Is the Crude Oil Pullback Enough?

Commodity

Summary:

Oil prices have continued their pullback for many days, and many people will ask whether the pullback is sufficient. Is it a pullback or a reversal? Perhaps the rising logic of oil prices has changed.

Friends who follow us will know that since the beginning of August, when US crude oil fluctuated around the previous high of 83, we have been emphasizing that oil prices will peak in the short term. At the same time, we also recommended in our daily trading analysis to go short at lows and keep trading with small stop losses to make large profits. The reasons given are: for one thing, the surge of oil prices is too fast, and the market's fear of being high and its risk aversion are gradually strengthening under the signs of being overbought. As a serious negative divergence has appeared technically, the rise in oil prices has largely been limited, which will need a decent large correction to dispel bullish fears. For another, the peak demand season in both the US and China is about to pass with the end of the summer, which means that demand will peak in the short term. Finally, China's economy was a factor supporting oil prices in the previous period while its recent weak data and weak reality seem to be unable to support oil prices anymore, especially the decline in China's crude oil imports in July.

At this point, some people may ask, what will happen to oil prices next? To answer this question, it is necessary to understand the rise logic of crude oil previously and the correction logic this time. First, let's look at the logic of the rise: on the one hand, crude oil has returned to commodity fundamentals driven by supply factors. Saudi Arabia's voluntary 1 million b/d cut was extended for another month until the end of September, and Russia also cut output by 0.3 million b/d. Coupled with the accelerated reduction in inventories, market expectations of tighter supply have further intensified. On the other hand, the promotion of demand factors also plays an important role. Travel demand in the US peaked in July and August, which is also a period of high summer demand in China. Investors expect that the economic growth of China will drive global demand for crude oil.

What is the logic of this correction? Of course, as we said before, a technical pullback is necessary, as well as constraints on the dollar rally. However, we can also see changes in several areas. First, crude oil demand fell in autumn. Crucially, China's economic data is weakening across the board, rather than the gradual strengthening that the market expects. Second, the dollar did not weaken as investors expected but rebounded strongly driven by US Treasury yields, with the dollar reaching 103 again, close to 104. Finally, inventories are gradually stabilizing rather than drastically decreasing, and there are even signs of accumulation.

What are we going to face? First of all, as the US Treasury yield remains high, the economy as a whole may run in a combination of high inflation, high-interest rates, and low growth for a long time. The probability of new risks will increase, which is not good news for oil prices. Second, what we have to face is the decline in demand after the end of peak season, as well as the weak reality of the global economy.

What about future oil prices? Although there has been a large correction, it may still have to continue, but the process will be repeated. As the technical upward trend has been broken, traders should beware of a pullback turning into a reversal. Oil prices will still likely continue to decline!

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Alex

Central Bank

Economic

Further hikes possible, but there are splits in the FOMC

The Federal Open Market Committee minutes to the July policy meeting, in which the Fed raised the policy rate range 25bp to 5.25-5.5%, show officials continue to have a bias to hike further, much as they outlined in their forecast update in June when they pencilled in the July hike plus one more before year-end. The key passage reads, "with inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy".

There is no specific guidance surrounding the September FOMC meeting, saying it will be down to the incoming information. Nonetheless, while the voting members of the FOMC all opted for a 25bp hike at the July FOMC meeting, there were two non-voting members who "indicated that they favored leaving the target range for the federal funds rate unchanged" if they had been on the roster to vote. Moreover, "a number of participants judged that… it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening".

As with some banks recently, Federal Reserve staff have also removed a "mild recession" as their base case (they are separate to the actual individual FOMC members' forecasts). Their base case now is that "real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level". This is broadly in line with the general view of FOMC members.

We see a long pause before 2024 rate cuts

Since this interest rate decision we have had the second 0.2% month-on-month core CPI print, encouraging news on moderating labour costs (the ECI index), more modest job creation, yet ongoing strength in activity data. The commentary from officials, including the hawks, such as Neel Kashkari, suggest a willingness to pause again in September, but to leave the door ajar for a further hike at either November of December FOMC meetings.

We think the Fed will indeed leave interest rates unchanged in September, but we don't think it will carry through with that final forecast hike. The combination of higher borrowing costs and less credit availability plus pandemic-era savings being run down and student loan repayments restarting should mean that households feel more of a financial squeeze in the fourth quarter and beyond and we expect to see consumer spending activity moderate. The concern is that it could go too far (as highlighted by some officials in these minutes) and heighten the chances of recession. Given this risk and the positive developments on inflation and labour costs we think the Fed will be on hold for a number of months. Our base case continues to be interest rate cuts from March 2024 onwards as monetary policy is relaxed to a more neutral footing.

Source: ING

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Thomas

Economic

Japan's exports fell in July for the first time in nearly 2-1/2 years, dragged down by faltering demand for light oil and chip-making equipment, underlining concerns about a global recession as key markets like China weakened.

Ministry of Finance (MOF) data out Thursday showed Japanese exports fell 0.3% in July year-on-year, compared with a 0.8% decrease expected by economists in a Reuters poll. It followed a 1.5% rise in the previous month.

Separate data by the Cabinet Office showed a key gauge of capital expenditures rose in June. However, manufacturers are braced for core orders to slide during the current quarter, partly due to the impact from weak offshore demand.

Overall, the batch of data underscored fragility in Japan's export engine that helped underpin second quarter domestic product (GDP) growth, with car shipments and inbound tourism the biggest drivers.

Japanese policymakers are counting on exports to shore up the world's No. 3 economy and pick up the slack in private consumption that has suffered due to broader price hikes.

However, the spectre of a sharper global slowdown and faltering growth in its major market China have raised concerns about the outlook.

The concerns about global growth was underscored by separate data earlier showing persistent declines in Singapore's exports, seen as a gauge of overseas demand as trade flows dwarf the city-state's economy.

"China remains weak and I don't see demand from Europe and America to accelerate further," said Takeshi Minami, chief economist at Norinchukin Research institute, adding that Japan's economy may suffer a downturn in the current quarter.

By destination, exports to China, Japan's largest trading partner, fell 13.4% year-on-year in July, due to drops in shipments of cars, stainless steel and IC chips, following a 10.9% decline in June.

U.S.-bound shipments, Japan's key ally, rose 13.5% year-on-year last month to log the largest in value on record, led by shipments of electric vehicles and car parts, following a 11.7% rise in the previous month.

Gloomy Outlook to Keep BOJ on Hold

"The Bank of Japan must be aware of downside risks from the global economy. Therefore, it would have no choice but to avoid any efforts to normalise monetary policy for the time being given the risk from external slowdown," Minami said.

At its July meeting, the BOJ kept its yield curve control (YCC) targets unchanged but took steps to allow long-term interest rates to rise more freely in line with increasing inflation and growth.

Thursday's data also showed imports fell 13.5% in the year to July, versus the median estimate for a 14.7% decrease.

The trade balance swung to a deficit of 78.7 billion yen ($537.27 million), versus the median estimate for a 24.6-billion-yen surplus.

Separate data showed Japan's core machinery orders rose 2.7% in June from the previous month.

Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, declined 5.8%.

Manufacturers surveyed by the Cabinet Office forecast that core orders will fall 2.6% in the July-September quarter, which taken together with the weakness in exports suggest rising pressure on Japan's economy.

"On their own, the July trade figures still point to a small boost from net exports across Q3," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"But even if that were the case, GDP growth will surely slow sharply," he added.

($1 = 146.4800 yen)

Source: Reuters

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Warren Takunda

Traders' Opinions

Energy

In a recent turn of events, Pound Sterling has shown resilience against various currencies as Office for National Statistics (ONS) data offers a mixed bag of signals, revealing both robust wage growth and concerning shifts within the UK labour market. The dual nature of these revelations has led to a more complex outlook for the British economy and currency.

The ONS data highlights that average annual wage growth reached remarkable new heights in June, breaking records even when accounting for or excluding annual bonuses. However, these wage growth achievements contrast starkly with other indicators that indicate the emergence of challenges within the broader labour market.

A striking trend is the contraction in employment, which decreased by 0.1% during the three months leading to the end of June. Both full-time payrolled employees and the self-employed experienced this impact, coupled with a reduction in the number of inactive individuals – those not seeking employment. This combination of factors likely contributes to the ongoing upward trend in the unemployment rate. Pound Sterling Gains as UK Labour Market Exhibits Cracks Amid Record Wage Growth_1

Pound Sterling Gains as UK Labour Market Exhibits Cracks Amid Record Wage Growth_1

The unemployment rate rose from 4% to 4.2% in the same three-month period, marking a significant shift from the 3.7% reported back in January. This transformation is largely attributed to individuals previously labeled as 'inactive' now entering the unemployed category as they seek new work opportunities. Notably, job vacancies have also seen a decline, falling by approximately 66,000 to an estimated 1.02 million.

These developments have implications for the Bank of England's (BoE) monetary policy decisions. Despite robust wage growth, the overall weakening in hiring activity and the troubling signs in the labour market are likely to be at the forefront of the BoE's considerations. The BoE's interest rate policy is poised to strike a balance between controlling inflation and promoting economic growth.

The implications for investors and financial markets are significant. The mixed signals from the UK labour market could lead to greater uncertainty and potentially increased market volatility. The Pound's recent strength against other currencies, particularly the US Dollar, indicates market participants' efforts to assess the various dynamics at play.

Analysts are keeping a close watch on the situation, as the evolving trends in the UK labour market could shape the BoE's future policy decisions and, consequently, influence market movements. The intricate interplay between wage growth, employment figures, and inflation will be crucial in guiding the Bank's approach and investor sentiment.

As the UK economy navigates through these complex conditions, prudent investors would do well to consider diversification, risk management, and a proactive approach to capitalize on potential opportunities while mitigating potential downsides.

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Samantha Luan

Stocks

Economic

Asian shares slid to nine-month lows on Thursday, while the dollar was at two-month peak as fears over China's sluggish economic recovery and concerns that the Federal Reserve may still raise interest rates rattled investors.

MSCI's broadest index of Asia-Pacific shares outside Japan slid to 495.03, its lowest since Nov. 29. It was last down 1.14% at 497.11, with the index down 8% for August and set for its worst monthly performance since September.

Losses were broad-based across Asia Pacific on Thursday, with Japan's Nikkei and Australia's S&P/ASX 200 index down 1%.

China's blue-chip CSI 300 Index was 0.45% lower, while the Hong Kong's Hang Seng Index fell 1.7% and was at near nine-month lows.

China stocks have been in the doldrums as a series of economic data has laid bare the stuttering post-pandemic recovery, with investors so far unimpressed with moves from policymakers.

"Investors looking for more aggressive support from policymakers amid soft activity have been disappointed as the recent incremental measures haven't been sufficient to restore confidence," said Taylor Nugent, an economist at NAB.

Adding to the worrying landscape for the world's second biggest economy is the deepening property sector crisis. Missed payments on investment products by a leading Chinese trust firm and a fall in home prices have enhanced the gloom.

Overnight, Wall Street ended lower after minutes from the Fed's July meeting showed officials were divided over the need for more interest rate hikes.

"Some participants" cited the risks to the economy of pushing rates too far even as "most" policymakers continued to prioritise the battle against inflation.

The U.S. central bank hiked rates by 25 basis points at the July meeting after standing pat in June. Fed Chair Jerome Powell said at the time the economy still needed to slow and the labor market to weaken for inflation to "credibly" return to the U.S. central bank's 2% target.

The commentary from officials, including the hawks suggest a willingness to pause again in September, but to leave the door ajar for a further hike at either November of December meetings, ING economists said in a note.

"We think the Fed will indeed leave interest rates unchanged in September, but we don't think it will carry through with that final forecast hike," they said, pointing out that further rate hikes could heighten the chances of recession.

Markets are pricing in an 86% chance of the Fed standing pat next month, CME FedWatch tool showed, with a 36% chance of it hiking in its November meeting.

Benchmark 10-year yields reached 4.288%, the highest since Oct. 21, with a 16-year peak of 4.338% in sight.

The rising yields lifted the dollar, with the dollar index, which measures the U.S. currency against six rivals, touching a two-month peak of 103.58 as investors sought safety.

The Japanese yen weakened 0.07% to 146.42 per dollar, a fresh nine-month low, as traders kept a vigil on possible intervention chatter from Japanese officials. Finance Minister Shunichi Suzuki said on Tuesday authorities were not targeting absolute currency levels for intervention.

Worries over China and the trajectory of the U.S. interest rates also rattled the commodities market, with oil prices dropping for the fourth straight session. U.S. crude fell 0.34% to $79.11 per barrel and Brent was at $83.23, down 0.26% on the day.

Source: Yahoo

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Devin

Economic

Central Bank

Bond

Investors are hoping policymakers gathering at the Kansas City Fed's annual Jackson Hole Symposium later this month will shed light on one of the murkiest - yet fundamentally most important - tenets of monetary policy: R-star.

Even before the pandemic, accurately gauging the theoretical real rate of interest - the equilibrium rate consistent with potential growth and stable, on-target 2% inflation - was a tough call. It is even more challenging now.

Which is why markets are desperate for any insight into policymakers' thinking. Fed officials won't give a steer on the immediate policy path but their view on whether the nexus between inflation, growth and interest rates has fundamentally changed since the COVID shock would be gold dust.

R-star is critical for understanding the economy's potential over the long term, and therefore central to estimates of what growth, corporate earnings, and investment returns might be.

It is a particularly sensitive topic now as the Fed nears the end of its hiking cycle and real yields on 10-year U.S. Treasuries hit 14-year highs.

Recent papers by New York and Dallas Fed staffers have dug into the short-term and longer-term estimates for R-star, and this might be something that is fleshed out more at Jackson Hole.

"Discussions at Jackson Hole could be used to separate the near-term outlook for R-star from the long-term outlook, to see if long-term trends have shifted since COVID," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

Goldberg notes that if the pre-pandemic consensus R-star was "relatively low with a wide uncertainty band", it is now "relatively low with a huge uncertainty band".

Even the New York Fed's two most renowned R-star indicators, the Laubach-Williams model and the Holston-Laubach-Williams model, are, metaphorically speaking, miles apart.

The LW model suggests the prevailing longer-term natural rate of interest for the U.S. economy is 1.14%, and the HLW model points to 0.58%. The discrepancy points to the ambiguity and nebulous nature around the whole concept of R-star.

Enrique Martínez-García, author of a Dallas Fed blog in July titled "Gazing at r-star: Gauging U.S. monetary policy via the natural rate of interest", estimates long-run R-star at around 0.70% and R-star over a three-month horizon of -0.30%.

"Imperfect as it is, my model suggests rates will remain high for a period of time, ending the policy cycle at somewhat lower levels than those we see right now, but still higher than at any other point during the post-GFC period," Martínez-García said, referring to the Great Financial Crisis. Markets Clamor for 'R-star' Signal from Jackson Hole_1

Markets Clamor for 'R-star' Signal from Jackson Hole_1

Markets Clamor for 'R-star' Signal from Jackson Hole_2

R-Star Gazing

The ambiguity around R-star, particularly since COVID, is highlighted by the wide divergence of opinion in the Dallas and New York Fed research.

Martínez-García's estimate of short-term R-star is negative, while the New York Fed staffers' models suggest it has "increased considerably over the past year".

If the short-term neutral rate of interest is higher than previously thought and close to the current fed funds target range of 5.25-5.50%, then it helps explain why the economy is holding up far better than most analysts had expected.

It could explain why economists at Goldman Sachs, Citi, JP Morgan and others have pushed back or removed their recession calls, and feeds into the view that the Fed may not ease policy any time soon.

"If they (policymakers) push that argument more officially, it would reduce the urgency of cutting the funds rate," Goldman Sachs strategist David Mericle wrote this week, referring to Jackson Hole. Markets Clamor for 'R-star' Signal from Jackson Hole_3

Markets Clamor for 'R-star' Signal from Jackson Hole_3

Looking further ahead, New York Fed President John Williams reckons the longer-term neutral rate today is probably just as low as it was before the pandemic, somewhere between zero and 1%.

"I haven't seen really any strong evidence that neutral rates have yet risen much beyond what they were, say before the pandemic," he told the New York Times.

This year's Jackson Hole Symposium, under the broad theme of "Structural Shifts in the Global Economy", could not come at a more critical juncture for the Fed or markets.

The Fed is near the end of its tightening cycle having raised interest rates by 525 basis points to the highest since 2007. Monetary policy is restrictive, and inflation could soon boast a 2% 'handle'.

But by many other measures, the economy is defying gravity - unemployment is near its lowest in over 50 years, retail sales are booming and the Atlanta Fed's GDPNow model is estimating third-quarter growth at a stunning 5% annualized rate.

Longer-dated real bond yields have shot up to their highest level since 2009 even as market expectations for inflation and Fed rates have held steady. This suggests investors are sending a signal that R-star could ultimately be higher, although by how much and over what time frame is far from clear.

It is this lack of visibility investors hope can be lifted a little at Jackson Hole.

Source: Reuters

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FastBull Featured

Daily News

[Quick Facts]

1. Atlanta Fed GDPNow model raises forecast for U.S. Q3 GDP.

2. Fed minutes: The staff no longer judged that the economy would enter a mild recession toward the end of the year.

3. San Francisco Fed: U.S. households will run out of excess savings in this quarter.

[News Details]

Atlanta Fed GDPNow model raises forecast for U.S. Q3 GDP

The U.S. economy is likely growing at a 5.8% annualized rate in the third quarter, compared to a 5.0% increase last quarter, the Atlanta Federal Reserve's GDPNow forecast model showed. This suggests that the U.S. economy is far from being in a recession.

The model's nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4% and 8.8%, respectively, to 4.8% and 11.4%.

Fed minutes: The staff no longer judged that the economy would enter a mild recession toward the end of the year

Most Fed officials still view high inflation as a continuing threat to the U.S. economy and believe that further interest rate hikes may be needed, according to the minutes of the Federal Reserve's July meeting.

The minutes showed that most participants believe there are serious upside risks to inflation that might require further tightening of monetary policy. In addition, participants no longer judged that the economy would enter a mild recession toward the end of the year.

The staff still expected real GDP growth in 2024 and 2025 to be lower than their estimates of potential output growth, which would lead to a modest increase in the unemployment rate relative to current levels.

Participants also expected headline and core personal consumption expenditure (PCE) price inflation to decline over the next few years. Most of the decline in core inflation is expected to occur in the second half of 2023. Forward-looking indicators suggest that the increase in the price of housing services will slow, and prices of core non-housing services and core commodities are also projected to slow over the remainder of 2023. Inflation is expected to ease further in 2024 as the supply-demand imbalance continues to be resolved, with the total PCE price projected to increase by 2.2% and core inflation by 2.3% by 2025.

San Francisco Fed: U.S. households will run out of excess savings in this quarter

According to a new study by the San Francisco Fed, the excess savings accumulated by U.S. households during the pandemic may run out this quarter, which means consumer spending may slow down which is not good for the economy. Excess savings often means excess consumption, which is one of the key pillars of the U.S. economy. The depletion of excess savings by U.S. consumers could hurt the economy's ability to achieve a soft landing.