Both West Texas Intermediate (WTI) and Brent crude futures ripped higher at the start of the week after OPEC+ said it would stick to its current output policy, benefitting from the rebound in energy demand globally. The decision flew in the face of calls from around the world to pump more oil, as governments fear energy price inflation could derail any economic recovery. After years of hearing the ongoing global calls from all quarters to stop new investments in oil companies and producers along with being side-lined in the rush to cut emissions by large industrial economies, it's hardly surprising they were not ready to play ball. The way OPEC sees it, higher oil prices are essential to continued investment, along with reminding the world that it still needs them.
The US benchmark WTI climbed 3 per cent after the announcement to more than $78 a barrel for the first time in 7 years, whilst Brent crude jumped to $82 a barrel for the first time since 2018.
France, Spain and the EU also waded into the issue of rises in gas prices by asking the rest of the EU to take urgent action to ‘immediately react to dramatic price surges’.
On the back of higher energy prices Treasuries bear steepened adding pressure to long end rates. The 30-year led the way higher in yield, as a nearly 6bp rise led them to again test 2.10%. However, even with rising energy prices and higher US yields injecting fresh uncertainty into the global outlook, US equities surged back, with energy (unsurprisingly) and tech among the leading sectors.
The Chinese property developer Fantasia failed to repay one of its loans, adding tension to China's financial system. The missed payment was worth just over $205m (of its near USD13bln in liabilities), as the smaller developer struggled for funding in the wake of the Evergrande debacle. Evergrande were yet to disclose details of a ‘major transaction’
Biden reiterated that he has confidence, just, in Federal Reserve Chair Jerome Powell, hours after Elizabeth Warren, the democratic senator for Massachusetts said she believed Powell had ‘failed as a leader’ amid fallout from financial trades made by top Fed officials last year.
On Thursday we saw progress made on the debt ceiling overnight as Democrats signalled that they would take the Republican offer to raise the debt ceiling into December, removing the immediate threat of default. The decision by Senate Minority Leader Mitch McConnell to agree on a temporary debt ceiling suspension was unexpected. According to his statement, the Republicans will allow Democrats to pass a fixed dollar amount to cover spending into December, using normal procedures. It certainly took away the urgency to increase the ceiling through reconciliation over the next few days.
We started Friday with risk back in full force. Treasuries sold off, equities rallied globally, there was still no stopping oil, taking out new highs, as the Senate passed the debt ceiling increase until 3rd December and the vote now passes to the house tomorrow, where it is expected to pass.
Currency moves were more muted as we waited for September Non-Farm Payroll numbers. The Fed's Powell had set a low bar for a November meeting taper announcement by saying he wants to see a ‘decent’ jobs report, so it didn’t have to be a great number.
The estimates before the figures were for 500k jobs added an unemployment rate of 5.1% and participation rate of 61.8%. The actual number of jobs added was just 194k with the previous month’s figure revised up to 366k from 235k. The unemployment rate was lower at 4.8% versus the prior month’s reading of 5.2% and the participation rate fell slightly to 61.6%. The average hourly earnings also edged higher at 0.6% against 0.4% expected keeping the yoy figure at 4.6%.
With Powell having set a low bar for tapering to begin in next month, it does seem that even with the miss on the September payrolls, the number reported is probably still ‘decent enough’. The upward revisions, household employment and hourly earnings all adding to the argument.
After the numbers the knee jerk reaction was for treasuries to rally, however they very quickly ran out of steam and drifted lower into the close, with the 10-year closing above 1.60% yield. Equites trod water as the US entered a long weekend.
The week ahead we have markets still digesting Friday’s jobs report, we have the September inflation readings, retail sales on Friday. We also have a heavy auction schedule, plus the FOMC minutes will be released Wednesday. The EU has a relatively light week, with German ZEW and ECB speakers the highlight. The U.K. has its monthly data dump. In Japan we have machine tool orders and PPI.