Nasdaq, S&P recover on quiet news day, Oil rallies

Equity markets rose modestly after recent sell-offs on a low energy day with little news. Tech stocks in the Nasdaq recovered after stock specific news hit big names like Apple. Oil resumed its upward path on news of China’s oil stockpiling. The US dollar held key support levels after its recent rise. The next few weeks will see traders on Fed watch and chatter about (another) budgets showdown which might have a real market impact this time around.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Another government shutdown argument?

As seasons change, here comes another political showdown over funding the US government – if Democrats and Republicans can’t agree on a bill to fund operations prior October 1st. Spending bills typically start in the House of Representatives as a package of 12 funding bills; just one of those 12 bills has thus far been approved. The House and Senate then haggle about spending priorities. Government shutdowns aren’t that rare – this would be the fourth of the last decade if it occurs – but they tend to have little impact on the economy typically, and therefore little impact on the markets. Will it be different this time?

Debt interest is becoming critical

House Republicans reportedly want to trim $120 billion off the $1.59 trillion in the discretionary spending package agreed to by House Speaker Kevin McCarthy and President Joe Biden several months ago in the last debt ceiling negotiations. What they’re not talking about is that the current annual interest bill on the US national debt is $673 billion, or 42% of discretionary budget spending, and that number is growing requiring them to be renewed at today’s higher interest rates.

Another credit downgrade?

Fitch lowered the US credit rating earlier this summer because of the volatile political environment in Washington. Another showdown will again highlight the problem, risking a debt downgrade by Moody’s, with S&P having made its downgrade over a decade ago. Credit downgrades might result in higher interest rates.

Higher bond yields?

Treasury yields are trending higher. Rapidly increasing federal spending increases the supply of debt supplied to the market at a time when the Fed is unwinding its balance sheet by reducing its demand for that same debt by $1.14 trillion per year, and as fiscal spending adds a trillion or so of supply. One to bring supply and demand together for debt is for their yields to rise to attract new buyers, and that’s what the market is doing. A failure of Washington to address this issue over the next several weeks may add to those interest rate hike risks by the market, and that presents a risk to both the economy and to the markets.

Takeaways

• Equity markets could suffer if bond yields are spooked by the debt debate and another US credit downgrade
• Tech stocks in the Nasdaq could be hardest hit
• The tentative recovery in the housing market could but hit by higher mortgage rates
• Bank stocks might also feel the strain from higher funding costs and a weaker property market

Job switchers not pushing wage gains

• Wage gains for those switching jobs are now just barely higher than those who stay in their current role according to Bank of America’s (BoA) economics team – this suggests that a tight labor market might not lead to higher inflation as is usually the case
• Annual wage growth for job switchers dropped to 5.6% in August (3-month average), down from 8.5% in July 2022 and barely higher than the 5.2% wage growth seen by those who didn't change jobs last month, according to data from the Atlanta Fed
• Wage gains in August stood at 5.3%, down from a peak of 6.7% in the same month last year.
• "The moderation in wage inflation appears to be mostly driven by wage growth for job switchers," according to BoA

China is stockpiling essential commodities, notably oil

• China is also building large reserves of crude oil, believed to be over 1 billion barrels, or a 66-day supply
• August imports were the second highest on record at 12.78 million barrels per day
• As we’ve noted in recent days, Saudi/Russian oil production cuts (positive for the oil price) are being matched by increased production, notably from Iran supplying China’s inventory and regular needs (negative for the oil price)
• Oil at close to $90 reflects this push and pull

TODAY’S MAJOR MARKETS

Nasdaq, S&P end three-day decline

• Equity markets recovered, with a 0.3% rise in the S&P 500 and Nasdaq, with the Russell 2000 unchanged
• European markets rallied overnight, with the FTSE 100 and Dax up 0.5% and 0.1%, respectively, while the Nikkei 225 saw profit taking was off 1.2%
• The VIX, Wall Street’s fear index, fell back to low levels at 13.7

Bond yields fall modestly

• 2-year and 10-year bonds fell back to 4.96% and 4.24% respectively
• The dollar index was unchanged at 105.0
• Versus the dollar, the Yen fell 0.3%, Sterling was unchanged, and the Euro rose 0.1%,

Oil rallies, Gold unchanged

• Crude oil prices rose 0.8% to 87.6 per barrel, with traders focusing on news of China’s oil inventory increases
• Spot gold and silver prices were unchanged at $1,947 per ounce and $23.1 per ounce, respectively
• Grain and oilseed markets were mixed ahead of next week's big USDA crop report

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]