Powell Remains Committed to His Script during Asia Open –

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Markets

US Benchmarks have been experiencing a lack of clear direction, swinging between substantial gains on one day and significant losses on the next. By the week’s conclusion, the S&P 500 achieved a modest 0.8% increase, marking its first positive movement in the past four weeks. Conversely, the Dow encountered a 0.4% decline. In contrast, the Nasdaq exhibited resilience, surging by 2.3%. Despite these noteworthy gains, the Nasdaq, heavily oriented toward technology stocks, struggled to maintain momentum even after Nvidia reported impressive financial results.

The standout event of this week revolved around Federal Reserve Chair Powell’s address at the Jackson Hole summit. Although he didn’t introduce any new information, Powell reiterated the central bank’s dedication to achieving the 2% inflation target and maintained a cautious stance. He welcomed the slower price rise amid tighter financial conditions and gradually easing supply constraints.

Indeed, consumer price inflation has significantly decreased from last year’s peak of 9.1% to just slightly above 3%. Nevertheless, Powell cautioned that reaching the 2% objective “still has a long way to go, even with the more favourable recent readings.”

Hence, the Fed intends to carefully approach future interest rate adjustments during this final and complex battle phase against inflation. Concurrently, Powell hinted that the Fed might hold steady during the September 19-20 meeting, considering that the repercussions of previous rate hikes are yet to materialize fully. All in all, Powell’s speech held few, if any, surprises.

Although the discourse on policy outlook is less fixated on inflation than in recent times, the overall sentiment aligns with our present projection of no rate hike in September and a probable determination that more stringent monetary measures are unwarranted. However, the spotlight on economic expansion means that any unexpected positive outcomes in upcoming key data releases, such as the Non-Farm Payrolls report, JOLTS, and ISM manufacturing indices, could elevate September rate hike expectations.

In Europe, stocks experienced marginal gains ahead of ECB President Lagarde’s speech at the Jackson Hole symposium on Friday. This occasion marked her first appearance at the event since assuming the role of ECB chief in 2019. Lagarde reaffirmed the Bank’s commitment to maintaining interest rates at appropriately restrictive levels for as long as needed to ensure a timely return of inflation to the targeted 2% mark. She also highlighted that the Bank’s future decisions will hinge on three criteria: the outlook for inflation, the dynamics of underlying inflation, and the effectiveness of monetary policy transmission. It appears likely that the ECB will adopt a more cautious approach at the September 14 monetary policy meeting, although the decision is expected to be a closely contested one.

Hence, the Euro area’s forthcoming inflation report assumes pivotal importance.

Powell concluded his eagerly anticipated speech at Jackson Hole with an analogy, comparing the current situation to “navigating by the stars under cloudy skies”. This metaphor aptly captures the post-COVID world’s intricate and highly uncertain landscape. Central banks, including the Federal Reserve, are compelled to proceed with careful consideration in the face of numerous variables and uncertainties.

Oil

I suspect oil bulls are recorking the champagne bottle after what appeared to be an imminent break higher encountered a flurry of fresh challenges. While the well-documented apprehension surrounding China’s economic trajectory impacts negatively, a possible European services sector swoon and cracks in US consumer spending have added to the macro demand malaise. However, a more subtle yet potentially significant development is emerging, casting a shadow over crude oil prices: production resurgence in major and minor oil-producing nations.

In the past week, the United States has witnessed a renaissance in crude output, reaching 12.8 million barrels per day (mb/d). This contrasts with an average of just under 12.3 mb/d recorded from January to July. Furthermore, the Energy Information Administration (EIA) predicts US output to escalate to 13.0 mb/d by the end of the year and to 13.4 mb/d by the conclusion of 2024, surpassing the pre-pandemic peak of 13.1 mb/d observed in early March 2020

Concurrently, a couple of the “fragile-five” oil-producing nations – Iran, Iraq, Libya, Nigeria, and Venezuela – have managed to elevate their domestic crude production. The cartel’s current production-cut agreement does not bind Iran despite being an official OPEC member.

Meanwhile, Venezuela, home to the world’s largest oil reserves, appears to have reached a production floor, climbing to 844 kb/d in July (in contrast to 660 kb/d in December). Despite this, it remains well below the peak of 2.9 mb/d recorded in 2015 during the political upheaval following Nicolás Maduro’s assumption of the presidency. If the US continues to loosen the sanction screws, we could be in for a deluge that would leave Saudi Arabia plugging the dyke with multiple fingers.

Additionally, there are indications that crude exports from Iraq, a participant in the OPEC+ agreement, are poised for a surge.

Recent shifts in the supply landscape underscore a less optimistic perspective on the trajectory of crude oil prices. Despite certain positive aspects, significant challenges and uncertainties persist.

When considering the impacts of rising production in Iraq, Venezuela, Iran, and other members of the Fragile 5, alongside record-level outputs from the US, it becomes plausible that these factors could place a ceiling on prices, pressuring Saudi Arabia to extend its production cuts. However, should the US significantly expand its own production share, this action might trigger increased output from Russia, subsequently influencing a similar response from other producers. Monitoring this intricate interplay of variables will be crucial moving forward.

With hedge funds and managed money possibly still in the long camp, there could be a good old oil market rug pull.