euro

Employment                    Surprise weakness – 5.5% unemployment

Economics This Week:

Date      Item                                  Est.                     Comment

6/12      Retail Sales                      0.5%                    Slight improvement seen

6/13      CPI                                    0.2%/0.5%        Lifting again on energy

Employment & Oil Lead the Way Lower:

Last week all was good, the GDP data pointed to better times, oil appeared to be trending lower, and stability was back in the market in most sectors.  Indeed, I even suggested that maybe this summer would let us all breathe a bit easier. Ah, what a difference just a few days can make.

We open today on last Friday’s heels of a 394 point loss on the Dow, oil at new highs above $138 per barrel and going to $140 and, of course, the prospects of deteriorating employment.  Add to that the heat wave in the East and you have a lot of very uncomfortable people heading to Wall Street this week in face of a truck load of tough economic news.

Let’s look at the employment scene first because it was that piece of juicy data that really sent the financial markets south. The market had expected an unemployment rate of 5.1%. What it got was a 5.5% rate and a loss of about 50k jobs (that was in line with expectations, by the way). This was the largest one month move since 1986. That shocker was enough to move the equity market lower right from the start and it didn’t let up until the very last trade. The read from most economists seems to suggest that, while a sign of a slowing economy, the jobs loss at 50k was not that bad, and possibly the unemployment rate may be revised back down next month. In addition, the data is still not showing large-scale layoffs despite the headline news regarding layoffs at some of the financial institutions and auto makers.  The reality is the Wall Street remains on a short fuse, and the news last Friday was just the sort of thing that can light that fuse. 

Oil Dominates the Market

While the employment data was certainly a surprise, the larger factor for Friday’s sell-off was the advance in oil prices. The July contract rose $10.75, (8.4%) on Friday with an all-time high close above $138. During the trading session it almost reached $140 and may be on track to do so early this week. The move higher was, in large part, pushed forward by rumors that Israel might attack Iran to stop its nuke program. What this shows is just how vulnerable oil prices have become in the last few months to event news – and we haven’t even had a hurricane yet. Add to that the decline in the dollar to 1.58 euro and you have all the ingredients for the very powerful (and negative) financial market reaction we saw Friday.

Our opinion is that – though the news on Friday was not positive – the market reaction was probably a bit over the top.  As we open this week, prices already appear to be showing some rebound rally characteristics, but the downstream challenge of higher inflation due to energy prices is and will be a reality in the foreseeable future. The Fed knows this and, of course, we all know it every time we fill up the car these days. Unfortunately, it won’t get better any time soon, even with conservation and lower energy demand. This means we are most likely looking at higher gas prices – and higher prices on nearly everything we buy – for the rest of this year. This has already shaped the Fed’s inflation concerns and monetary outlook, which means the market can’t look to them for further interest rate cuts. This is clearly seen in the fed funds futures market.  So, one has to ask, “Is all the bad news finally in the market?” You would have thought so a few weeks ago but it’s less certain today, and the market will react to that uncertainty with volatility and unexpected pricing – higher and lower, in the near-term.

Source: Cleveland Fed

Lighter Side:  Your New Gas Gauge

Source: Internet

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