Macro Heading
Talk to me in January he says. In the last ECB meeting of 2014 where expectations were high that the Euro-area would finally emerge from the doldrums, the President of the multi-national monetary body moved only his mouth – not the needle of balance sheet growth. Perhaps hopeful that the raft of measures announced earlier this year will get some more take up, the discussion session following the decision pushed expectations once again to the next meeting. In one report, we read that esteemed policy maker got a little testy with the question of whether QE is within the ECB mandate. Answering tersely, he said that they would not be talking about it if it were not and that what would be illegal is not pursuing their stated price goals. We can understand that answering the same question over and over must be frustrating, but so is waiting for the action that shows conclusively that the question is not necessary.
Meanwhile, the US job report on Friday demonstrates yet again that the path to recovery is there. For the first time since the start of the recession, payrolls increased over 300k when the unemployment rate was below 6%. In addition, evidence of further wage growth shows pricing power in the labor market that will underpin consumption. Yields on the US 10yr “jumped” 7 basis points on the news as one would expect but remains at a rather anemic 2.3% – hovering not far over inflation. It seems the bond market continues to believe “lower for longer” for the moment – at least until wage pressure trickles through the cost of all goods.
One week does not a trend make, but oil prices generally stayed in the $65 to $70 range these past five days. Stabilization of the commodity price is the first step to stabilizing sentiment. In the recent past, we have focused our investment capital in areas that seek to invest in companies that would benefit from low energy prices as well as companies positioned for supporting increasing volumes of production. What occurred over a relatively short-time horizon is a decline in energy prices (oil in particular) that has been swift enough to cause the market to become unsettled in their outlook for the future. Said a different way, it is completely logical that a growing supply (increasing volumes) would lower prices over time. However, the pace by which prices fell has caused some concern that decisions by drillers will stop the growth of volume. In response, some areas like railroads and refiners have done well but there are others that have not fared as well such as some chemical companies that export products priced based on Brent. As the oil market seeks to test producers at lower prices, we think many traders are selling indiscriminately. We have done a lot of work in the past week to reconfirm our thesis and continue to believe the that the fundamentals for increasing US energy production are sound in the long, albeit at a slower pace in the near-term. While it is likely that the market will remain skittish as news headlines on capital expenditure cuts come out over the several weeks, the stabilization of the commodity price will bring fundamental analysis back to the fold of investors and they will continue to see the US growth story.