2 Big Themes This Week: Jobs and Oil

03/06/2012 8:00 am EST


Jim Farrish

Founder and CIO, Jim's Notes

Expect new job data and any news regarding the recent spike in oil and gas prices to move the markets this week, writes Jim Farrish, especially if tensions between Iran and Israel heat up again.

For the week ahead, traders are once again focused on jobs. The expectations are for 210,000 new jobs in February. This has been the one consistent the last few months, and without the continuation of the trend, some are looking for a pullback in stock prices. Based on that approach, the data has renewed significance for the week ahead.

I have been digging to find out why the emphasis on jobs in many of the reports posted over the weekend. The best I have been able to discern is amusing on the surface, but when you let it settle, it shows you how the system is wired and how analysts on Wall Street see things…or should we say manipulate them towards their best interest.

The direction of gasoline prices has become a renewed concern over the last month, and the price at the pump has gained better than 30 cents in most places and has eclipsed $4 per gallon in some areas of the country. This increase in gas prices is akin to a tax on the consumer. The impact is immediate, as it takes place each time you fill your automobile with fuel. Will it have an impact on spending and economic growth if the trend continues? Therein lies the million-dollar question for investors.

There is the argument that natural gas is cheaper than in 2008 at $2.50 per million BTUs, which could help offset some impact of rising gasoline costs. The chart below shows the significant drop in natural gas prices over the last year via the United States Natural Gas Fund (UNG).

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We know the employment data is improving, with more people finding jobs in 2012. This fact is being compared to the last time gasoline rose above the $4 mark in 2008. Thus, the economic impact of higher gasoline prices will be offset by more people finding jobs because the negative impact of the price of fuel is being offset by the positive impact of lower unemployment.

Therefore, the sentiment relative to the improving jobs picture will offset the negative impact of higher gasoline prices. We can also add to the lower prices of commodities overall. Agriculture costs are lower in cotton, coffee, sugar, etc. Natural gas is lower and base metals are cheaper. Thus, the impact of higher fuel costs is not as important to the economic picture overall.

This all sounds good, but when you piece it all together, you see how this puts added pressure on the jobs report this Friday. This puts the total picture into focus as to how the jobs report has grown in significance over the last few weeks as the price at the pump has risen.

NEXT: Iran Tensions Threaten Broad Markets


The issue in Iran also remains a key point facing the broad markets. Israel’s Prime Minister visits Washington this week, and the threat of a pre-emptive strike by Israel is the headline discussion. President Obama issued his warnings to both countries relative to the issue at hand as well as the development of nuclear weapons by Iran.

It is all a chess game at this point, and the rhetoric is the key issue relative to oil prices in the short term. The speculation in the commodity market is alive and well along with a new trend in volatility as the price of crude jumps and falls more readily on the speculation—good or bad. The chart below shows the increased volatility last week in the price of oil.

Click to Enlarge

When you tie it all together, it is interesting how Wall Street has managed to put the jobs report squarely in conjunction with the crude oil picture. I love the fact we have somehow related the improving job market to being able to afford the rise in the price of gasoline. Wow, I didn’t’ see that one coming, but it makes for a great story nonetheless.

Putting this all together is like talking about the Tooth Fairy, Santa Claus, and the Easter Bunny having lunch. The bottom line from my view is to pay attention to the data this week, as it has taken on a renewed significance in the current trend higher for the broad markets.

By Jim Farrish of SectorExchange.com

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