Major sell-off in Oil, Nasdaq rallies as bond yields fall

Oil prices saw a significant sell-off, down 4.6% to $85.3 on fears of slower economic growth and signs that supply will soon pick up. Nasdaq took its cue from a modest bond rally, with 10-year yields back at 4.74%. The dollar weakened. But for how long? Higher bond yields are becoming widely anticipated.

Bottom line: risk-on.

TODAY’S MAJOR NEWS

Fewer private sector jobs added sets up NFP data

This morning’s ADP report showed fewer private sector jobs added than expected. This sets the market up to expect a weaker Non Farm Payroll (NFP) report on Friday. Why is this important? The Federal Reserve is focused on “super-core” inflation, the service sector minus shelter. Labor costs are one of the primary drivers of service inflation. Getting super-core inflation low enough to bring overall inflation down to the Federal Reserve’s 2% target means it must slow down the employment sector by bringing the number of job openings into balance with the number of workers seeking a job.

Employers post fewer job openings if they’re worried about slowing consumer spending. Higher unemployment rates mean that more people are looking for jobs. The object is to bring the job openings to several workers seeking a position closer to 1:1 after it reached nearly 2:1 in the post-pandemic recovery. That ratio is comparable to 1.5:1, but this morning’s ADP report suggests we may be drawing it even lower, pending Friday’s data.

On a related matter, analysts expect Friday’s jobs report to show that average hourly earnings are up 4.3% year-on-year, unchanged from the previous month, suggesting that wage inflation remains a problem.

• The private sector added just 89,000 jobs in September, less than 150,000 forecast, according to ADP, and down from 180,000 jobs created in August
• The US economy created 187,000 jobs in August, with a forecast of Friday’s Non Farm Payroll now expecting a drop to 160,000 for September
• The ADP report often gives us an indication of the trend that we can expect to see in the government report

Health worker's strike could impact inflation

Continuing the summer of labor discontent, over 75,000 unionized employees of Kaiser Permanente, one of the nation’s largest health providers, went on strike today. Progress has been slow on settling the auto workers' strike. Eight unions, making up 40% of Kaiser Permanente’s staff, will be out until Saturday. Service workers like these are seeking higher wages and improved staffing levels as current staff shortages are compromising patient care and taking workers’ health. These demands will concern the Fed due to the impact on core inflation and the tight labor market.

Factory orders surprising  rebound

• Factory orders rebounded 1.2% in August, ahead of the forecast 0.2%, after falling 2.1% in July, the Commerce Department reported
• Orders rose 0.5% on a year-on-year basis in August
• Non-defense capital goods ex aircraft, a key measure of business spending plans on equipment, increased by 0.9% in August
• Shipments of manufactured goods rose 1.3% in August
• Manufacturing, which accounts for 11% of the economy, has been in decline for several months, but the gains made were broadly based
• Orders for computers and electronic products gained 0.3%
• Electrical equipment, appliances, and components orders rose by 1.0%
• Machinery orders gained 0.6%
• Motor vehicle orders rose 0.3%

Oil prices tumble on fears of slowing economy, easing supply conditions

Crude oil prices fell to fresh three-week lows at $85.3 per barrel this morning on trader’s fears for a slowing global economy, combined with headlines suggesting rising supplies. Industry chatter suggests that Russia may be close to easing export restrictions on diesel exports. In contrast, Turkey indicates that the Kirkuk-Ceyhan pipeline may be operational later this week, adding nearly 500,00 barrels per day to the supply of crude oil on the global market. This represents some of the ebb and flow of market psychology, allowing for a pullback in prices following a solid run to 10-month highs.

Speaker’s ouster points to greater volatility

Kevin McCarthy was ousted as Speaker of the House in the Republican-controlled House of Representatives. Does it matter for markets? Wall Street worries as it demonstrates the power wielded by a handful of conservative House Republicans. The power of the few typically leads to disruption of the status quo and greater volatility.

We can expect more drama in Washington when it comes to fiscal policy. The first real test of that will likely come in mid-November when the current stopgap funding bill expires, again threatening a partial government shutdown. This, in turn, could be reflected in still higher bond yields and volatile financial markets.

TODAY’S MAJOR MARKETS

Nasdaq rallies as bond yields fall back

• Nasdaq rallied most strongly this morning, up 0.9%, while the S&P 500 and Russell 2000 rose by 0.4% and 0.2%, respectively
• Foreign markets were mixed, with the Nikkei 225 down 2.3%, the FTSE 100 was off 0.8% and the DAX was unchanged
• The VIX, Wall Street’s fear index, fell back to 18.9

Bonds rally, dollar pulls back

• 10-year yields fell back to 4.74%, while 2-year yields fell to 5.10%
• The dollar index fell 0.3% to 106.7
• Versus the dollar, Sterling, Euro, the Yen were up 0.7%, 0.5%, and 0.1%, respectively

Oil sees major profit-taking

• Crude oil prices fell a remarkable 4.4% to $85.3 per barrel on fund’s selling.
• Spot gold prices were unchanged at $1,822 per ounce, while silver fell 1.1% to $21.0 per ounce
• Grain and oilseed markets were mixed to lower
• We're seeing modest strength in soymeal and soybean prices as they bounce following recent sharp losses
• Lower wheat prices are providing a drag for corn prices following the strength of the past couple of sessions,

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

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