State Of The Union: US Economy, Market Reaction
MarketPulse | Jan 29, 2014 03:22AM ET
Here we go again, the annual address by the President of the United States to Congress and fellow citizens. We did not really see any surprises from this year's speech, as Obama said things that were mostly within expectations. Nonetheless, it is important for us to digest what has been said and what are the implication for the market in 2014.
Below are the main points of Obama's speech related to the economy:
- US economy is recovering and is expected to recover further, but President Obama would like to see more done to help the middle/lower income as they have not been able to enjoy the capital gains in assets in the past 4 years. To achieve this, Obama will issue executive order for Government funded contractors to pay minimum wage of $10.10. Congress is also urged to restore unemployment insurance that has just expired. Treasury will start a new individual pension program with protected principal to build retirement savings.
- Obama said he will "act on my own" to permit key infrastructure projects - road building/upgrading, ports upgrading. This will protect "more than 3 million jobs" and get construction workers on the job as fast as possible.
- 6 more high-tech manufacturing hubs will be launched in 2014. Number can double if Congress pass further bills which will create even more jobs.
- Entrepreneurs and small business will receive more help as they create most new jobs in America. New trade partnership with Europe and Asia needed to support the 98% of exporters that are small businesses.
- $4 Billion tax grants/rebates to fossil fuel industries should be stop. Natural Gas production and alternative fuel sources to increase. Obama will "cut red tape" to help private business build close to $100 billion in new factories that run on natural gas. US is getting less reliant on foreign oil, and is closer to reaching energy independence - suggesting that Obama will continue to press for growth of crude production.
All these being said and done, let us take a look at the market reaction.
Natural Gas
Interestingly, Natural Gas did not rally despite having higher implied demand in the future. Perhaps market is still wary after being sold the same optimism in the past, only to see Nat Gas demand nowhere near the purported levels. In fact, prices traded slightly lower as Obama is clear in his preference for higher Natural Gas usage, which would naturally (pardon the pun) require higher rate of production in order for US to reach energy independence if they switch to Natural Gas as primary energy source. Market believes that US can produce more, but does not believe in the uptick in usage.
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WTI Crude
Crude oil became a little bit more expensive following the suggestion by Obama to cut down tax rebates/grants to oil producers/refiners. As Crude Oil demand is inelastic, it is possible for producers to simply pass down higher costs to end consumers, and it is not surprising to see end user potentially buying Futures to hedge against any risks of prices rallying down the road.
S&P 500
Stock futures are flat though, for all the bullish talks about supporting small firms, infrastructural building and jobs creation, market remain unconvinced. Considering that market is currently in a "feel good" bullish phase, it is clear that market does not think much of all the plans Obama has mentioned as prices would have rallied at the hint of slight bullish news due to the underlying bullishness. To be fair, this also could be a sign that market is cautious given that the Fed will be making their policy announcement in slightly more than 12 hours time.
A final word on the State of the Union address. Is it a positive or minus for the economy? A fundamental read suggest that Obama's plans should help economy push higher. However, that is assuming that the plans come to fruition. Hence, do not blame market for not believing in all the good news touted especially since Obama has failed to deliver on most (if not all) of his promised agenda in 2013 SOTU.
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