The Market Today
Oil Prices Pull Back; Treasury Yields Lower as Fed Kicks Off Two-Day Meeting
by Craig Dismuke, Dudley Carter
Fed Kicks Off Two-Day Meeting: The Fed gathered in Washington today to kick-off a two-day meeting that is expected to end with a 25-bp rate cut, and provide a refreshed set of economic projections and a dot-plotted path for 2019 and 2020 that is necessarily lower.
Later Today: At 8:15 a.m. CT, the Federal Reserve will release the industrial production report for the month of August. Both industrial production, and the manufacturing subset, are expected to have recovered 0.2% from monthly declines in July. At 9 a.m. CT, the NAHB is expected to report that its housing market index, a measure of home builder confidence, was unchanged in September near the middle of its range from the last several years.
OVERNIGHT TRADING ACTIVITY
Oil Prices Pullback After Eye-Popping Gains Monday: Oil prices edged back overnight with both Brent and U.S. WTI down approximately 1.5% around 6:30 a.m. A weekend drone attack on key oil facilities in Saudi Arabia sent oil prices surging to start the week and aggravated an already-simmering geopolitical environment. Saudi Arabia blamed Iran, and the U.S. agreed that evidence indicated the Rouhani regime was the likely perpetrator behind the attacks.
Chinese Stocks Fall After PBOC Leaves Key Lending Rate Unchanged, German Expectations Improved But Remain Low: Global equities were mixed but modestly changed across most of Asia and Europe. However, China’s CSI 300 fell 1.7%, the steepest decline in more than a month, to lead all global losses. Analysts were pointing to the PBOC holding its one-year benchmark lending rate, which drives its recently enhanced Loan Prime Rate, unchanged on Tuesday in the monthly repricing. Global bond yields had moved in opposite directions and German yields were holding lower despite an uptick in a survey of financial market experts’ economic expectations. The current assessment weakened more than expected to a new nine-year low, while the expectations index, still deeply in negative territory, rebounded 21.1 points from August’s seven-year low.
Treasury Bill Yields Remain Under Pressure, Even As Long Yield Decline: The dynamics behind the Treasury market remain consistent with yesterday’s finish, with yields on notes and the Long Bond lower while shorter maturities remained under pressure, perpetuating for the now the narrative of short-term funding pressures. Just after 7 a.m. CT, the 2-year yield had declined 2.6 bps to 1.73% while the 10-year yield slipped 3.8 bps to 1.81%. According to ICAP, the rate on the general collateral repo rate opened at 7% Tuesday, while separate data showed SOFR rose 0.23% to 2.43%, the highest since before Fed dropped its overnight rate on July 31.
YESTERDAY’S TRADING ACTIVITY
Historic Oil Price Surge Drove Markets Monday: Oil prices were the major market story Monday after a weekend drone attack on key Saudi Arabia oil facilities knocked roughly 5% of global production offline. After surging nearly 20% overnight, the biggest intraday move up since 1991, Brent crude ended the day 13.1% higher at $68 per barrel, its biggest daily gain in over a decade. U.S. WTI matched Brent’s daily gain to close at $62 per barrel, it highest level since May.
Recovery From “Iranian Weapons” Attack Could Take Longer Than Expected: Oil prices had eased their daily gain ahead of U.S. trading, but restrengthened after Saudi Aramco indicated it could take longer than expected to get operations back up and running and the Saudi military said “Iranian weapons” had caused the damage. On Sunday, President Trump said the U.S. was “locked and loaded” as they waited for evidence of who was responsible. When asked in a press conference Monday if Iran was responsible, he answer “it’s looking that way.”
Broader Risk-Off Tone Offset Oil Boost To Energy Companies: The rally in oil boosted the S&P 500’s energy sector by 3.3%, but the associated economic and geopolitical uncertainty weighed on most other sectors. After fluctuating in negative territory for the entirety of the session, the S&P 500 slipped 0.3% while the Dow dropped 0.5%. Treasury note and bond yields ended off their lows but cut into their recent surge by roughly 4 bps to 5 bps across the curve. Shorter bill yields, however, moved higher and overnight repo rates spiked, eliciting reports of pressures in funding markets caused by coincident Treausury auction settlements and corporate tax payments. If prolonged, the apparent funding pressures could also raise monetary policy questions about the level of banking reserves being held at the Fed.