Equity markets at home and abroad retreated last week as lingering signs of sluggish global economic growth moved many investors to the sidelines. The Chicago Board Options Exchange (“CBOE”) volatility index fell on the week to 15.6 from 16.26, while the yield on the 10-year US Treasury note declined to 1.76% from 1.85%. West Texas Intermediate crude prices dropped to $44.35 from $46.22 a week ago, and global Brent crude prices fell to $45.03 from $48.11.
Whatever slim chance that the US Federal Reserve might yet raise rates in June went by the boards on Friday, when the US Department of Labor released underwhelming employment numbers. Nonfarm payrolls rose 160,000, falling short of the 200,000 consensus. Downward revisions to the prior two months' data trimmed another 19,000 jobs. The unemployment rate held steady at 5.0% while the participation rate dipped to 62.8% from 63.0%. The silver lining in the otherwise dark labor cloud was a 2.4% rise in average hourly earnings on an annual rate. Futures markets are now pricing in a meager 4% chance of a Fed rate hike next month.
The rest of the world was no help on the economic front. J.P. Morgan's composite global manufacturing purchasing managers' index, which aggregates PMI data from around the world, registered 50.1 in April, just above the breakeven line of 50. US manufacturing expanded less vigorously in April, as did manufacturing activity in China, the United Kingdom, and Japan. The “bad news is good news” trade is still in play for the time being, as sluggish growth should keep central banks in “lower-for-longer” mode for the foreseeable future.
Oil prices, the other pillar of bullish support for the market, have recovered dramatically from February lows, fueled by a combination of US dollar weakness and falling US supplies, primarily from higher cost shale basins. This bullish development for the price of crude has been taking place even though OPEC, the Saudi-led global oil cartel, has been made ineffective by its regional rivalry with Iran. With leadership changes within Saudi Arabia’s oil industry over the weekend that further consolidate the new deputy crown prince’s hold over the country’s energy policy, chances are slim for supply cuts coming from the Middle East.
So why are crude prices holding up for the moment in the face of potential excess Middle East supply? That answer is found in headlines from our neighbor to the north. Crude oil production near Fort McMurray, Alberta, Canada, has been severely disrupted and nearly 90,000 inhabitants have been evacuated as a result of massive wildfires in the region. Crude prices drifted higher earlier in the week on the shutdown, but weak economic data knocked prices back on Friday.
The offline Canadian volumes will eventually come back, however, and the worst is probably behind us in the oil market – though we acknowledge the worst may yet to be for those directly affected by these tragic fires. Many experts expect oil to stabilize around current levels through the summer, and to begin to inch higher in the second half of the year on the back of reduced supply overhang. In a world where markets were feeling high anxiety about collapsing crude prices last year and earlier this year, that is good news. For those of us who have enjoyed lower prices at the pump, not so much.