Macro Commentary
Pop goes the oil! After the data released last Friday from Baker Hughes showing rig counts coming down in the United States quicker than expected, US oil prices (West Texas Intermediate or WTI) headed for a wild ride this week ending higher. Monday and Tuesday followed through from the previous Friday leading the commodity price 10% higher before the inventory number on Wednesday (added 6.3mm barrels versus an expected 3.7mm taking inventories to decades-long highs) caused it to give up all the gains. But sure enough, it headed back higher after that one day blip to end the week up over 7%. There is some financial funny business going on when a global commodity such as oil makes consecutive moves of 5-8% in different directions over a sustained series of days. Having seen some big returns from Macro/CTA funds in the month of January (HFRI Macro Systematic index was up 4.5%), you are left to wonder how many financial futures players hopped on a strong trend of being short the oil market and then was forced to cover in the reversal. Regardless, a little stability and bounce in the oil market breathed confidence into a lot of investors that have been mulling over when to get more oil commodity price exposure in their equity portfolios. Index funds which track Exploration and Production (E&P) companies were up 7-12% this week (as measured by the IEO and XOP respectively).
Oil was not the only item surging this week in the US. The jobs report released today also showed that not only is employment strengthening (a better than expected 257k jobs added in January plus big positive revisions to prior months) but so are wages (up 2.2% over the last year). The increase in wages shows that labor is gaining power which is both a benefit (more consumption, savings, and investment) and a challenge (compressing corporate profit margins). Immediately the chatter heats up about the Fed as interest rates across maturities headed higher. It remains our opinion that the Fed will act to raise rates at some point this year, the timing of which is likely less important than the magnitude and pace of their collective action over time. We continue to believe that the Fed will be cautious.