Oil Prices Fall To Six-Week Low

The International Energy Agency (IEA) released a report Friday, warning that the recent stabilization in oil prices may have just been temporary. Their reasoning behind this statement was due to U.S. production showing no signs of slowing down, despite the existing oversupply conditions. Also, as we noted last week, U.S. producers are running out of places to store the oversupply. “U.S. stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive,” the IEA said. It does appear that supply cuts are on the horizon. The U.S. oil-rig count declined for the 14th straight week to 866, down from the peak of 1,609 in October. Though this has not yet translated into reduced supply, the U.S. should see reduced output from these declines later this year.

U.S. Banks Pass Second Round of Stress Tests:

Last week we discussed how 31 of the largest U.S. banks (these banks represent more than 80% of assets held by domestic bank holding companies, or $14 trillion as of the fourth quarter of 2014, according to the Fed) passed the first round of “quantitative” tests that were designed to determine if these banks have sufficient capital levels to sustain severe economic circumstances.

The second round of “qualitative” test, known formally as the Comprehensive Capital Analysis and Review, reveal how the banks would respond under hypothetical circumstances similar or worse than that led to the credit crisis of 2008. In other words, the tests determine whether the banks can withstand another significant market downturn. Of the 31 banks tested, 28 earned unconditional permission to increase dividends, share buybacks or other forms of shareholder payouts.

Bank of America’s (BAC) plan was not formally rejected by the Fed, but will need to resubmit its plan by the end of the third quarter because of certain “weaknesses” in their capital planning that was cited by the Fed.

The Fed rejected the capital plans for the U.S. operations of two big foreign banks – Germany’s Deutsche Bank (DB) and Spain’s Santander (SAN). Both of which were expected.

This is the fifth year the Fed has administered these tests that are required under the Dodd Frank banking reform legislation passed in 2010. The Fed has stated that U.S. Banks have “substantially” increased their capital levels since the first round of tests were given.

Consumer Confidence Falls:

Consumer confidence fell to a 4-month low in March as optimism about the U.S. economy is weakening amid lower gasoline prices and weaker income expectations.

Wholesale prices in the U.S. unexpectedly declined in February for a fourth consecutive month in a row, reflecting cheaper food and a slump in profit margins among wholesalers and retailers.

The stronger dollar coupled with the uncertainly surrounding when the Federal Reserve will begin to raise rates has probably contributed to the recent decline in confidence. The dollar hit a fresh 12-year high against the euro today as dollar buying momentum overcame soft U.S. economic data that would normally weaken it.

The Federal Reserve will meet next week and investors are hopeful that the Fed will provide further insight into when the first rate increase will come, which should help calm equity markets.

Jobless Claims Show Steep Fall:

U.S. initial jobless claims fell to 289,000 last week, much lower than the 305,000 average economists were expecting and represents a drop of 36,000 over last week’s report. There did not appear to be any special factors impacting this week’s drop, further showing volatility in the week-to-week jobless claims. However, the 4 week average is 10,000 higher than it was a month ago. We expect this week’s report to be more in line with expectations going forward, now that the weather is improving. While one week or one month of data are important, it is far more important to examine the overall trend, which we see falling.

Prescription Drug Spending Rises 13% Last Year:

Pharmacy Benefit Manager Express Scripts (ESRX) released a report yesterday showing total prescription drug spending rose 13% in 2014 and was the largest year-over-year increase since 2003. The primary driver of this growth was spending on new drugs for Hepatitis C, led by Gilead’s Sovaldi (and later Harvoni). This makes sense, as people who have Hepatitis C were previously only able to treat the disease and Gilead’s drugs offered a cure. Overall, Express Scripts expects that companies will continue to try and raise prices, though Pharmacy Benefit Managers like Express Scripts and CVS will continue to push for lower prices.

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