The Market Today

Rise in Oil Prices Adding to Inflation Concerns

by Craig Dismuke, Dudley Carter


Manufacturing Output, Homebuilder Confidence, and Fed Speakers: The September Industrial Production report is scheduled for 8:15 a.m. CT.  Manufacturing output is expected to inch up 0.1% MoM. Of interest will be auto activity.  Overall manufacturing output excluding motor vehicles and parts is currently up 3.7% YTD while auto-related activity is down 5.0%.  Also released today will be the October NAHB’s homebuilder sentiment index.  Confidence remains strong but is expected to decline for the seventh month of the last twelve.  Speaking from the Fed today are Vice Chair Quarles (4:30 a.m. CT), and Minneapolis Bank President Kashkari (1:15 p.m.).


Stocks Fall After Big Weekly Gain as Treasury Yields and Oil Rise: U.S. equities pulled back early Monday following last week’s earnings-driven gains (more below) as Chinese data disappointed and rising oil prices and Treasury yields reenergized the inflation debate. U.S. index futures had slipped around 0.2% at 6:30 a.m. CT as European markets weakened after a mixed session across Asia. China’s CSI 300 led losses as growth data disappointed already subdued expectations. Despite better-than-expected retail spending, the world’s second-largest economy grew 4.9% in the third quarter from a year ago, short of the 5.0% gain expected and a slowdown from the 7.9% pace in the second quarter. China’s economy has been hit by several headwinds, including energy shortages, virus lockdowns, and regulatory and real estate concerns. Consternation about rising global energy costs remained front and center Monday as oil prices gained 1.0% to push U.S. WTI to more than $83.50 a barrel, a new seven-year high. The recent rise in energy costs has helped push market-based inflation expectations, a key component of Treasury yields, back up in recent weeks (see Chart of the Day). At 7:00 a.m., the 10-year Treasury yield was 3.0 bps higher at 1.60%. Market repositioning for the potential that quicker rate hikes projected in the Fed’s latest forecast may come to fruition has driven shorter yields higher. The 2-year yield rose 4.5 bps to 0.44%, a new high back to March 2020, and the 5-year yield added 5.8 bps to 1.18%, its highest mark since February 2020.

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ICYMI – October 15, 2021 Weekly Market Recap: Treasury yields parted ways on Tuesday as the bond market reopened from a holiday and remained on divergent paths through Thursday. Yields on shorter maturities pressed higher as several Fed officials signaled continued support for tapering asset purchases despite disappointing payroll growth in September. September’s Minutes showed broad support for a plan to taper monthly asset purchases proportionally, potentially starting as early as mid-November and wrapping up by the middle of next year. Job openings stepped down in August for the first time this year but remained notably higher than the number of unemployed workers. Further signaling that the labor market is tight, layoffs hit a new series low while quits jumped to a new record high and jobless claims fell to new lows for the pandemic. A surface-level read of September’s CPI data gave an indication that price gains are moderating while a deeper dive showed pressures may be broadening out. Despite the taper confirmation, higher oil prices, signs of a tight labor market, and firm inflation, longer Treasury yields declined. By Thursday, the spread between the 2- and 10-year yields had reached its flattest level since September 22. A strong batch of retail sales data on Friday, however, lifted longer yields and steepened the curve. For the week, the 2-year yield added 7.7 bps to 0.39%, its highest level since March 2020, the 5-year yield rose 6.6 bps to 1.13%, its highest yield since February 2020, and the 10-year yield dipped 4.2 bps to 1.57%. The S&P 500 rose 1.8% after strong bank earnings brightened spirits, marking the index’s strongest week since July 23. Click here to view the full recap.

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