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Friday, March 21, 2014

The stock market today appears on track to build on Thursday’s gains as the perception of a somewhat hawkish turn for the Fed is offset by expectations of a better economy. Stocks reversed Wednesday’s post-meeting losses in Thursday’s session and will likely end the week on a positive note.

The markets were spooked by Janet Yellen’s ‘six month’ comment. But the realization seems to be sinking in that the Fed will remain data dependent and will not be on some pre-set timeframe. And as long as the economy keeps improving in-line with the Fed and private-sector projections, then higher growth can offset the restraining effects of higher interest rates.

Recent housing, manufacturing and labor market data is indicating that the soft patch over the last couple of months was weather-related. Next week’s New Home sales, Durable Goods and Personal Income & Spending reports all pertain to February and will likely be no different from what we had seen the month before. But the expectation is that we will start seeing signs of improvement in March data that comes out in April.

While weather was a headwind for the broader economy the last few months, it appears to have turned around the outlook for natural gas. Strong heating-related demand has brought down the commodity’s availability enough that prices will likely remain elevated through the spring and summer days when demand is seasonally weak. Thursday’s data from the Energy Information Administration showed that the level of natural gas in storage fell to 953 billion cubic feet, the first under-one-trillion cubic feet reading since 2003.

This improved outlook is showing up in greater demand for drilling activities, particularly the more challenging horizontal and lateral drilling. The recent strong momentum in the stock prices of onshore drillers like Helmerich & Payne (HP), Nabors (NBR), Patterson-UTI (PTEN) and others is a reflection of this trend.

Sheraz Mian
Director of Research

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