The latest oil price spike follows a decision by Saudi Arabia to maintain oil production cuts of a million barrels per day through the end of the year, while Russia agreed to extend a -300,000 barrel per day oil export cut.
The cuts come despite concerns about shrinking oil supplies and strong global demand that has pushed Brent crude prices up nearly +25% in the last three month.
Oil market insiders say that Saudi Arabia and other OPEC+ members want to maintain tight supplies in order to keep oil prices higher for longer, which of course means higher gasoline prices.
Keep in mind, the dramatic decline in gas prices over the past year has been a key factor behind slowing inflation. If you recall, average US pump prices last summer soared past +$5.00 per gallon. While the Fed prefers to track "core" inflation measures that strip out energy prices, the costs still tend to filter out into the wider economy via transportation, shipping and other operating expenses, especially if oil prices remain elevated for an extended period.
That potentially means more upward pressure on "core" inflation ahead, which has already proven tougher to rein in than headline prices.
In general, economists say the last 1% to 1.5% leg of inflation is typically the toughest to beat, which is why it also carries the highest risk of a policy mistake. Bears also warn that with stocks currently "priced for perfection," any indication that inflation pressures could be reigniting could see more money retreat from stocks and seek shelter in bonds and other "safer" basset classes.
Investors today are anxious to see the ISM Non-Manufacturing Index after the"price" component in July rose to 56.8% from 54.1%. There are signs that service providers are starting to hit pricing limits but economists believe rising wages and energy prices will nonetheless work to keep services inflation stubbornly elevated.
On the earnings front, todays key results come from American Eagle Outfitters, ChargePoint, and GameStop.
Oil Price Back Above +$90 Per Barrel for First Time in 2023: Brent crude oil prices rose above $90 a barrel for the first time in 2023 yesterday as Saudi Arabia and Russia said they would extend their voluntary production and export cuts until the end of the year. Saudi Arabia, which leads the expanded Opec+ cartel with Russia, has cut an additional -1 million barrels a day from the global market since July, in what had been originally billed a temporary measure. But having already extended the cut until the end of September, Saudi Arabia’s state media reported the kingdom would keep its -1 million barrel per day reduction in place until the end of December. Source Financial Times
Higher Inflation Helped Boost Earnings, Now the Hangover Hits: The Commerce Department last week reported that after-tax U.S. corporate profits were down -9.4% in the second quarter from a year earlier, a more severe drop than the -2.9% decline in earnings per share registered by companies in the S&P 500, as estimated by Refinitiv. Some of this difference is a matter of composition as the S&P 500 contains only large, public companies, many of which have operations outside the US, while the Commerce Department figures include Federal Reserve banks, which have been losing money as a result of high rates and the Fed’s portfolio reductions. S&P 500 companies have also reduced their share counts, through buybacks and the like, boosting earnings per share. Indeed, S&P 500 net income was down notably more in the second quarter than earnings per share, falling -5.5%. Cooling inflation is something that most investors would see as a cause to celebrate. But if investors haven’t considered how it might affect the measured earnings of the companies they own, they could be in for a surprise. A lot will hinge on the accounting a company uses... Companies that use last-in, first-out accounting, or LIFO, can take earnings hits in inflationary environments. This is because under LIFO, they record the cost of inventory at the latest price they paid for those materials in the open market. That raises the cost of goods sold, and lowers profit. But more companies use first-in, first-out accounting, or FIFO, whereby the cost of their oldest inventory is valued first. In an inflationary environment where, in addition to paying higher prices for materials coming in the door, they are also charging customers more for what they sell, profits can get a temporary boost. “That is going to look good for a while and then it won’t,” explains David Zion, head of the accounting and tax-research firm Zion Research Group. Source WSJ
Hurrican Lee Brewing in the Atlantinc: Tropical Storm Lee has developed in the Atlantic Ocean and is forecast to strengthen into a major hurricane by the end of the week. Forecasters had been tracking Invest 95L for several days as it moved through open waters of the Atlantic Ocean. It was upgraded to Tropical Depression Thirteen on Tuesday morning before becoming Tropical Storm Lee on Tuesday afternoon. Lee is forecast to reach hurricane strength by early Thursday and major hurricane strength by Friday afternoon. By Saturday, winds could reach Category 4 strength. It's still too early to say if an where it might hit the US. Stay tuned...
Congress Returns with Clock Ticking to Avert Government Shutdown: A deeply divided Congress has returned from a monthlong summer vacation with the clock ticking to pass spending legislation to avoid a government shutdown and boost U.S. emergency response funding following multiple natural disasters. The U.S. government will shut down at midnight on Sept. 30 if Congress fails to pass spending legislation. While the Senate is back in session as of yesterday (Tuesday), the House will not return to work until Sept. 12, leaving nearly three weeks to pass funding before the deadline. The White House on Thursday asked Congress to pass a single short-term measure, called a continuing resolution, to fund the federal government at current levels and avoid a shutdown while negotiations continue over a dozen long-term funding bills. The House of Representatives has only passed one of the bills needed to fund the federal government through 2024. The battle over funding the U.S. government comes as the Federal Emergency Management Agency is running low on money with hurricane season kicking into high gear this month. FEMA expects to use up the $3.4 billion left in its disaster relief fund and run a deficit by the middle of the month in the absence of additional money. Source CNBC
China Slowdown Means It May Never Overtake US Economy: China is no longer set to eclipse the US as the world’s biggest economy anytime soon, and it may never consistently pull ahead to claim the top spot as the nation’s confidence slump becomes more entrenched. That’s according to Bloomberg Economics, which now forecasts it will take until the mid-2040s for China’s gross domestic product to exceed that of the US — and even then, it will happen by “only a small margin” before “falling back behind.” The economists now see growth in China’s economy — the world’s second largest — slowing to +3.5% in 2030 and to near +1% by 2050. China’s economy expanded 3% last year, one of its slowest rates of growth in decades as pandemic controls and a property crisis battered the country. The revised outlook comes as the world reconsiders how to work with a China that may be approaching a peak in power, even if it’s not already in decline. The US and Group of Seven nations are increasingly looking at evidence of deep-seated structural problems in China, seeing opportunities that ultimately will strengthen the West’s hand against a weakening geopolitical competitor while also considering ripple effects from the slowdown. Source Bloomberg
BMW to Use Amazon Cloud Tech to Build Autonomous Driving Features: BMW will build its semi-autonomous driver assistance system on Amazon’s cloud computing technology, the two companies said Tuesday. The German automaker’s next-generation advanced driver assistance system, or ADAS, will feature in its Neue Klasse range of electric cars that the company revealed on Saturday. BMW also said it will use Qualcomm’s Snapdragon Ride platform — a set of specialized chips — to help power its ADAS from 2025 onward. An ADAS is a software system that can offer drivers assistance with actions such as lane changing or parking. Automakers are looking to introduce an increasing number of these features as they push toward autonomous driving. Tesla’s ADAS for example is called Autopilot. ADAS will require large amounts of data processing as the software relies on hardware sets, including cameras and semiconductors. Artificial intelligence processes are key to underpinning these assisted driving systems. That’s where Amazon Web Services, or AWS, comes in. BMW will store and process lots of data in Amazon’s cloud servers. As autonomous driving features advance, an increasing amount of data storage and processing will be required Source CNBC
The Cheap Flights of Fall Are Back: End-of-summer airfare discounts are in full swing, with students back in school and more workers back in the office. It’s the latest signal that flight pricing might be returning to normal after the frenzied travel demand of the past two years. Business travel hasn’t rebounded to the extent that leisure travel has, and airlines need to fill up their planes. Cue the limited-time offers and low fares for flights—for some of the season. Visiting Grandma for Thanksgiving or taking a Christmas trip is still likely to cost a bundle. An analysis from travel app Hopper found that fall fares are down -9% from last year and -10% from 2019 prices. Airfares for September and October are -29% lower than the average prices during the peak summer months for domestic routes, says Hayley Berg, lead economist at Hopper. Prices for international flights, including to destinations in Europe, are down by a similar amount. Discounted plane tickets are typical for autumn. But they have been harder to find in the past few years as travel demand remained high beyond the usual peak periods. Source WSJ
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