Oil prices rise on production cuts and US soft-landing talk

‘Soft landing’ is phrase on trader’s lips after good economic data and no expectation that rates will rise again. Oil prices continued to rise on more production cuts and good economic growth. Nasdaq led stocks morning recovery, back to unchanged on the day. Higher bond yields were a key negative, but the dollar benefitted.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Oil price hits 9-month highs

Oil prices jumped 1.6% to $87 per barrel in morning trade, after touching $88, after key OPEC+ players announced an extension of supply reductions specifically intended to keep prices high. Saudi Arabia extended its 1 million barrels per day production cut, and Russia also reduced its exports by 300,000 barrels per day, both to December. These cuts are in addition to OPEC+ reductions that started in November of last year. Higher oil prices are starting to become an outside inflation risk.

Fed can ‘wait and see’ says interest rate hawk

Federal Reserve governor and interest rate hawk Christopher Waller said the Fed can afford to wait and see what happens to the economy. “That was a hell of a good week of data we got last week”, he said, speaking to CNBC about last week’s jobs and inflation data. “We can just sit there, wait for the data, see if things continue.” Following a “hawkish pause” in June, no change is expected this year. Fedwatch, the market’s gauge for official rates, is pointing to no change in rates at the September 19-20 FOMC meeting and just one-in-three chance of rate hikes by the end of the year.

Soft-landing forecast for US economy

Some 69% of economists surveyed by the National Association for Business Economics (NABE) said they see a “soft landing” on the horizon, in a “significant shift” from March’s survey. A soft landing is a slowdown in economic growth that avoids recession, or two quarters in decline. Goldman’s chief economist Jan Hatzius cut the probability of a recession in the coming 12 months to 15% now, down from 35% chances in March. He now expects a gradual slow-down, which will be “shallow and short-lived”, an ideal scenario for equity and bond markets.

Equities in "good shape" as inflation risk recedes

Jeremy Siegel says the stock market is in good shape and the housing market will recover: "Equities can hold in here," the retired Wharton finance professor said on the "Behind the Markets" podcast on Friday. Siegel likes stocks because he believes the inflation threat is receding, so the Federal Reserve won't need to hike interest rates. "The likelihood that the Fed will raise in September is now almost nil, and in fact it puts the November increase in doubt … That means a stronger economy, better profits, good view towards productivity," he added. As for the housing market, Siegel said he was surprised to see house prices climb 0.7% in June, according to Friday’s Case-Shiller national home price index, given soaring mortgage rates, but the market is buoyed by strong demand and low supply.

US factory orders drop in July

• US factory orders dropped 2.1% in July, versus an expected unchanged position, after a 2.3% increase last month
• This was the first decline after four months of gains

China’s weak property sector hits financial markets

• Mixed property headlines tended dampened stock investors’ enthusiasm after recent stimulus moves
• The Shanghai Composite Index fell 0.7% from the previous close
• Troubled property developer Country Garden, faces its second debt challenge in days as offshore payment comes due
• Shenzhen, one of the four largest first-tier cities, reported even weaker housing sales in the early few days of the recent round of stimulus

China’s service sector slows

• Caixin’s service Purchasing Managers Index (PMI) in August expanded at the slowest pace this year, dropping to 51.8 in August from 54.1 in July missing the market expectation of 53.6
• The Caixin composite PMI, including manufacturing and services, edged down to 51.7 from 51.9 in July, showing that marginal improvement in manufacturing was more than offset by a slowdown in the service sector

TODAY’S MAJOR MARKETS

Equity market’s weaker, Nasdaq relative winner

• Equity markets were weak in morning trade, with the Russell 2000 and S&P 500 down 1.8% and 0.3% respectively, while Nasdaq pulled back from early declines to be unchanged
• Global markets were mixed overnight, led by the Nikkei 225 up 0.3%, while the FTSE and DAX were down by 0.2% and 0.3% respectively
• The VIX, Wall Street’s fear index, rose to 14

Bonds yields and dollar rise

• 2-year and 10-year bonds rose to 4.94% and 4.25% respectively
• The dollar index rose 0.6% to 104.7, with continuing signs of a bullish breakout
• Versus the dollar, the Yen, Euro and Sterling were off 0.8%, 0.6% and 0.5% respectively

Oil rally continues

• Crude oil prices rallied 1.6%, to $87.0 per barrel on hoped for OPEC+ production cuts
• Spot gold was down 0.7% $1,947 per ounce, while spot silver fell 2.7% to $23.8 per ounce
• The grain and oilseed sector was mixed to higher due to short covering in corn and wheat, and follow-through weakness in beans

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

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