New all-time highs for the Dow and gold

The Dow Jones made another all-time high of 36,265 in morning trade, despite Fed chair Powell trying and failing to talk down hopes that interest rates will be cut in the spring. Gold rose 1.6% to a new all-time high of $2,089 per ounce. Paradoxically, weaker manufacturing data, and the belief that interest rates have thus peaked is the best explanation.

TODAY’S MAJOR NEWS

Fed chair fails to quell rate cutting speculation

Fed chair Jerome Powell tried to quell the market's anticipation for upcoming rate hikes by saying that it would be "premature" to conclude that the FOMC is ready to do so, but also said current rates are slowing the economy as expected and noted that "the data will tell us if we need to do more."  "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Powell said Friday in prepared remarks at Spelman College in Atlanta. Despite his comments, Traders are placing a 55% probability of a March rate cut in the Fed Funds rate, up on yesterday’s 40%. One explanation for this optimism was bad news out of the US manufacturing sector.

US manufacturing sector weakens in November

The US manufacturing sector continued to show weakness in November, with Manufacturing Purchasing Managers Indexes (PMI's) from both ISM and S&P coming in below forecasted levels and showing continued contraction on their respective releases this morning. Both indexes also showed a softening in employment in the sector, adding more intrigue to upcoming US labor data next week

• ISM's November Manufacturing PMI came in at 46.7, unchanged from the month prior despite expectations of an improvement to a 47.6 reading
• This is the 13^th consecutive month spent in contractionary territory for the index, the worst such streak seen in the US for over 20 years
• S&P Global's Manufacturing PMI came in at 49.4 in November, moving back into contractionary territory after sitting right at 50 in October and marking the worst reading since August

OPEC+ ups production cuts, market unimpressed

OPEC+ decided to increase the current round of cuts to roughly 2.2 million barrels per day(bpd)  as we start 2024 in a month, making total cuts more than 5.0 million bpd. Eight members of the cartel will make cuts, adding to a million barrels already being voluntarily cut by Saudi Arabia, that it will roll into the new year. Thus far, the market is thus far unimpressed with the oil price off 2%. The need for these cuts emphasizes the problem the oil industry has with global demand, and the shrinking influence of the cartel on controlling prices. There are three reasons to question OPEC’s ability to control prices.

First, are some cartel members are cheating the system. Saudi Arabia has done a good job of controlling the cartel over the past several years, but cheating tends to increase when members start hurting, and they start questioning the effectiveness of the quotas to support prices. Many member economies are dependent on oil revenue, such that the inability to achieve the desired price – which many wish to be $85 or above – necessitates greater volume to achieve that needed revenue.

Second, quotas are designed to work within demand growth projections issued by the cartel and by the international energy community. Those growth projections are largely based on expectations for consumption growth in Asia. Growth in China has been positive, along with India, although less than desired. However, that growth has been offset by weak demand in other Asian countries.

Third, the price of oil is hard to control. The price is largely set by seaborne crude oil imports. Seaborne crude oil movement totals roughly 41.2 million barrels per day through the first 11 months of this year, which is up 4.6% from 2022 levels. However, much of that increased growth in movement is being serviced by rising output from non-OPEC+ members, further reducing the influence of the cartel on the price of oil with its output cuts. These increased production levels for non-OPEC+ members are largely coming from increased technology that increases well efficiencies.

Chinese banks catch a cold, but could it be Covid?

Chinese banks reportedly held intense meetings with various domestic property companies recently, reflecting the government’s concern for the sector that continues to be one of the weak links for China’s economy. It also leads one to ask, what else do authorities know about problems in the sector. A few cities reported a rebound in property sales in November, but overall sales for the top 100 developers dropped 0.6% on the month, with sales for the first 11 months of the year down 14.7% from the previous year’s pace, with that pace gaining momentum.

On a related note, China says that the mystery virus spreading through the country is a variant of influenza that is likely to have very limited impact on the economy. Authorities say that the virus is hitting so many people due to low antibody levels following the recent Covid lockdowns. But do consumers trust this assessment after Covid?

TODAY’S MAJOR MARKETS

Dow hits new all-time high

• The Dow Jones index hit a new all-time high today at 36,208 and was today’s market leader, up 0.7% to an all-time high, with the Russell 2000 up 2.4%, the S&P 500 was down 0.5%, and the Nasdaq was up 0.4%
• European markets followed the rally in US equities, with the FTSE 100 and Dax up 1.0%, while the Nikkei 225 fell 0.2%
• The VIX, Wall Street’s fear index, fell back to 12.7

Bonds yields and Dollar slip

• 2- and 10-year yields fell to 4.58% and 4.22%, respectively.
• 10-year TIPS index-linked yields fell to 2.02%
• The dollar index fell 0.4% to 103.1
• Versus the dollar, the Euro was unchanged, Sterling was up 0.6%, the Yen was up 0.9%, while the Euro was unchanged

Gold hits all-time high, Oil slips

• Oil prices fell 2.4% to $74.1 per barrel despite further production cuts from the OPEC+ cartel
• Gold prices, up 1.6%, hit new all-time highs at $2,089 per ounce, while Silver prices rose 0.8% to $25.9 per ounce
• The grain and oilseed markets were once again mixed

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com