Natural Gas Rises, and North Carolina GO Yields Increase

While the ultimate impact from Hurricane Florence on lives, business and infrastructure will remain unknown until the skies clear, many investors already appear to be bracing for the worst.

The U.S. National Oceanic and Atmospheric Administration (NOAA) noted Wednesday that Air Force hurricane hunter aircraft had found little change in the force of Florence while moving toward the Southeast coast, while warning of “life-threatening storm surge and rainfall” across portions of the Carolinas.

NOAA advised that persons located within affected areas should “take all necessary actions to protect life and property from rising water and the potential for other dangerous conditions.”

In response to any potential catastrophic damage from the hurricane, the Virginia National Guard said it plans to enlist up to 1,500 soldiers, airmen and members of the Virginia Defense Force for assistance. It added that Virginia governor Ralph Northam has also authorized up to 6,000 personnel for response operations.

In South Carolina, the state’s Emergency Management Division has also been actively monitoring the storm, and North Carolina governor Roy Cooper said that everyone in his state “needs to take this vicious, life-threatening storm seriously.”

Governor Cooper on Tuesday had ordered a state evacuation for barrier islands along the entire coast, from the Virginia line to the South Carolina line, with local evacuation orders in place for many additional areas.

Corporations prepare

Lean Hog Futures

Companies with operations close to North Carolina’s coast, including Perdue Farms, Coca Cola (KO) and Smithfield Foods (SFD) are most likely eyeing the unfolding storm very carefully.

Despite uncertainties over how much damage may be wrought by the storm, Smithfield said it is “fully prepared for the potential impact,” specifically in the states of North Carolina and Virginia.

Smithfield, which claims to have 14,000 employees across both states, and touts itself as the world’s largest pork processor and hog producer, may ultimately feel a sting from higher commodities costs, as agricultural land could be devastated by the impact of the storm.

While the company readies its hurricane preparedness procedures for its estimated 250 company-owned-farms, and 1,500 contract farms, the October contract for lean hogs futures rose more than 2.5% intraday Wednesday to around US$55.47.

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Natural Gas Futures

Meanwhile, the October natural gas contract has also risen, however some of the recent price increase appears to be independent of the impending Hurricane Florence landfall, according to Jacob Meisel, chief weather analyst, at Bespoke Weather Services. 

Meisel recently noted there was a risk of prices moving slightly higher towards US$2.85 first, over another test of US$2.75 short-term, due to a number of factors, including slight overnight additions in Gas-Weighted Degree Days (GWDDs).

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Meisel added that the move is likely to occur “despite Florence rather than instead of it, as demand destruction from Florence is more likely to hurt physical prices across the East. Still, the extent of market impacts from Hurricane Florence remains quite uncertain, as models differ in key ways on the exact track, speed, and intensity of the storm.”

The current natural gas futures contract was up about 0.7% to US$2.83 intraday Wednesday.

Munis

The impact from the hurricane could also hamper economic growth in the affected region, which may have stirred some nerves among muni bondholders.

The yield on North Carolina’s 5.0% General Obligation Refunding Bonds, Series 2016A, due June 2027, for example, have been inching up recently, with a rise of roughly 3.1% since late July.

The rise compares to the uptick in the yield of the 10-year U.S. Treasury note, which has gained around 18bps within the same timeframe. The yield on the 10-year was last hovering at around 2.96%, amid mild risk aversion.

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The bonds, which are secured by a pledge of the faith and credit and taxing powers of the state, received Moody's Investors Service’s pristine ‘Aaa’ credit rating in February 2016 – one month prior to issuance.

While it remains unclear to what extent any severe damage the storm may cause to North Carolina’s economy, the state appears to be in a relatively strong position.

Since the issuance of the GO, North Carolina’s economy has strengthened, with employment up, the unemployment rate down, and housing market reports somewhat positive, according to the Federal Reserve Bank of Richmond.

Employers in North Carolina added 10,400 net new jobs to their payrolls in July 2018, a gain of 0.2%, with unemployment down 0.1% to 4.1%. In the first quarter of 2018, real personal income in the state rose 0.6% and was up 1.9% since the first quarter of 2017.

The state’s GDP amounted to more than US$553.4m in the first quarter of 2018 – 2.8% of the total U.S. GDP –ranking 10th in the country, according to the U.S. Bureau of Economic Analysis. The Census Bureau places the population of the state at around 10.3m.

The Richmond Fed also noted that regional manufacturing activity had expanded in August, according to its most recent survey.

The composite index rose from 20 in July to 24 in August, as all three components (shipments, new orders, and employment) increased, with respondents generally expecting growth to continue in the coming months.