Commodities
Marketmind: Plunging yields, oil checked amid BOJ jolt
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© Reuters. FILE PHOTO: The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri/File Photo
A look at the day ahead in U.S. and global markets from Mike Dolan
Plummeting bond yields and oil prices clawed back some of the week’s dramatic falls on Thursday, while a burst of speculation about a Bank of Japan policy tightening this month cut across the interest rate optimism and catapulted the yen higher.
The size and slightly erratic nature of this week’s macro market moves may speak a little to yearend markets both squaring off books and jockeying for position for 2024.
But a stream of softer labor market and inflation news – not least an oil price plunge to 6-month lows on booming supplies – has been relentlessly positive for bonds along with clear signs of central bank policy shifts going into next year.
Too far, too fast? Ten-year Treasury yields plumbed three months lows near 4.1% on Wednesday and money markets are pricing well over 100 basis points of central bank rate cuts next year.
Ten-year U.S. yields recaptured about 6bp of the 25bp drop over the past week early on Thursday – although ten-year German bund yields continued to fall to their lowest since May.
Cutting across the global rates euphoria, however, were Bank of Japan comments that spurred markets into upping chances of another tightening of monetary policy there as soon as this month. That saw 10-year Japanese government bond yields jump more than 10bps and the yen jump almost 2% to its best level since September 1.
BOJ Governor Kazuo Ueda said on Thursday the central bank – the lone holdout over the past two years of G7 tightening – has several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory.
The five-year JGB yield leapt 10.5 bps to 0.34% – the biggest increase in a single day since April 2013.
And yet, it was hard to ignore the latest oil price fall to its lowest since June as another major disinflationary force – while trade news from China continued to show worrying demand signs from the world’s second biggest economy despite some rebound in overall exports.
China’s crude oil imports in November fell 9.2% year-on-year, the first annual decline since April, as high inventory levels and poor manufacturing activity took their toll.
U.S. retail gasoline pump prices have now fallen to their lowest since January.
All of which switches Wall St traders back to demand signals at home, with another round of labor market updates on weekly jobless and November layoffs due later ahead of Friday’s official employment report.
The private-sector jobs reading from ADP on Wednesday came in below forecast, chiming with the previous day’s news of a surprising drop in job openings in October.
The frenetic macro market activity – which saw bond market volatility gauges jump back to their highest since October this week – has stopped benchmark stock markets in their tracks. The closed slightly in the red on Wednesday and futures were flat ahead of today’s open.
Asia and European bourses fell back too, with underperforming with losses of almost 2% on the rate speculation and yen surge.
Key developments that should provide more direction to U.S. markets later on Thursday:
* U.S. November layoffs, weekly jobless claims. U.S. Oct consumer credit
* Federal Reserve issues quarterly financial accounts of the United States. European Central Bank President Christine Lagarde attends euro group meeting of euro finance ministers in Brussels, focussed on 2024 budget plans
* EU-China Summit in Beijing
* U.S. Treasury auctions 4-week bills
* U.S. corporate earnings: Broadcom (NASDAQ:), Cooper Companies, Lulumelon Athletica, Dollar General (NYSE:)
(By Mike Dolan, editing by Christina Fincher; mike.dolan@thomsonreuters.com)
Commodities
Oil prices settle lower after weak August jobs report adds to demand concerns
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Investing.com — Oil prices settled lower Friday, ending the week with a loss as weaker U.S. nonfarm payrolls stoked concerns about an economic-led slowdown in crude demand.
At 2:30 p.m. ET (1430 GMT), the futures (WTI) traded fell 2.1% to settle at $67.67 a barrel, while contract fell 2.2% to $71.06 per barrel.
U.S. economic slowdown worries resurface after weak jobs report
The US economy added fewer jobs than anticipated in August, but rose from a sharply revised July figure, according to Labor Department data that could factor into the Federal Reserve’s next policy decisions.
Nonfarm payrolls came in at 142,000 last month, up from a downwardly-revised mark of 89,000 in July. Economists had called for a reading of 164,000, up from the initial July mark of 114,000.
Following the release, bets that the Fed will introduce a deeper 50 basis-point rate cut — rather than a shallower 25 basis-point reduction — increased.
Concerns about the demand come just a day after OPEC+ said it had agreed to postpone a planned increase in oil production for October and November.
U.S., Europe working on Iran sanctions
Geopolitical tensions ratcheted up on Friday after the U.S. and Europe they were working on sanctions to impose on Iran after the Tehran sent missiles to Russia.
The U.S. had previously warned Iran about transferring missiles to Russia, saying it would represent a major escalation in Iran’s support of Russia’s war against Ukraine.
Commodities
Goldman Sachs expects OPEC+ production increases to start in December
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(Reuters) – Goldman Sachs adjusted its expectations for OPEC+ oil production saying it now expects three months of production increases starting from December instead of October, the bank said in a note on Friday.
OPEC+ has agreed to delay a planned oil output increase for October and November, the producers group said on Thursday after crude prices hit their lowest in nine months, adding it could further pause or reverse the hikes if needed.
However Goldman Sachs maintained its range of $70-85 per barrel and a December 2025 Brent forecast at $74 per barrel.
The investment bank expects the effects of a modest reduction in OPEC+ supply in the upcoming months to be counterbalanced by easing effects from the current softness in China’s demand and faster-than-expected recovery of Libya’s supply.
“We still see the risks to our $70-85 range as skewed to the downside given high spare capacity, and downside risks to demand from weakness in China and potential trade tensions,” Goldman Sachs said.
Brent crude futures were down $1.63, or 2.24%, to $71.06 a barrel on Friday, their lowest level since December 2021. U.S. West Texas Intermediate crude futures fell $1.48 on Friday, or 2.14%, to $67.67, their lowest since June 2023. [O/R]
Commodities
Citi, Bank of America see oil prices potentially going to $60
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Investing.com — Strategists at Citi Research said oil prices could decline to around $60 per barrel by 2025, citing a significant market surplus as the primary driver.
While recent supply disruptions in Libya and a delayed production cut unwinding by OPEC+ have offered short-term support for Brent prices in the $70-72 range, Citi views this as temporary.
“At the time of writing, markets have not reacted to the OPEC+ decision, with Brent around flat to the 4 September close. Still, the Libyan situation could take months rather than a week to resolve, strategists wrote.
They highlight the likelihood of a strong market surplus emerging next year, pushing prices lower.
“We recommend selling on a bounce toward ~$80 Brent, as we look ahead to moves down to the $60 range in 2025 as a sizeable market surplus emerges,” the note states.
OPEC+ has delayed the start of its planned production cut unwind from October 2024 to December 2024, with the process now set to conclude by the end of 2025. This decision comes in response to recent market weakness and price declines, despite ongoing disruptions to Libyan oil supplies and broader economic concerns in the U.S. and China.
Separately, Bank of America’s Commodities Research team has revised down its price forecast to $75 per barrel for the second half of 2024, down from nearly $90, and for 2025, reduced from $80.
The team cites concerns about growing global oil inventories despite assuming OPEC+ will delay planned production increases. They note that weaker demand growth, combined with record OPEC+ spare capacity exceeding 5 million barrels per day, has dimmed the outlook for oil prices.
“In effect, we now see Brent oil prices moving from the top toward the middle of our unchanged $60-80/bbl medium-term range faster than previously warned,” BofA strategists said. This surplus in capacity, along with slower demand, also reduces the risk of price spikes from potential geopolitical disruptions.
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