The week started off with a large drop on Monday as Saudi Arabia and Russia started a price war over crude oil. Talks between OPEC and the so-called Plus nations headed by Russia failed to agree to a temporary production cut. Then both Saudi Arabia and Russia pledged to maximize production to capture more market share. Oil prices sank nearly 25% on Monday. This threatens U.S. shale production as prices fell below the price of production for shale oil.
On Thursday, stocks had their largest drop since the 1987 crash following what was perceived to be underwhelming responses from the President’s Wednesday night’s address and from the European Central Bank. Fear reigned following many major league sporting events being postponed or cancelled due to Covid-19. Schools and universities have closed in many places as the virus spreads.
The Federal Reserve responded Thursday by extending $119.5BN of repurchase agreements and on Friday by accelerating Treasury purchases buying $37BN of government bond with the intent to address highly unusual disruptions in the Treasury market associated with Covid-19.
While the market reaction on Thursday was negative, markets responded very positively to the President’s press conference late Friday with stocks regaining 90% of what they lost on Thursday. The President finally declared a state of emergency for the virus which will free up funding for various initiatives. Before the markets closed the presentations instilled confidence and included various administration officials and health industry representatives. In addition to the numerous health initiatives, the main economic points driving the markets were:
- Temporarily waiving interest on student debt.
- Replenishing the strategic oil reserve to take advantage of cheap oil prices.
- Lower rates on small business loans.
- Potentailly backstoping the travel industry if needed.
Looking in the rear view mirror, we are yet to see bad economic numbers. However, economists are forecasting at least one quarter of gross domestic product decline. We are optimisting we will get through this. However, it will be months before the coronavirus effects on the economy will abate.
Treasury yields rallied by weeks end with the 30-year bond ending at 1.58% and the 10-Year note at 0.987%. Crude oil ended down to $33.43 a barrel and natural gas rose to $1.891 MMBTUs. The U.S. dollar rose sharply against a basket of currencies and gold prices fell to $1522.90 an ounce.
In economic numbers this week:
- China reported:
- The consumer-price index was up 5.2% in February from a year earlier, down from 5.4% in January. Food prices were up 21.9% as pork prices rose 135.2% from the African Swine Fever. Non-food prices rose only 0.9% in February down from 1.4% in January.
- The producer-price index fell 0.4% in February from a year earlier down from a 0.1% increase in January.
- Germany reported industrial production fell 1.3% in January from last January.
- The Labor Department Reported:
- First time jobless claims in the prior week fell 4,000 to a seasonally adjusted 211,000. The four-week moving average of claims rose to 214,000.
- Consumer prices rose 0.1% in February and 2.3% over the past year. Excluding volatile food and energy prices were up 0.2% in February and 2.4% from a year earlier.
- The EIA weekly oil report is attached. Also, the EIA reported in the past week:
- Field production of crude oil fell from 13.1MM barrels per day to 13.0MM bpd.
- Natural gas storage fell by 48BN cubic feet and is above the five year average at this time of year.
- Baker Hughes reported the number of active oil rigs rose 1 to 683 and the number of active gas rigs fell 2 to 107.
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Loren C. Rex, CFP®, AIF®, MA Erik A Smith AIF®
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
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Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
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