With oil stockpiles overflowing, Baker Hughes rig count to be keenly watched

Outlook:

The Baker-Hughes rig count probably counts as much as payrolls this morning, or at least it has the potential to be equally powerful in driving a market reaction. It’s important to remember that rig count refers to the equipment used to explore and develop, not to produce the oil itself. We al-ready know that rig count should be down because big oil companies have said they are cutting explora-tion and capital spending. That doesn’t mean the market won’t freak out on a low number, because the market—whose ranks were recently increased geometrically—is in the mood to freak out.

Inciting panic is a well-worn tactic to drive prices where you want them for your own advantage. Two lessons—now is not the time to listen to industry experts. They are almost certainly talking their book. Secondly, remember that the purported correlations between and among commodities, equities and cur-rencies are not actually real in any fundamental way. They become operational only when crisis condi-tions develop and fade back when conditions become less tense and anxious. Granted, right now we have a sense of “crisis conditions,” even though a real crisis is when there is a shortage of a necessary thing, not when there is a glut. Think of the oil embargo and shortages in 1973 and 1978. Now there’s a crisis. But never mind. Traders are having a fine old time playing a game, and some of them have really deep pockets.

Payrolls might be contaminated by developments in the oil patch, too. We already know over 20,000 jobs were lost and the official number for January could be cut for that and other reasons (inadequate seasonality adjustments, weather). We may get an antidote this jobs report containing the annual adjust-ment based on tax records, more reliable than the surveys used to create the monthlies. The new basline will be the number of workers paying taxes in March 2014, and everything gets adjusted to that. The revisions are always interesting. The revision made in September was a partial revision along these lines, meaning today’s new number will probably not be a big one.

More important is the average wages, such a disappointment last time and possibly an aberration. We also look at the participation rate, which hit a near-record low of 62.7% in Dec. Okay, baby boomers retiring but also those not yet at baby boomer status declining to keep looking. The Fed can’t judge whether there is “slack”—authentic job-seekers—or not, and this affects its perception of potential infla-tion. If the job-seekers have really given up, then wages must rise—eventually.

Philadelphia Fed Pres Plosser, who retires March 1, gave an interview to the WSJ, Among other com-ments, Plosser says “I don’t think economists understand inflation dynamics. By that I mean short-term inflation dynamics. It is pretty clear that in the near-term slack doesn’t seem to make that much differ-ence. Movements up and down in money growth in the near term don’t make that much difference in the short run. I don’t know that we understand the dynamics. The notion that expectations are important is a powerful one. As long as the public believes that a central bank will keep inflation under control on one side or another, those expectations will do a lot to stabilize the short-run dynamics of inflation. What makes those expectations become unanchored or not, I don’t think we know the answer to that. There’s a lot we don’t understand.”

Plosser also criticized Fed communications. “Our statement is a bit like the Hotel California,” he said. “Words check in and they never check out. We have way too many words. I think our statement is too long. I think it is too confusing. I think it needs a thorough rewrite.” Thank goodness. Somebody else thinks “considerable time” and “patient” did more harm than good. Feel better now?

And on to Europe, which is torn between thinking Greece will capitulate and everyone can go back to their espressos and Greece will be stubborn and Grexit is not so unthinkable after all. This is actually a distraction from the real issue in Europe, which is negative returns just about everywhere. Germany may be offering 0.36% (or 0.34%, depending on your source), but the FT chart is filled with negative return data, Finland sold a note this week at -0.017%. We don’t have the maturity (the story is at Quartz) and the FT gives the 10-year at 0.39%, a little more than the Bund, but we don’t doubt the story. Quartz says “Finland was the first to issue long-dated debt at a negative rate, but in the secondary market an increas-ing number of bonds are trading at negative interest rates. More than $1 trillion worth of European gov-ernment debt now finds itself in this unusual state.”

It’s conceivable we will get some news from Athens over the weekend and that puts downward pressure on the euro. But the market is expecting disappointment from US payrolls, and that puts pressure on the dollar. A bad number (under 210,000, say) and continuation of low wage gains, and/or a worse partici-pation rate—all are dollar-negative. Right now it looks like oil will rise and that implies a rising euro, perhaps to 1.1500 and a test of the next resistance level around 1.1650. The last high was 1.1680 from Jan 21 (horizontal gold line on chart), and we expect that to be ultimate resistance.

At this point, it would take bad news from Greece to avert the euro meandering its way upward on the chart. But remember, the sane and reasonable oil market analysis is that the global market is still vastly oversupplied, with stockpiles overflowing. We do not have a prospect of new demand, either. Oil prices “should” fall. But as noted above, traders are having a fine old time playing in the oil patch and drawing in the suckers.