Oil Hits 4-Month Low On Possible Virus-Related Economic Weakness

The week begins with Wall Street vacillating between signs of an improving economy and worries about the Delta variant.

This morning, the bias seems to be a bit lower. Maybe that’s in part because of a sharp decline in crude prices to the lowest level since May, below $66 a barrel. Weaker crude demand could indicate worries about falling economic growth both here and in China, where new virus cases are starting to rise. Some of the so-called “horsemen of risk” moved in a bearish direction, with Treasury yields and crude lower early Monday, while volatility edges up.

None of the moves aside from crude looked like anything major to get too excited about, at least for now. While things are a bit lower this morning, we’ve had 44 record closes this year, and arguably the “market that no one wants to like” remains in an upswing. Having a “down” day is nothing unusual, even in an “up” market, so consider taking losses in stride.

Delta remains the big focus. Vaccination rates are improving, but hospitalization and death rates have been rising, too. Basically, we know a way to mitigate the impact of the virus through vaccination, so Wall Street appears to be focused on the vaccination rate across the country picking up pretty significantly. This could help explain why stocks have generally behaved well despite the growing caseloads.

Some analysts say that even though indices have been rising, growth stocks started outperforming cyclical sectors recently. That’s the pattern we saw in 2020 when the virus hit and tech steamed ahead, while financials, energy and other sectors that tend to do better in a growing economy fell back.

It’s always important to keep an eye on what’s driving the overall picture. Big gains in a few “mega-cap” tech stocks can make it look like the market is doing better than it actually is, because that small handful of stocks swings so much market-cap weight on the major indices.

For now, consider keeping an eye on crude to see if it can hold above the $65.15 to $65.20 level, which is where it fell earlier today. The July low was near $65.20, so a sharp move below that level could indicate a rougher road ahead for both crude and perhaps other aspects of the market.

Jobs Report Refresh

Now that the 10,000-pound elephant — the July jobs report that came out on Friday and handily beat expectations— is out of the room, investors could start the week looking for some reassurance that the Delta variant, staffing shortages, and inflation fears won’t rain on what was an impressive Friday jobs parade.

As a reminder, Friday’s July jobs report showed 943,000 new positions created last month, above the Wall Street consensus of around 925,000 and above 850,000 in June. Unemployment fell to 5.4%, the lowest since the pandemic began a year and a half ago. We’ve now had two blockbuster jobs reports in a row, though July’s headline number might have been bulked up a bit by educational hiring ahead of the new school year.

Industries that added the most jobs included leisure and hospitality, with two-thirds of those gains in food services and drinking places, accounting for 253,000 jobs. Employment in manufacturing increased by 27,000 in July, largely in durable goods. Construction jobs, a key indicator of economic activity, didn’t change much. Health care added 37,000, which is good to see given that this industry was severely impacted by the pandemic.

The jobs report also showed upward revisions to payrolls in May and June, but not so much that wages are necessarily becoming an inflation concern. If there were such a thing as bond market tea leaves, they arguably would appear to say that the Fed would have to see several more strong jobs reports before it goes into hawkish mode.

What’s Next? More Jobs Data

Later this morning, many eyes will likely focus on the monthly job openings report for June. Wall Street analysts’ consensus expectation is for 9.1 million openings. It could be interesting to see what that number will be given that employers seem to be having a tough time finding employees. Later this week we’ll get some inflation reports—namely the Consumer Price Index (CPI) and Producer Price Index (PPI).

Another thing to consider watching this week is any progress in Congress on the infrastructure package. A media report late Sunday said the Biden administration believes “we’re on the cusp” of seeing the bill move through the Senate. Any progress here could lend support to the industrial and material sectors over the coming days.

WTI crude futures settled lower by 1.2%, or $0.81, to $68.28 per barrel on Friday amid ongoing demand concerns due to the spread of the Delta variant. Bloomberg reported that the European Union is likely to discuss reintroducing travel restrictions on visitors from the U.S. next week as coronavirus case numbers rise again, but airline stocks didn’t appear to take notice. Crude’s slide continued today partly due to growing virus caseloads in China.

The CBOE Volatility Index (VIX), closed down to near 16.15 on Friday, but popped back above 17 early Monday. That’s still pretty low historically. VIX would probably have to hit 20 for people to start worrying about increased market turbulence.

Strong Finish To Old Week

Relief, or tempered euphoria, about the report led the S&P 500 Index and the Dow Jones Industrial Average to hit record highs, while the Nasdaq Composite took a breather. The DJI gained 126 points, or 0.4%, to 35,190 and the SPX was up 0.17% to 4437. The tech-heavy Nasdaq fell 0.45% to 14,836.

The 10-year Treasury yield gained Friday on the news that 943,000 jobs were added in July and the employment level fell to 5.4%, its lowest level since the pandemic shuttered swaths of businesses in March 2020. The 10-year yield jumped to finish at 1.29%. Keep an eye on 1.3% to see if it can top that, because some analysts see 1.3% as a key technical resistance level.

Bank stocks have been a big beneficiary of the rise in yields from recent six-month lows. When the cost to borrow money goes up, banks have more opportunity to make a profit. The S&P Financial Select Sector Index ($IXM) was up over 2% on Friday (see chart below).

In other stock news from Friday, plant-based meat producer Beyond Meat (NASDAQ:BYND) rose 2% after it reported a wider quarterly loss. Seems like a long time ago since that stock stirred so much excitement, but it was only two years ago.

American International Group (NYSE:AIG) rose 4.6% after the insurance firm said late Thursday it swung to a Q2 profit, helped by gains in its private-equity investments. Monster Beverages Corp (NASDAQ:MNST) beat estimates after the close on Thursday on improved revenues, finishing the week up 3%.

About 89% of S&P 500 companies have reported earnings so far, with most beating expectations. But there’s still more to come. This week we’ll see Walt Disney Company (NYSE:DIS), Nio (NYSE:NIO), Baidu (NASDAQ:BIDU) and Airbnb Inc (NASDAQ:ABNB) reporting, among many others.

Keeping Frenemies Close: Last week some influential American business groups asked the Biden administration to restart trade talks with China, which were muted during the prior administration’s bruising trade wars. Of particular interest are the tariffs that were imposed on Chinese-made goods, which the groups referred to as “burdensome” because they are seen as a drag on the U.S. economy. It is estimated that the tariffs now amount to levies on about half of what the U.S. imports from China. They were imposed as part of a trade deal that included China boosting its purchases of U.S.-made goods by $200 billion over two years, which it has not yet achieved.

The Biden administration’s response is worth watching. China is one of the biggest trading partners, and competitors, of the U.S. A carrot-and-stick approach has often been deployed in negotiations with China in an effort to persuade the Chinese to change some of its human rights practices. Are the policies working? Any barriers to the billions of dollars of goods going back and forth can have a significant impact on the U.S. economy, just as it tries to dig out of the pandemic hole.

The Good, The “Not So Good” And The Uncertainty: Last week’s jobs report gave the market some high hopes. Meanwhile, average hourly earnings are up in June 3.6% year over year. Not bad. The economy is pulling off a nice bounce back. But is it time to go fully “risk on” and dump most safe haven assets?

For one thing, you can’t ignore the fact that June CPI data showed that prices overall are up 5.4%. So, if you think about wages being up 3.6% but inflation surging 5.4%, it doesn’t take a rocket scientist to see the “hole in a pocket full of coins” type of scenario. And that brings us to the uncertainty of it all. Will the surge in CPI outpacing wage growth be a “transitory” phenomenon, as the Fed claims? How might the new Delta variant impact the economy in the near term? Once spending picks up, as the velocity of money is hovering at record lows, how might that play into the inflationary scenario to come? The truth is that we don’t know, and that’s what makes it all a bit uncertain. All the more reason to pay attention to the CPI and PPI to catch a glimpse as to how these dynamics are playing out.

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