Oct 06

Today’s News 6th October 2022

  • JPMorgan Sees Oil Rising Back Over $100 If These Five Conditions Are Met…
    JPMorgan Sees Oil Rising Back Over $100 If These Five Conditions Are Met…

    The OPEC+ meeting has come and gone, with “Fist-bump bro” Biden humiliated…

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    … and the White House scrambling to save at least a little face…

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    … and failing.

    And so, with oil surging – even as the dollar spikes sharply higher – traders are asking two questions: i) is the drop in oil over and ii) how much higher can it get.

    Here are the answers: i) with just a few more weeks left on Biden’s SPR drain mandate, which has soaked up a record 30% of all the “emergency” oil inventory this year…

    … and with even less supply coming to market now, Europe about to go turbo on gas to oil switching, and China set to rebound post this month’s congress when Covid Zero will be gradually phased out, we can decisively say that the drop in oil is over.

    As for ii), we go to the head of JPM commodity strategy, Natasha Kaneva, who repeats her long-standing 4Q22 price target of $100/bbl, and says that to realize it, five key forecasted conditions need to play out:

    1. demand needs to bounce 0.9 mbd yoy in 4Q, most of that from gas to oil substitution;
    2. sanctions on Russia need to constrain supply by 600 kbd;
    3. Saudi Arabia production needs to normalize from 11 mbd in September to a sustainable 10.6-10.7 mbd pace;
    4. US SPR releases need to end in October or sooner; and
    5. the US dollar needs to stabilize.

    Kaneva concludes that if four of the above supply-demand conditions materialize, the bank’s models suggest a return to deficits in 4Q22 as supply declines (lower Russian and Saudi production and the end of SPR releases) and demand is supported by incremental gas to oil switching. Adding a stable US dollar to the deficit should result in prices once again re-testing $100 later in the quarter, according to JPMorgan.

    More in the full note available to pro subs.

    Tyler Durden
    Wed, 10/05/2022 – 11:40

  • Biden Blasts "Short-Sighted" OPEC+ Cut, Blames US Energy Firms For Surging Pump Prices
    Biden Blasts “Short-Sighted” OPEC+ Cut, Blames US Energy Firms For Surging Pump Prices

    Update (1125ET):

    The Biden administration is absolutely furious with the Joint Ministerial Monitoring Committee (JMMC) of the Organization of the Petroleum Exporting Countries (OPEC) and allies, including Russia, for agreeing to slash oil production by 2 million barrels per day. 

    CNN’s Chief Congressional Correspondent Manu Raju tweeted that Biden responded to the OPEC+ cut announcement by saying he’s “concerned” and called it “unnecessary.” 

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    Biden’s top national security and economic advisors expressed their disappointment in the OPEC+ production cuts via a statement: 

    The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine. At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on low’er- and middle-income countries that are already reeling from elevated energy prices.

    The President’s work here at home, and with allies around the world, has helped to bring dowm U.S. gas prices: since the beginning of the summer, gas prices are down $1.20 – and the most common price at gas stations today is $3.29/gallon. At the President’s direction, the Department of Energy will deliver another 10 million barrels from the Strategic Petroleum Reserve to the market next month, continuing the historic releases the President ordered in March.

    The President will continue to direct SPR releases as appropriate to protect American consumers and promote energy security, and he is directing the Secretar)’ of Energy to explore any additional responsible actions to continue increasing domestic production in the immediate term. The President is also calling on U.S. energy companies to keep bringing pump prices down by closing the historically large gap between wholesale and retail gas prices — so that American consumers are paying less at the pump.

    In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.

    Finally, today’s announcement is a reminder of why it is so critical that the United States reduce its reliance on foreign sources of fossil fuels. With the passage of the Inflation Reduction Act, the U.S. is nowr poised to make the most significant investment ever in accelerating the clean energy transition while increasing energy security, by increasing our reliance on American-made and American-produced clean energy and energy technologies.

    … and what tools may those be? 

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    We detailed below, ahead of the announcement, the White House said the prospect of a production cut would be a “total disaster” and “hostile act.” 

    It also appears OPEC+ has made its views entirely clear to the White House as well… 

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    Brent crude finds weekly support above the 100-day moving average. 

    Goldman Sachs’ Damien Courvalin breaks down what a 2 million barrels per day OPEC+ cut means for oil markets. 

    *  *  * 

    OPEC+ could be on the verge of one of the largest production cuts in two years, a move White House officials would undoubtedly have a ‘panic attack’ as they attempt to dissuade the 23 crude-producing countries and its allies, such as Russia, from making the cuts. 

    OPEC+ is considering cutting 2 million barrels a day, and on the smaller side, a reduction of 1-1.5 million barrels a day, delegates said. Such a move would be a blow to Washington as the Biden administration has scrambled to unleash record amounts of crude from the strategic petroleum reserve to tame soaring crude prices this summer. 

    “Higher oil prices, if driven by sizeable production cuts, would likely irritate the Biden administration ahead of US midterm elections,” Citi strategists wrote in a note. 

    Citi strategists appear correct: CNN obtained some of the draft talking points circulated by the White House to the Treasury Department this week and called the prospect of a production cut a “total disaster” and “hostile act.” 

    “There could be further political reactions from the US, including additional releases of strategic stocks,” the strategists added. They said the Biden administration could also push forward with an anti-trust bill targeting OPEC.

    But that’s not all. According to Bloomberg, White House officials are discussing possible export bans on gasoline, diesel, and other refined petroleum with the Energy Department. 

    People familiar with discussions said administration officials are discussing export bans of refined products with top oil industry leaders as the risk of an OPEC+ reduction could catapult fuel pump prices higher ahead of the midterm elections in November. 

    And given the resurgence in crude and wholesale gasoline prices, regular pump prices are set to soar again…

    Another person said the Energy Department is analyzing the economics of an export ban. Bloomberg said both people familiar with talks asked not to be identified because discussions are still private. 

    Despite Biden’s SPR drain, hitting levels not seen since 1984, the export ban could be the most controversial move yet by the desperate administration to tame pump prices ahead of the midterm elections next month. 

    Biden’s political emptying of the SPR has left it with a record low of just 22 days of supply…

    Top oil execs and industry experts have blasted the proposed export ban, saying it could backfire and result in even higher gasoline, diesel, and jet fuel prices, while throwing energy markets into turmoil in Europe ahead of winter. 

    In a letter to the Energy Department, Exxon’s CEO Darren Woods wrote last week that “continuing current Gulf Coast exports is essential to efficiently rebalance markets—particularly with diverted Russian supplies.” 

    “Reducing global supply by limiting US exports to build region-specific inventory will only aggravate the global supply shortfall,” Woods said. 

    On Tuesday, the American Petroleum Institute warned any attempt to ban exports will disrupt not just global markets but harm US national security and geopolitical standing. API continued: 

    Banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate US allies during a time of war. For these reasons, we urge the Biden administration to take this option off the table and focus instead on working with us on policies that will strengthen US energy security and protect consumers.

    API outlined the major points from a July study via the American Council for Capital Formation about the economic impacts of a potential export ban of refined products: 

    1. An export ban could result in the shuttering of an estimated 1.3 million barrels per day of US refining capacity (7% of US total) due to trapped refinery production in the Gulf Coast. The loss of this capacity would likely strand a surplus of crude oil in the Central United States, halting important upstream energy production. 

    2. An export ban could result in higher product prices for US fuel consumers, with more than two-thirds likely to experience price increases of more than 15 cents per gallon for gasoline and 45 cents per gallon for distillates. 

    3. An export ban could cause a net loss to US GDP of more than $44 billion in 2023. 

    4. An export ban could eliminate 85,000 jobs this year and 35,000 job losses during 2023.

    “There simply is not sufficient pipeline connectivity or the range of economic shipping alternatives that would be required to transport significantly more fuel to the East Coast from refineries in the Gulf, API continued, adding, “Banning exports of fuel from the United States will not eliminate this challenge or make it easier and more affordable to supply American-refined fuel to the East Coast. Instead, by cutting into global fuel supplies, it would likely raise the cost of fuel imported into the East Coast from the global market.”

    Tyler Durden
    Wed, 10/05/2022 – 11:25

  • "The Whites Of Their Eyes"
    “The Whites Of Their Eyes”

    By Peter Tchir of Academy Securities

    The Whites of Their Eyes

    “Don’t Fire Until You See the Whites of Their Eyes” was allegedly the command given to soldiers at the Battle of Bunker Hill. The original intent of the order was to ensure that ammunition wasn’t wasted when the shots were unlikely to be effective.

    That has changed over time to mean “don’t act too early.”

    But maybe we need to go back to the original order and think about the soldiers (nervous, even scared, facing an enemy likely already firing at them) and imagine how difficult it was to stand their ground and hold their fire until the right moment.

    At Academy, many of my colleagues have faced enemy fire. I think that universally they will tell you how difficult it is. Even with intense training, team building, leadership, and so many other things designed to prepare them for that moment, it is still a difficult test.

    Which brings me to the Fed.

    The Fed has had a consistent message since Powell’s Jackson Hole speech. The Fed doesn’t care about recession and they might even welcome one. They don’t care about job losses, and in fact, they are targeting job losses. They say that they will do anything to fight inflation and that they need to do more, despite:

    • Evidence that rising rates are slowing major purchases and the economy.

    • COVID related supply chain issues and fiscal stimulus created much of the inflation (which had very little to do with monetary policy).

    • Saying that it was transitory for a year or more and now acting as though it is permanent.

    • Anchoring inflation expectations both in surveys and market-based measures.

    • Ignoring their own models that acknowledge prior actions take time to show up in the data.

    • A dangerous geopolitical landscape with North Korea reminding us to pay attention to them and Iran busily working on their nuclear options (in addition to issues with Russia and China).

    • Evidence that QE and QT distort prices more than other traditional tools and unwinding them may be more impactful than thought.

    Will the Fed wait until they see the proverbial whites of their eyes, or will they blink first?

    If your legacy was Mr. Inflation or Mr. Recession, which would you go for?

    We know that the Fed has presented a unified front with the inflation fighting mantra, but does everyone really want to go down with the ship if it is sinking?

    Bottom Line

    Expect weaker data, including jobs.

    The Fed might try to stick to the hawkish rhetoric, but I expect some cracks in the messaging. The bad news is good trade is not over yet, but it needs Fed corroboration, which I expect to happen in the coming days. There will be some “sticking to the inflation fight” mantra, but just enough words will be used to keep this rally alive.

    My view remains that this will morph into “bad news is bad” after that because we’ve already started rolling the rock down the hill and have been pushing when we already should have been pulling it back.

    Tyler Durden
    Wed, 10/05/2022 – 11:20

  • Meanwhile Over At Lehman-Suisse…
    Meanwhile Over At Lehman-Suisse…

    What do credit traders know that equity traders are ignoring?

    While equity prices had risen for the last two days, dragged higher by the market’s melt-up, Credit Suisse credit risk continued to wide dramatically…

    For context, with CDS trading at around 373bps, the equity market (price and volatility) is implying a spread around 157bps…

    So either CDS is drastically too high, and/or CS stock price is too high (or implied vol too low).

    SocGen analysts wrote this morning that Credit Suisse needs to aggressively deleverage its investment banking operations, suggesting that the stock’s recent decline reflects management leaning toward retaining IB trading operations and reports of it resurrecting the First Boston name.

    Analyst Andrew Lim says capital and liquidity ratios are robust, aggressive restructuring plan can be self-funded and wouldn’t need a capital increase.

    Additionally, HSBC said Credit Suisse has no immediate concerns around liquidity and funding.

    From a more systemic risk perspective, we note that, according to Neue Zürcher Zeitung, the Swiss government could provide liquidity to struggling lender Credit Suisse Group AG, tapping a state-backed safety net for big banks it plans to introduce.

    The government voted in favor of introducing a public liquidity backstop for systemically-relevant banks in March, the newspaper said.

    Officials commissioned the ministry of finance to work out details until mid-2023.

    Specifically, the state would be granted ‘bankruptcy privilege,’ putting it first in line among creditors, to avoid losses to the public coffers in case of default.

    Even though the law would not be passed until next year, officials could move to help Credit Suisse on that basis, NZZ reports, since the Swiss government in early September also gave a credit line of 4 billion francs ($4.1 billion) to struggling electricity company Axpo Holding without a specific legal basis.

    Which may explain why professional credit traders bidding protection still.

    Finally, Reuters reports that the Swiss National Bank is monitoring the situation at Credit Suisse Group AG “closely”.

    “We are monitoring the situation,” Governing Board member Andrea Maechlersaid according to Reuters citing an interview on the sidelines of an event Wednesday.

    “They are working on a strategy due to come out at the end of October.

    Additionally, Swiss regulator Finma has already said it is monitoring the bank’s stability.

    Tyler Durden
    Wed, 10/05/2022 – 11:07

  • Turn Off CNBC And Watch Real Yields
    Turn Off CNBC And Watch Real Yields

    Authored by Michael Lebowitz via RealInvestmentAdvice.com,

    Investors watch CNBC and CNBC’s competitors for guidance on where the markets are going. CNBC may provide insightful commentary from very qualified investors. Still, if one is watching CNBC to figure out where markets are headed, they may be better served to turn off the TV and look to the bond market for direction.

    Today, real yields, or the bond yield less inflation expectations, helps explain the movement of many assets. If we are to form reasonable expectations for stocks, commodities, the dollar index, and gold prices, we best have an opinion on where real yields are going.

    In this article, we share evidence supporting the recent strong relationship between real yields and risk assets. We then ponder where real yields are heading to help save you the confusion of trying to follow the conflicting bullish and bearish views presented on CNBC.

    What Are Real Yields

    The real yield is the yield an investor expects to receive after inflation. Think of it as the amount of purchasing power a bondholder expects to gain or lose. The inflation figure within the calculation is based on inflation expectations which are a byproduct of the difference between TIP yields and nominal yields.

    In a free market, lenders should be compensated for lending money. The compensation in the form of interest rate should encompass the risk of non-repayment, the opportunity cost of not having the money available, and expected inflation.

    The focus of this article is primarily inflation, but risk and opportunity costs are also high.

    What Do Real Yields Tell Us?

    The graph below charts real five-year Treasury yields since 2005. The current real yield is 1.62%, the highest level since 2009. Since January 1, 2022, the real yield has risen 3.2% (from -1.58% to +1.62%). The composition of the change is important. Since the start of the year, inflation expectations have fallen by .55%, while nominal bond yields are 2.65% higher.

    The level of real interest rates is a sturdy gauge of the weight of Federal Reserve policy. If the Fed is treading lightly and not distorting markets, real rates should be slightly positive. The more the Fed manipulates markets from their natural rates, the more negative real rates become. –The Fed’s Ever-Growing Golden Footprint

    Real yields provide a durable gauge helping quantify the degree of Fed dovishness or hawkishness. Today, the Fed is incredibly hawkish, judging by real yields.

    Risk Assets vs. Real Yields

    Before sharing our expectations for where real yields might be in the future, it is worth showing the recent strong relationship between real yields and risk assets.

    Stocks

    Fed actions to halt inflation, including hiking interest rates and QT, reduce liquidity in the financial markets and economy. Accordingly, they are not beneficial for stock prices. When considering allocations to stocks, what matters is the degree to which they apply monetary policy.  

    The graph below shows that the recent increase in real yields is like the sharp jump in October 2008. At that time, the financial system failed, and the Fed introduced QE. In a matter of months, inflation expectations whipsawed from +2.70% to -2.40% and back to zero percent. Nominal yields fell sharply over the period.

    Today’s increase in real yields is due primarily to increasing nominal yields and less so inflation expectations. Accordingly, the increase in real yields will be much more damaging to the economy than the last time real yields were at similar levels.

    The following graph shows the strong inverse correlation between real yields and stock prices this year. The Y-axis of the chart pertaining to real yields is in reverse order to highlight the relationship better. The Fed is aggressively removing liquidity, and not surprisingly, stocks are heading lower.

    Dollar

    The U.S. dollar has surged this year against all currencies. Recently the linkage between dollar strength and bond weakness has been pronounced.

    The graph below shows the strong correlation between the dollar and real yields this year. The Fed is employing the most aggressive hawkish monetary policy among developed nations. Such policy should keep the dollar well bid, barring central banks intervening in the FX markets.

    Commodities

    Commodity prices and the dollar tend to be negatively correlated as most global trade in commodities occurs in U.S. dollars. When the dollar is strong, commodity prices tend to weaken and vice versa.

    Given the strong relationship between the dollar and real yields, the inverse relationship of commodities to real yields is expected. As we did in the S&P 500 graph, the graph’s Y-axis pertaining to real yields is in reverse order.

    Gold

    Earlier, we shared a paragraph from The Fed’s Ever-Growing Golden Footprint, which discusses how real yields are a barometer of Fed monetary policy. In particular, the article talks about the strong inverse correlation between gold and real yields, especially when real yields are negative.

    The rationale is that gold prices are largely driven by monetary policy. Gold tends to trade well when the Fed is dovish and pushes real yields below zero. Real yields should never be below zero, as lenders are being punished for lending. As such, negative real yields point to too easy a monetary policy. Given that many consider gold a substitute for money, anything that decreases the value of money is good for gold. Conversely, gold trades poorly when the Fed is hawkish and a better steward of money.

    Gold started the year well, rising about 10% as inflation rose and the Fed was relatively complacent. Real yields increased as the Fed grew increasingly hawkish, and the inverse correlation between gold and real yields grew strong. 

    The Million Dollar Question

    Having seen the evidence, you must think that correctly forecasting real yields is the holy grail of investing. While it does appear that way today, relationships change. That said, let’s consider where real yields may be going.

    As we showed earlier, the change in real yields is due to lower inflation expectations and much higher nominal yields. Over more extended periods, nominal yields are a function of economic growth and inflation expectations. Given that high rates are and will be a drag on economic growth and will dampen inflation, we think nominal and real yields will be headed lower over the coming months.

    The current real yield on a five-year Treasury note is 1.62%. Over the last 20 years, the actual real yield attained on five-year notes has averaged 0.47%. Accordingly, five-year yields may be trading over 1% too high.

    The scatter plot below from Fidelity charts weekly levels of the ten-year UST yield and 5×5 inflation expectations. The 5×5 inflation expectation is the implied five-year inflation rate expected five years from now. The current 5×5 inflation rate is 2.28%, similar to the current five-year implied inflation rate is 2.18%. As the graph shows, the current ten-year yield of 3.68% is 1.33% above the 2.35% trend line rate.

    We took Fidelity’s analysis a step further and compare the ten-year rate to the five-year implied inflation rate average and the 5×5 inflation rate. This method captures the whole ten years of inflation expectations. Since 2010, the Treasury note was 0.21% above the expected inflation rate on average. Currently, it is 1.40% above it. Bond yields are over 1% too high based on inflation expectations.

    Summary

    CNBC analysts spew all kinds of predictions. But for our precious time and money, we would rather turn off CNBC and instead consider that the future direction of yields may be the best investment advice today.

    The U.S. economy will not function with 7% mortgage rates. The Fed may keep raising rates, but the economy will falter. With it, inflation will decline. Nominal yields should fall precipitously to catch up with inflation and growth fundamentals. Real yields should follow. If so, the outlook for stocks, bonds, gold, and commodities may be brighter than it has been. Conversely, the recent dollar strength may be close to peaking.

    We end with the closing paragraph from Yields are Defying Yesterday’s Logic.

    Tried and trustworthy relationships are failing bond investors. While powerful and concerning, we think the abnormal relationships are temporary. When the supply and demand for bonds normalize, bond investors will likely realize that economic, inflation, and other factors warrant much lower yields.

    Tyler Durden
    Wed, 10/05/2022 – 10:44

  • WTI Rallies After Big Crude, Product Draws
    WTI Rallies After Big Crude, Product Draws

    Oil prices are extremely noisy this morning with OPEC+ headlines dominating price action (after prices surged 9% in the past two days in anticipation of this move by the cartel).

    “Near term OPEC has put a floor in crude,” but the 2 million barrel cut was largely priced in already on Tuesday, said Rebecca Babin, a senior energy trader at CIBC Private Wealth Management.

    We also note that Hurricane Ian’s impact may already be affecting some of this week’s inventory, production, and implied demand after API reported unexpectedly large crude and product draws.

    API

    • Crude -1.77mm

    • Cushing +925k

    • Gasoline -3.47mm

    • Distillates -4.05mm – biggest draw since Mar 2022

    DOE

    • Crude -1.356mm (-1.00mm exp)

    • Cushing +273k

    • Gasoline -4.728mm – lowest overall inventory since 2014

    • Distillates -3.443mm

    The official DOE data confirmed API with large crude and product draws seen last week…

    Source: Bloomberg

    Gasoline stocks fell to their lowest since 2014…

    Source: Bloomberg

    6.194mm barrels were drained from the Strategic Midterm Reserve…

    Source: Bloomberg

    As a reminder, the SPR is now at a record low 22 days of supply…

    Source: Bloomberg

    Something else to note on US crude exports, it’s the second time ever that we’ve registered above 4m b/d on a 4-week average. 

    Source: Bloomberg

    So US gas prices are about to soar so Europe can have some fuel?

    Gasoline demand destruction continues to show up…

    Source: Bloomberg

    US Crude production was flat on the previous week

    Source: Bloomberg

    WTI was hovering around $86.50 ahead of the official data print and rallied above $87 after the big draws…

    “I see some some persistence upside certainly from a supply perspective. Two million barrels a day is a substantial cut,” said Harry Altham, energy analyst for StoneX Group.

    “But of course, that doesn’t detract from the longer-term implications of demand destruction” from slowing global economies, he added.

    Finally, we note that all of this likely implies pump prices will continue rising into the MidTerms and Biden’s “tools” are running out to ‘fix’ that…

    Source: Bloomberg

    Who will he blame now?

    Tyler Durden
    Wed, 10/05/2022 – 10:37

  • What Does OPEC's 2 Million b/d Cut Really Mean: Goldman Crunches The Numbers
    What Does OPEC’s 2 Million b/d Cut Really Mean: Goldman Crunches The Numbers

    On the surface, the OPEC+ headline cut of 2mb/d sounds very large, but the cut is from baselines and there were no revisions to the baselines… which means that to figure out the real impact of the “gross” cut one needs to net out countries which are already producing well below their quotas.

    As Goldman’s Damien Courvalin writes, given Russia is under-producing by c.1.3 mb/d versus its current quotas, it would need to be exempted for a 2mb/d cut to add up. Additionally, Russia is unlikely to allow for a quota much below its capacity. Meanwhile, the other countries in the aforementioned list have not displayed the level of capacity erosion observed in much of the rest of OPEC+.

    From this alternative perspective, Goldman believes that such a baseline adjustment is worth approximately 1.5 mb/d alone (even excluding a Russia rebasement). As such, the bank believes that the 2mb/d headline OPEC+ cut would only be implemented as an incremental 0.5 mb/d quota cut on top of such a baseline change.

    Net, this only amounts to an effective cut of 400-600 mb/d versus Goldman’s expected November/Nov-22 – Dec-23 expectations from the bank’s 27-Sep-22 balances respectively. This is very similar to the 1mb/d announced quota cut scenario from the bank’s previous report, which we discussed here.

    More in the full Goldman note available to pro subs.

    Energy Intel’s Amena Bakr confirm’s Goldman’s math:

    • Here is the answer: Adjust downward the overall production by 2 mb/d, from the August 2022 required production levels, starting November 2022 for OPEC and Non-OPEC Participating Countries
    • This means an actual cut of a little under 1 million bpd

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    As a bonus, here is Bloomberg commodity guru Julian Lee with his initial calculation of what the new targets would look like for key OPEC+ members (in thousand barrels a day):

    • Saudi Arabia and Russia: 10,481 from 11,004
    • UAE: 3,028 from 3,179
    • Kuwait: 2,544 from 2,811
    • Iraq: 4,430 from 4,651
    • OPEC-10: 25,421 from 26,689
    • OPEC+: 41,856 from 43,856

    Tyler Durden
    Wed, 10/05/2022 – 10:14

  • Services Surveys Signal Q3 Recession Imminent Amid "Tightening Financial Conditions"
    Services Surveys Signal Q3 Recession Imminent Amid “Tightening Financial Conditions”

    Despite bouncing from August’s plunge, S&P Global’s Services PMI printed below 50 (in contraction) for the 3rd month in a row (at 49.3). Of course, in keeping with the idiocy, ISM Services printed 56.7 (below 56.9 in August but well above the 56.0 expected)…

    Source: Bloomberg

    The pictures from ISM and PMI data remain mixed (as ever) with ISM data slowed in September while S&P Global rose…

    Source: Bloomberg

    Under the hood of ISM, Services Prices and New Orders slowed while employment improved…

    Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

    “With service sector activity declining for a third straight month in September, businesses have faced a tough third quarter. Economic growth has come under pressure from falling output in both the manufacturing and service sectors, though in both cases September has seen some encouraging signals that business conditions may be starting to improve.

    “Driving this improvement is a cooling of inflationary pressures in manufacturing supply chains, which is in turn alleviating cost growth for goods and energy in both manufacturing and service sectors, helping stimulate demand and allaying some concerns about the economic outlook.

    “The worry is that tightening financial conditions, and notably higher borrowing costs, are exerting increased cost pressures on households and businesses, as well as hitting growth in the vast financial services sector, which has seen the steepest downturns in both demand and business activity in recent months and saw yet another marked worsening of business conditions in September.

    “Furthermore, despite easing, inflationary pressures in terms of firms’ costs and average selling prices for goods and services remain elevated. With companies also reporting staffing issues and rising wages due to very tight labor market conditions, persistent inflation remains a concern at the same time that the economy appears to be struggling to regain momentum.”

    The S&P Global US Composite PMI Output Index posted 49.5 in September, notably up from 44.6 in August, but still in contraction overall as a further decline in output at service providers outweighed a slight expansion at manufacturers.

    But, as S&P Global concludes, hopes of greater client demand, a peaking of inflation and investment in new products drove business expectations for the year-ahead to the highest for four months.

    So we are back to ‘hope’?

    Tyler Durden
    Wed, 10/05/2022 – 10:06

  • Looting "Will Get Progressively Worse" Amid Hurricane Ian Chaos, Sheriff Warns
    Looting “Will Get Progressively Worse” Amid Hurricane Ian Chaos, Sheriff Warns

    Authored by Lorenz Duschamps via The Epoch Times,

    As parts of Florida face a long road to recovery following extraordinary damage caused by Hurricane Ian, some people have already been taking advantage of the situation and started looting amid the chaos.

    William Snyder, the sheriff of Martin County, told TCPalm that he doesn’t expect looters to calm down, fearing the worst. He said looters already went on a spree of stealing and ransacking structures “very early” after the Category 4 storm made landfall in western Florida last week.

    “It was very early and some of the looting was starting already, but it will get progressively worse, I think, as people become more desperate,” Snyder, who was dispatched as part of a 15-person rapid response team on Sept. 30 to assist in the aftermath of Hurricane Ian in Charlotte County, told the publication.

    Shortly after the team’s arrival in Charlotte, officials encountered “dazed” residents, as well as several “pretty sketchy people” looking for water, food, and fuel, but nobody was arrested at the time.

    However, sometime later, Snyder received reports of people stealing gas-powered generators that were supposed to be powering traffic control devices.

    “When they bolted those down, they chained them down, they started stealing the gas out of the generators,” the sheriff told TCPalm.

    A day after the team’s arrival, they received a report about a house that was burning after the homeowner put a generator in the garage because he was so fearful that looters would steal their backup generator. The house was a total loss, Snyder said.

    “The challenge that stuck out to me the most was just how fragile society is when electricity and water go,” the sheriff added.

    “No gas, no electric, no water, and everything starts to come to a stop.”

    ‘We Have Law and Order’

    In nearby Lee County, Sheriff Carmine Marceno issued a stark warning to would-be-looters after a group of four people—including three illegal immigrants—were arrested on Sept. 29 for taking advantage of the situation.

    A warning to looters is painted on the side of a car destroyed during Hurricane Ian in Pine Island, Fla., on Oct. 3, 2022. (Win McNamee/Getty Images)

    “As far as looting—we have law and order in Lee County. We have law and order in our great state of Florida, and we always will,” said Marceno.

    “Right now, we have four cases of looting, and I’m proud to say they’re behind bars where they belong. Our residents are going to be safe.”

    Marceno added that three of the arrested individuals—Robert Mena, Brandon Araya, and Stephen Araya—were illegally inside the United States while they were caught looting in Lee County.

    Lee County jail records show that Brandon Mauricio Araya, 20; Stephen Eduardo Sanchez Araya, 20; Valerie Celeste Salcedo Mena, 26; and Omar Mejia Ortiz, 33, were arrested for burglary of an unoccupied structure during a state of emergency. Ortiz also faces petit larceny charges.

    Florida Gov. Ron DeSantis, among other officials, have issued similar messages to would-be looters after reports emerged that people allegedly started traveling to stricken islands and ransacking properties.

    “I can tell you, in the state of Florida, you never know what may be lurking behind somebody’s home, and I would not wanna chance that if I were you, given that we’re a Second Amendment state,” DeSantis said, who noted that some Floridians have firearms.

    Some residents also “boarded up all the businesses, and there are people that wrote on their plywood, ‘you loot, we shoot,’” DeSantis added. “At the end of the day, we are not going to allow lawlessness to take advantage of this situation.”

    Tyler Durden
    Wed, 10/05/2022 – 09:45

  • It's Geopolitics And Geoeconomics Amateur Hour At The White House Again
    It’s Geopolitics And Geoeconomics Amateur Hour At The White House Again

    By Michael Every of Rabobank

    OPEC+/RBNZ divots in BOE/RBA pivots

    Markets were already starting a bear market rally helped by the shifting (quick)sands of UK politics, where more policy U-turns may be underway; the Chancellor tried to suggest the Queen’s death might have played a role in the messy mini-budget launch; and one journalist notes: “This Tory conference is so amazingly messy I still can’t believe it’s real. Ministers going completely rogue, MPs barely here but still throwing shade left, right & centre, Tory members downing champagne while half laughing/half crying “we’re all f****d”. It’s WILD.” That Keystone Cops dynamic had already led to the desperate “not QE or MMT!” actions of the BOE.

    Then the RBA only hiked 25bp, not the 50bp 80% priced in, front-running even its own dovish pivot. “The Board is committed to returning inflation to the 2–3% range over time. Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead,” said the Governor, knowing full well his actions would be taken dovishly and bring down expectations of the rates peak to around 3% – versus around 8% expected inflation this year; above 2% inflation until 2025; a red-hot labour market; and a government more pro-labour than capital for once.  

    While pivoting he noted, “inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role… national income is being boosted by a record level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring workers… Wages growth is continuing to pick up from the low rates of recent years…. Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.”

    So why pivot? “The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates.” In other words, the RBA still thinks inflation is transitory(!); and the focus is, out of character, on the rest of the world – ‘A big economy did it and ran away.’  

    However, this was really all about housing: “Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining after the earlier large increases. Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages.” In short, everyone has a job; wages are going up; but after further crazy upwards movement, housing prices are finally coming down… so time to pivot. The Bank also rolled out its “Don’t Panic!” trick to explain why housing will be OK: “many households have large financial buffers.” Yes, the ones *without* large mortgages! Everyone in markets can see it’s the Reserve Bank of Austr-house-lia.

    However, despite an initial drop, AUD was not hit too hard, just as GBP has rallied in recent sessions. There is a key message in that.

    While the UK and Australia were pushed off their hawkish paths by asset prices, the real focus is the US. In both cases the initial market reaction was to push *US* yields and the *US dollar* lower, pricing for a Fed pivot. If it doesn’t, then we will see the UK and Australia punished for not being to keep up the pace, with higher yields and/or much lower currencies for both.

    On that front, we got an important US data point in the form of the JOLTS jobs number, which saw the largest fall since 2020. That will register with the Fed. However, it cannot be looked at in isolation as presented by some: it has to be set alongside the incredible surge in jobs on offer ahead of it, which was not the pattern in 2020. Even after this decline there are still 1.67 jobs on offer for every worker. Even presuming the labour market lags, does that say pivot now when the Fed has made clear it is expecting to see higher unemployment, not a lower ratio of excess jobs available, in order to bring inflation down? Hardly!

    That said, we got a speech from non-voter San Fran Fed Daly which, while excoriating inflation as a “corrosive disease” also notably added, “We have to acknowledge and understand the impact that raising the interest rate or dollar appreciation against other currencies has on global growth and on global financial conditions, because ultimately, those things feed back into onto the US.”

    However, as I keep underlining, the real world is not playing ball. Indeed, alongside the lower yields and US dollar in recent sessions we have seen higher commodity prices. Moreover, besides that simple dynamic we have a geopolitical one.  

    OPEC+ meets today, and reportedly Russia and Saudi Arabia are combining to cut output by as much as 2m barrels a day. In other words, supply destruction to match demand destruction; so energy inflation even into a recession. And higher energy is already seeing supply destruction in fertilizers; with a lag, that will mean supply destruction in food; and then workers will demand higher wages so they can still eat.

    CNN reports the White House is “having a spasm and panicking” as the most senior US energy, economic, and foreign policy officials lobby against production cuts, which some draft talking points frame as a “total disaster” that could be taken as a “hostile act.” Indeed, the US is reportedly “taking the gloves off,” and language used also includes the phrase that: “There is great political risk to your reputation and relations with the US and the west if you move forward.” What is the US going to do? Invade? Encourage the Saudis to deal more with Russia and China, reducing supply to the West even more? It is geopolitics and geoeconomics amateur hour (again)!

    On which note, the EU has agreed on its Russia oil price cap, the ‘details’ of which are to be released today. One part is clear: no more EU technology to help Russian energy production, which will reduce output over time – and so push prices higher. The rest is so unclear it looks like an inverse South Park Underpants Gnomes strategy: “Step one: Russian oil price cap – Step two: ? – Step three: No Russian profit.” Greece has already agreed a carve-out for its tankers, apparently.

    Relatedly, Russia is said to be moving towards either embracing all forms of crypto for payment, or a digital RUB. How do you think the US is going to respond? More light touch Wall Street crypto regulation and lower Fed Funds to allow everyone thinking of moving back into the labour market to stay at home and trade NFTs of monkeys wearing sunglasses again? Even Kim Kardashian just got slapped with a $1.2m fine by the SEC for plugging a crypto asset.

    Today also saw the RBNZ hike 50bp to 3.50% and note they had discussed a 75bp move, like major central banks, not a 25bp one, like the Reserve Bank of Austr-house-lia. The NZD gained 0.9% on this news and linked comments that the RBNZ is worried about the inflation pass through from a weaker currency – which Australia should note well. (And by the way, New Zealand has a housing market they very much love too.)

    Even back on the BOE, all the GBP2.22bn of Gilts it was offered at its Tuesday daily reverse auction aimed at stabilising markets were rejected. FinTwit gossip adds: “institutional Gilt broker I know, on why BoE not buying Gilts… “BOE insisting on QT commencement on the 31st Oct (which I think is ridiculous while tightening hard at the Front). BOE aren’t willing to buy these longs at Mid. All just a backstop to contain systemic risk.”

    Sorry for the structural divot in your BOE/RBA pivot, Mr. Market.

    Finally, Elon Musk Twitter bait-and-switched away from his ‘AI robot’, which looks like a geriatric Terminator in a nursing home that needs other robots to look after it, towards a peace-deal between Russia and Ukraine, before pivoting back to Twitter which –surprise-surprise, having signed a water-tight legally-binding agreement with him– he will be buying after all. Let’s see what now happens to Western political and market debate: it can’t get much worse to be honest.

    Tyler Durden
    Wed, 10/05/2022 – 09:25

  • TWTR Slides After Report Musk, Twitter Have Not Yet Reach Agreement To End Litigation
    TWTR Slides After Report Musk, Twitter Have Not Yet Reach Agreement To End Litigation

    Update: for all those who sold TWTR stock yesterday, congrats.

    https://platform.twitter.com/widgets.js

    To everyone else, the rollercoaster is back, with Reuters reporting that – shockingly –  there is actually no deal actual deal to end the litigation:

    • ELON MUSK, TWITTER LEGAL TEAM HAVE NOT YET REACHED AGREEMENT TO END LITIGATION – SOURCES FAMILIAR WITH THE LITIGATION

    As a reminder, one of the conditions Musk required for the deal to go through at its original terms, was for trial to be adjourned. And now that appears to be a hang up.

    * * *

    Following Tuesday’s Musk shocker which sent Twitter stock soaring more than 20%, TWTR has slumped in premarket trading with shares nearly 106% below Elon Musk’s $54.20 offer price as analysts point out the “unknowns” surrounding the transaction. While they expect the deal to go through, further challenges lie ahead for Musk as he will now need to fix the social media firm’s issues.

    Courtesy of Bloomberg, here is a snapshot of sellside reactions:

    MKM Partners (neutral, PT $48)

    • “If both parties agree (again) on the proposal, a trial would be averted, and Twitter could potentially cease to be a public company by the end of next week”
    • However, this isn’t a done deal “as there are no guarantees that Musk would still follow through with his proposal and close the transaction”

    Stifel (hold, PT $30)

    • This is yet another surprising twist in the ongoing back and forth between Twitter and Musk, “but it’s likely the last change of course”

    If Twitter’s next phase does not include some form of advertising, that might be a marginal positive for some social platforms like SNAP and PINS

    Citi (neutral, PT raised to deal price of $54.20 from $40)

    • While there are still some unknowns around the transaction, the deal “is now likely to close which is also likely to improve overall operations going forward”

    Wells Fargo (equal weight, PT $54.20)

    • Musk embarking on significant changes to TWTR supporting more expansive speech rights, could likely have a negative impact on brand advertising spend
    • Marketers could then reduce brand spend on the platform and redeploy experimental ad budgets on emerging short-form and long-form video advertising platforms like TikTok, META’s Reels, GOOGL’s YouTube Shorts, SNAP’s Spotlight, PINS’ Idea Pins

    Morningstar

    • Under Musk, Twitter could “experience mixed reactions from large advertisers who likely will assume the content on the platform will become even more heavily weighted toward politics”
    • On the other hand, Musk’s strong following could benefit TWTR’s subscription revenue model

    Wedbush (neutral, PT raised to deal price of $54.20 from $50)

    • The deal will mostly likely close in the next few weeks “with minimal speed bumps to overcome once the Twitter Board officially accepts and removes the lawsuit in Delaware Court”
    • Buying Twitter was “the easy part of this deal,” the hard part will be fixing it with monetization and subscriber engagement

    Truist Securities (hold, PT $43)

    • While the take-out price is a material premium to peers, “relative to expectations and to peers, TWTR’s results in 2Q22 trailed materially”
    • “With the deal effectively concluded, the heavy lifting is next”
    • Musk will now have to fix the “business, which has been challenged across products, ad formats and user engagement”

    Baird Equity Research (neutral, PT $54)

    • Raising our price target to reflect the intention to consummate the deal

    CFRA (hold, PT raised to $54 from $42)

    • The deal could close “very soon”
    • “Musk’s first order of business will need to be focused on repairing a damaged employee base and finding the right leadership team”

    Of course, the situation remains fluid and as we said yesterday…

    https://platform.twitter.com/widgets.js

    … Musk may change his mind at any moment.

    Tyler Durden
    Wed, 10/05/2022 – 09:22

  • Oil Rallies As OPEC+ Agrees Historic 2 Million B/D Production Cut, Shuns Biden
    Oil Rallies As OPEC+ Agrees Historic 2 Million B/D Production Cut, Shuns Biden

    As was well-telegraphed – and despite The White House’s sabre-rattling – OPEC+ JMMC has recommended the cartel to go ahead with a historic 2 million b/d production cut.

    One delegate has confirmed this cut is from baseline levels. This means the production cut is less than 2 million b/d directly since current actual production levels are already below quota. However, it is still a sizable cut.

    As ArgusMedia reports, the extent to which any cut to November quotas will reduce actual supply will depend on how OPEC+ members fare in meeting their targets this month and how the cut is distributed.

    The group as a whole fell 3.58mn b/d below its collective ceiling in August, according to an average of secondary source estimates.

    If agreed by ministers at their meeting in Vienna today, it will mark the biggest cut since the group reduced its collective quota by 9.7mn b/d during the early stages of the Covid crisis in 2020.

    WTI is extending gains on the news, rallying back above $87 at 7-week highs…

    This is not good news for the American consumer as gas prices are about to start accelerating again…

    And that is not good news for President Biden’s approval rating…

    We await The White House statement ‘mulling’ a reaction to this clear dissent of the unipolar order.

    As we have detailed recently, this is a direct message to The Fed and The White House…

    https://platform.twitter.com/widgets.js

    Tyler Durden
    Wed, 10/05/2022 – 09:11

  • Show-Of-Force Fail: South Korean Missile Malfunctions And Crashes, Causing Panic
    Show-Of-Force Fail: South Korean Missile Malfunctions And Crashes, Causing Panic

    What was supposed to be a South Korean show of force ended in humiliation on Wednesday as a ballistic missile malfunctioned and crashed near a South Korean city, triggering panic. There were no injuries — beyond those to the military’s own reputation.

    According to the Associated Press, citing South Korea’s Joint Chiefs of Staff, a short-range missile blew up on an air force base near the coastal city of Gangneung. South Korean authorities said the warhead did not explode. 

    Video purporting to show the fiery aftermath circulated on social media: 

    https://platform.twitter.com/widgets.js

    The failed missile launch was part of a broader saber-rattling response to North Korea’s successful launch of an intermediate-range ballistic missile that flew over Japanese airspace on Tuesday.

    That missile demonstrated a record distance capability for a North Korean missile. It was said to have traveled some 2,800 miles, with analysts saying it has the range to hit the bases on the U.S. territory of Guam.  

    In their ensuing show-of-force drills, U.S. F-16 and South Korean F-15 fighter jets on Tuesday hit an island target off South Korea’s west coast, using Joint Direct Attack Munition (JDAM) bombs. Wednesday brought surface-to-surface missile launches. 

    The embarrassment over the misfire was compounded by the South Korean military’s inept handling of the incident, reports AP:  

    The explosion and subsequent fire panicked and confused residents of the coastal city of Gangneung, who were already uneasy over the increasingly provocative weapons tests by rival North Korea.

    Their concern that it could be a North Korean attack only grew as the military and government officials provided no explanation about the explosion for hours.

    Posting on Facebook, legislator Kwon Seong-dong, who represents Gangneung, said a “weapons system operated by our blood-like taxpayer money ended up threatening our own people.” He also assailed the military’s prolonged silence: “It was an irresponsible response. They don’t even have an official press release yet.”

    The errant missile was a Hyunmoo-2, which the Center for Strategic and International Studies describes as a short-range, solid-fueled ballistic missile. Fired from road-mobile launchers, recent variants are about 42 feet long, carry high explosive payloads and have a range of 500 miles. 

    A South Korean Hyunmoo-2 missile (Photo via CSIS)

    The U.S.-South Korean show of force will soon be buttressed by the presence an aircraft carrier: The USS Ronald Reagan is being deployed to the waters east of the peninsula. 

    The UN Security Council is set to meet on Wednesday to discuss North Korea’s missile launch. With China and Russia resisting a public discussion of the issue, it’s unclear if they will instead meet privately. Either way, there’s little expectation of a substantial response. 

    Tyler Durden
    Wed, 10/05/2022 – 08:55

  • OPEC's Counterattack…
    OPEC’s Counterattack…

    Via Adventures In Capitalism,

    The Federal Reserve has been attacking inflation. The problem is that after printing trillions of dollars, they’re ill-equipped to succeed at their task. Partly, this is because all that cash has to go somewhere and partly this is because their mandate does not extend into ensuring that global energy production expands. While Owners’ Equivalent Rent and wages have remained elevated, those are often seen as the “good” sort of inflation—or at least the benign sort. Meanwhile, all other forms of inflation tend to be characterized as “bad” and frequently the “bad” inflation is caused by elevated energy prices, which then increase the costs of producing and transporting everything else. Therefore, despite the Fed ignoring the inflation they caused for well over a year, when oil cleared $100 a barrel, the Fed finally felt that they had no choice but to do something.

    The problem is that the only ways to reduce the price of oil are to produce more of it or consume less of it. It’s hard to produce more when the President and many of his powerful oligarch buddies are aggressively intervening to ensure that it’s difficult to expand or finance production. Meanwhile, no one wants to invest when there are constant threats of excess profits taxes, carbon taxes, expropriation and price caps. Since the obvious solution has been made so impossible, the Fed has been forced to embark on a plan to reduce global energy consumption.

    How do you reduce oil consumption?? Well, it seems that their plan is to create a global depression. So, after a decade of paying lip-service to “inclusive economics” and “closing the wealth gap,” the Fed has been forced to pivot and destroy the finances of the world’s poor, in the hopes that they’ll consume less oil. For the past half-year, this plan has unfolded with the usual crescendo of mini-temblors as global growth screeches to a halt and over-leveraged institutions find themselves on the wrong side of asset depreciation. The Fed is now well on its way towards creating an economic crisis that will reduce global energy consumption—consequences be damned.

    Naturally, most global citizens do not want a lower standard of living so that US consumers can continue their orgy of excess. In fact, many global citizens owe their current standard of living due to elevated energy prices. Hence, after watching Biden liquidate the Strategic Petroleum Reserve in order to improve his polling numbers, while watching the Fed directly target their standard of living and that of their customers, OPEC has had enough. They’re going to do something about the Fed and its war on oil. OPEC has finally launched a counterattack. Last month, they agreed to cut output by 100,000 bbl/d. It was meant as a warning that went unheeded. Tomorrow, they’re going to Blitzkrieg the Fed.

    No one knows how big the cuts will be and frankly, it doesn’t matter how large they are. Instead, the message is clear—the Fed can crash global GDP in their fight against oil, but OPEC wields a much larger stick and will cut production even faster. In fact, OPEC will DO WHATEVER IT TAKES if the Fed continues on this path. OPEC has drawn a line under the price of oil and told the Fed that it’s wasting its time. OPEC controls the price of oil and oil is the world’s Central Banker, not the Fed.

    On Monday morning, the market heard that message loud and clear. The Fed is trapped, oil is going higher, and the Fed is powerless to contain it. Why would the Fed continue trying to blow up the world’s financial markets if oil will not bend to their will??

    Let’s look at a country like India that imports almost all of its energy. The Federal Reserve has effectively been saying, “they’re a poor country, we’ll break them and then global oil consumption will decline and US citizens will have cheaper oil.” Meanwhile, OPEC is saying, “India is a large and growing customer of ours. We’ll defend them against the Fed. Sure, they’ll pay more for their oil, but that’s much better than having the Fed detonate their currency, banking system and economy.” The battle lines are now drawn and OPEC is taking the mantle from the Fed. The market is loving it.

    The Fed tends to be the last ones to realize anything when it comes to economics and the markets, so they likely haven’t internalized what OPEC just told them. However, the stock market understood it instantly, having one of the largest 2-day rallies in years. We’re getting much closer to The Pause. The Fed still needs to break something before they can declare victory and reduce rates, but The Pause is near—maybe not near in terms of price, but certainly in terms of when they pause. OPEC’s counterattack has changed the calculus and the Fed is now on the backfoot. If you can’t win at something, why try?? Especially if you’re going to leave casualties all over the financial markets.

    On the topic of OPEC, here’s some quick math. Global supply and demand are roughly in balance today. Add in 1.5 million bbl/d of global SPR releases that will end soon, add in 2 million bbl/d of reduced demand from Chinese covid lock-downs that appear to be ending, add in 1 million bbl/d that Russian oil will decline by in 2023 (at a minimum), add in the 1 million bbl/d that global demand seems to expand by each year and assume that global supply somehow grows by 1 million bbl/d (though it isn’t clear where that growth would be coming from) and you have a 4.5 million bbl/d swing in 2023. Now add in whatever OPEC chooses and you realize that there’s an imminent and exponential crisis for the consumers of oil.

    Of course, the Fed could destroy enough global GDP to erase 4.5 million bbl/d of global oil demand and stop the price from exploding, but OPEC just told them that they’ll DO WHATEVER IT TAKES. Do you think the Fed continues its war on GDP when they now know they’ll fail to contain the price of oil??

    In 2023, energy will be the only thing that matters to investors. Everything else, including the Fed will be a side-show. Who’s ready for the insanity wave?? Ever since Monday, I’ve been maxing it all out in energy. I’ve been ripping right-tails all over the screen. Oil is going to wreck all the other CUSIPS. The S&P is partying this week because the Fed is cornered by OPEC, but that’s only because speculators don’t realize what this means for the price of oil.

    We just had a half-year pause in my oil thesis, now it’s about to resume with the sort of vigor that comes from a good long nap. Hope you’re ready…

    *  *  *

    Disclosure: Funds that I control have an obscene amount of energy exposure. Equities, options, futures, futures options, ETFs, you name it, we probably have it…

    If you enjoyed this post, subscribe at http://www.adventuresincapitalism.com

    Tyler Durden
    Wed, 10/05/2022 – 08:35

  • ADP Reports Better Than Expected Jump In Jobs In September, Wage Growth Accelerates
    ADP Reports Better Than Expected Jump In Jobs In September, Wage Growth Accelerates

    Ahead of Friday’s big number, and following last month’s dismal print (under its new model regime) which dramatically under-predicted the payrolls print in August, ADP was expected to show a modest uptick in September of 200k jobs. The actual print came in at +208k jobs but most notably, the +132k print from August was revised drastically higher to +185k…

    Source: Bloomberg

    ADP’s Nela Richardson notes that “there are signs that people are returning to the labor market. We’re in an interim period where we’re going to continue to see steady job gains. Employer demand remains robust and the supply of workers is improving–for now.”

    The goods-producing sector lost 29,000 jobs in September while Services gained 237k…

    Job changers, who have been notching double-digit, year-over-year gains since the summer of 2021, lost momentum in September. Their annual pay rose 15.7 percent, down from a revised 16.2 percent gain in August. It’s the biggest deceleration in the three-year history of our data…

    For job stayers, annual pay rose 7.8 percent in September from a year ago, up from a revised 7.7 percent in August.

    According to ADP, US private employment is back above pre-COVID levels…

    Finally, as a reminder, even under its new model, ADP has been a serial underpredictor relative to the BLS payrolls print…

    Which means this Friday’s print will likely not be bad enough to prompt any Fed pause.

    Tyler Durden
    Wed, 10/05/2022 – 08:24

  • Futures Fall As Rally Fizzles, Dollar Spikes Amid Fresh Doubts Of Fed Pivot
    Futures Fall As Rally Fizzles, Dollar Spikes Amid Fresh Doubts Of Fed Pivot

    After the best 2-day rally since April 2020, the best start to a new quarter since 2009 and the best start of a Q4 since 2002, the powerful rally fizzled and US equity-index futures fell as investors pushed back on bets for less hawkish central banks amid the latest surge in oil, and sought more evidence that inflation is moderating. In other words, unlike yesterday, stock algos finally noticed what oil was doing.

    https://platform.twitter.com/widgets.js

    Futures tracking S&P 500 and Nasdaq 100 dropped 0.9% each after the underlying indexes scaled two-week highs on Tuesday. And as the dollar rebounded for the first time in three days, Treasuries slid across the curve as oil swung ahead of the OPEC+ meeting today where the cartel is expected to cut output by as much as 2mmb/d.

    In premarket trading, Twitter dropped 0.4% after Tuesday’s jump. Shares remain nearly 5% below Elon Musk’s $54.20 offer price as analysts say there are still “unknowns” around the transaction, although they expect the deal to go through. Further challenges lie ahead for Musk as he will now need to fix the social-media firm’s issues, analysts say. Here are the other notable premarket movers:

    • Church & Dwight shares rise 0.6% in US premarket trading, after the consumer-products maker was upgraded to buy from hold at Deutsche Bank, with the broker saying that, while the stock has taken a break, it is not “broken.”
    • Emerson Electric (EMR US) shares rise as much as 2.9% in US premarket trading after the industrial-tech company was said to be in talks with buyout firm Blackstone to sell some of its commercial and residential solutions assets. Citi said a potential divestiture could give Emerson the opportunity to further simplify its portfolio.
    • US- listed Macau casino stocks could be in focus after Hong Kong- listed peers surged amid optimism over a travel rebound during the seven-day Golden Week holiday period. Watch Wynn Resorts, Las Vegas Sands, Melco Resorts and MGM Resorts

    Today’s reversal, which followed the biggest drop in job openings on record (outside of the covid lockdowns), comes as a growing number of money managers is cautioning (again) that expectations for a so-called Fed pivot are (again) overdone and risk ignoring the economic pain that would underpin such a dovish tilt should policymakers opt for it. With several Fed officials reiterating their focus on reducing inflation, US jobs numbers due Friday and a new earnings-reporting season may provide the next catalysts for markets.

    “A dovish pivot requires more evidence of weaker growth and a decisive fall in inflation,” Emmanuel Cau, the head of European equity strategy at Barclays Plc, wrote in a note. “We doubt equities are out of the woods yet.”

    Elsewhere, as noted above, OPEC+ is considering its biggest production cut since 2020, a move Washington is trying to head off with furious diplomatic efforts. The group is set to discuss a cut to its output limits of as much as 2 million barrels a day, using current targets as a starting point. While a significant move, the actual impact on global supply would be smaller as several countries pump below their quotas/

    Meanwhile, investors’ attention remained focused on Friday’s nonfarm payrolls data, which is expected to show 263,000 jobs were added in September: “For the market to continue higher, the jobs data will have to be in line with, or short of expectations,” said Lindsey Bell, chief markets and money strategist at Ally.

    Europe’s Stoxx 600 halted its best three-day advance since November 2020. The gauge fell 0.7%, trimming some of its 5.3% rally since Thursday. Real estate, auto-parts and retail shares slid the most. Here are some of the biggest European movers:

    • Shop Apotheke shares gain as much as 11%, the most since early July, after preliminary third-quarter results beat expectations. Analysts say it was a strong quarter, with adjusted Ebitda remaining in positive territory.
    • Infineon rises as much as 4.8%, leading semiconductor peers higher, with analysts from Citi and Jefferies bullish on the chipmaker’s near-term demand and longer-term growth following a conference call with the company.
    • Anima Holding rises as much as 7.3%, the most intraday since April 8, and is among the day’s top performers on the FTSE Italia All-Share Index; Reuters reported on Tuesday that Italy favors keeping the company in domestic hands and could raise the stake it holds through Poste Italiane.
    • Tesco drops as much as 3.9% after the UK grocer provided guidance that Jefferies analysts say is “more cautiously nuanced,” while Bernstein analysts flagged possible margin pressure.
    • Credit Suisse declines as much as 3.9% as Societe Generale analysts say the firm needs to aggressively deleverage its investment banking operations.
    • The Stoxx 600 Automobiles & Parts Index declines, the worst- performing subgroup on Wednesday, led by parts suppliers and tiremakers. Continental AG drops as much as 7.2%, Valeo -6.4%
    • Shares in Avanza and Nordnet slide as much as 9.8% and 8.5%, respectively, after the Swedish retail trading and savings platforms presented their latest monthly statistics, which both showed negative net savings in September.
    • Vallourec drops as much as 8.9%, falling below the price at which stockholders sold 14.4m shares after the close Tuesday.

    Earlier in the session, equity markets gained ground across Asia, catching up with overnight moves in the US. Hong Kong stocks posted their best rally since March after a one-day break amid optimism that the global monetary policy tightening cycle will ease. The MSCI Asia Pacific Index climbed as much as 2.1% on Wednesday, led by a surge in consumer discretionary and tech stocks such as TSMC and Alibaba. That brings the measure’s two-day rally to about 4.6%, the best since March. Stocks in Hong Kong were the region’s top performers, with the benchmark Hang Seng Index jumping almost 6% as trading resumed following a holiday. A gauge of Chinese technology stocks listed in the city rallied more than 7%. Thin trading with the onshore market closed for the Golden Week holiday likely amplified price gains. Anticipation has grown that the Federal Reserve may be less aggressive in hiking interest rates following a decline in US job openings. Such expectations had sent global equities surging, with some strategists forecasting a near-term trough in the battered Asia market. 

    “There’s a high probability that a bottom can form in emerging market and Asian equities from current levels as “signs of capitulation are abundant,” Morgan Stanley strategists including Jonathan Garner said in a note. “Valuations are now at or approaching prior cycle trough” after a major bear market in both regions, they added. Traders have plenty to digest this week from US payrolls to China’s Golden Week spending to reassess their wagers. While any weakness in US jobs data may further fuel bets for a slower pace of Fed tightening, Asian markets may continue to face headwinds should China spending disappoint. India markets are closed Wednesday for a national holiday.

    Japanese equities climbed for a third day, as a decline in US job openings further boosted investor hopes for slower Fed rate hikes.  The Topix Index rose 0.3% to 1,912.92 as of market close Tokyo time, while the Nikkei advanced 0.5% to 27,120.53. Keyence Corp. contributed the most to the Topix Index gain, increasing 2.7%. Out of 2,168 stocks in the index, 1,047 rose and 1,009 fell, while 112 were unchanged. “The rise in the Japanese stocks is largely due to the decline in the US interest rates,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The economy and exchange rate is at the right temperature for stocks at the moment with a lack of strength in the US economy which has pushed the interest rate down.” 

    Australian stocks rose to near a three-week high: the S&P/ASX 200 index rose 1.7% to close at 6,815.70, extending gains into a second day, spurred by the central bank’s smaller-than-expected hike. The rally, which puts the benchmark at the highest since Sept. 15, tracks the best two-day run for US equities in over two years, as investors start to anticipate that the Fed will also slow its aggressive tightening path. In New Zealand, the S&P/NZX 50 index rose 0.8% to 11,180.01. The nation’s central bank hiked rates by a half-percentage point for a fifth consecutive meeting, signaling more to come. 

    In rates, Treasuries remained near lows of the day after selling off during European morning, following bigger losses across gilt curve as BOE hike premium is added. S&P 500 futures are down, paring a portion of Tuesday’s 3% advance. Treasury yields are cheaper by 2.5bp to 6bp across the curve, the 10Y yield is up to 3.67%, with losses led by intermediates, knocking 5s30s spread slightly flatter after a strong two-day steepening move; UK yields, higher by as much as 10bp, lead selloff in core European rates.

    In FX, the Bloomberg Dollar Spot Index bounced from nearly a two-week low in early European trading and the greenback was steady or higher against all of its Group-of-10 peers.

    • The euro retreated by as much as 0.6% to 0.9923 after trading just below parity against the dollar on Tuesday. The German bond curve bear steepened. Italian bonds underperformed euro-area peers, ahead of the ECB’s non-monetary policy meeting, where officials are expected to discuss reducing the central bank’s balance sheet, according to people quoted by Bloomberg. Money markets were also raising ECB tightening wagers
    • The pound fell as much as 0.8% to $1.1380, snapping six days of gains. Gilts fell
    • The New Zealand dollar was steady versus the US dollar; it earlier jumped after the RBNZ increased its official cash rate to 3.5%, by delivering a fifth straight half percentage point hike
    • The yen and the Swiss franc also held up reasonably well amid a demand for havens

    In commodities, WTI trades within Tuesday’s range, falling 0.4% to near $86.20; OPEC+ expected to cut oil output. Spot gold drops roughly $12 to trade near $1,715/oz. Oil demand in top importer China may pick up after Beijing released trade allowances enabling its vast refining industry to ship in more crude and export more fuel. Local refiners and traders have been handed two separate batches of crude-import quotas for the remainder of this year and early 2023, as well as a 15 million ton fuel-export quota, according to JLC. Consensus heading into OPEC is that there will be a sizeable production cut announced, the magnitude of which is unknown but source updates are becoming increasingly skewed towards the top-end of a 0.5-2.0mln range.

    Bitcoin is under modest pressure in very slim ranges just above the USD 20k mark, parameters which are well within yesterday’s/recent sessions levels.

    To the day ahead now, and data releases include the final services and composite PMIs for September, as well as the ISM services index from the US. Otherwise, there’s French industrial production for August, the ADP’s report of private payrolls from the US for September, and the US trade balance for August. Finally from central banks, we’ll hear from the Fed’s Bostic.

    Market Snapshot

    • S&P 500 futures down 0.9% to 3,768.75
    • STOXX Europe 600 down 0.9% to 399.21
    • MXAP up 1.8% to 144.75
    • MXAPJ up 2.5% to 470.65
    • Nikkei up 0.5% to 27,120.53
    • Topix up 0.3% to 1,912.92
    • Hang Seng Index up 5.9% to 18,087.97
    • Shanghai Composite down 0.6% to 3,024.39
    • Sensex up 2.2% to 58,065.47
    • Australia S&P/ASX 200 up 1.7% to 6,815.68
    • Kospi up 0.3% to 2,215.22
    • German 10Y yield little changed at 1.95%
    • Euro down 0.5% to $0.9936
    • Brent Futures down 0.2% to $91.63/bbl
    • Gold spot down 0.8% to $1,711.81
    • U.S. Dollar Index up 0.60% to 110.72

    Top Overnight News from Bloomberg

    • The president of the European Commission, Ursula von der Leyen, called for boosting common funding for the European Union’s strategy to shift away from Russian fossil fuels and signaled she’s open to discussing a temporary broad price cap on gas
    • The European Union backed a new package of Russia sanctions that includes support for a price cap on oil sales to third countries, according to people familiar with the issue
    • Russian gas supplies to Italy via Austria resumed, bringing some temporary relief to gas prices in Europe
    • France plans to recoup part of windfall profits made by electricity producers to bolster aid to companies and local governments struggling to pay rising bills
    • Saudi Arabia’s sovereign wealth fund started taking orders for its inaugural dollar green bond as the oil-rich state looks to burnish its environmental credentials
    • OPEC+ is considering its biggest production cut since 2020, a move Washington is trying to head off with furious diplomatic efforts. The group is set to discuss a cut to its output limits of as much as 2 million barrels a day, using current targets as a starting point
    • The world is careening toward recession and buying old haven reliables Treasuries and the yen still offers the best protection, according to Fidelity International

    A more detailed look at global markets courtesy of Newsquawk

    Asia-Pacific stocks traded higher across the board as the region sustained the momentum from Wall St where the major indices extended their rally after soft data releases stoked hopes of a Fed pivot. ASX 200 continued to benefit following RBA’s recent rate hike slowdown with tech, consumer discretionary and financials leading the advances, while M&A prospects added to the optimism with Link Administration Holdings boosted after it received further proposals from Dye & Durham to acquire some of its businesses. Nikkei 225 reclaimed the 27k level although gains were capped by the lack of fresh catalysts and amid lingering geopolitical tensions after the US, Japan and South Korea responded to North Korea’s recent missile launch with military drills and even the test firing of four surface-to-surface missiles by the US and South Korea. Hang Seng outperformed as it played catch up to yesterday’s advances on return from its holiday closure and with HSBC among the biggest gainers as it explores a multibillion-dollar sale of its Canadian business.

    Top Asian News

    • RBNZ hiked the OCR by 50bps to 3.50%, as expected. RBNZ stated that the Committee agreed it is appropriate to continue to tighten policy and members agreed that monetary conditions needed to continue to tighten until inflation was back in target range. RBNZ also stated that core consumer inflation is too high and labour resources are scarce, while they considered whether to increase the OCR by 50bps or 75bps and some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required.
    • Mizuho to Acquire About 20% of Rakuten Securities: Nikkei
    • Malaysia Palm Oil Stockpiles May Surge to Largest in Three Years
    • Morgan Stanley Says Bottom Near for Emerging-Market Equities
    • Gold Falls After Two-Day Surge With Fed Rate Stance in Focus
    • SK E&S Removes LNG Claim Amid Greenwashing Crackdown

    European bourses are under pressure following the strong gains seen in Tuesday’s session with fresh newsflow fairly limited heading into key US data, Euro Stoxx 50 -1.1%. In Europe, sectors are lower across the board with underperformance in Autos, Telecoms and Banking names. Stateside, ahead of those metrics which will be eyed for further clues around a ‘pivot’, futures are under similar pressure though magnitudes are a touch more contained, ES -0.9%. TSMC (2330 TW) has reportedly begun negotiating prices with its suppliers of equipment and materials for 2023, considering price reductions of at least 10%, according to sources via DigiTimes.

    Top European News

    • Votes to implement the UK government’s “mini-budget” will not take place until next spring in an attempt to put off potential rebellions until 2023, according to the understanding of the Telegraph.
    • EU ambassadors have now approved all details of the Russian sanctions package and a so-called written procedure launched that will finish at 09:00BST; publication will be in the EU official journal some time tomorrow, according to Radio Free Europe.
    • Russia says it does not intend to use additional budget revenues to purchase FX or gold, via Reuters.
    • U.K. Sept. Composite PMI 49.1 vs Flash Reading 48.4
    • European Gas Slides as Russia Resumes Flow to Italy Via Austria
    • EU Chief Urges Funds for Energy Pivot, Floats Gas Price Cap
    • Even Deutsche Bank Sees Paris as a Rising Hub for Traders
    • Gold Falls After Two-Day Surge With Fed Rate Stance in Focus

    FX

    • USD has benefited from a rebound in yields and perhaps on phycological/technical grounds, DXY at a 110.84 high.
    • Action which has come to the modest detriment of peers across the board, with GBP lagging into a speech from PM Truss after brief PMI-induced upside.
    • EUR/USD got within touch of parity, but failed to convincingly test the mark and has since faded back to 0.99.
    • NZD the relative outperformer after the RBNZ stuck with consensus for a 75bp hike in contrast to the RBA’s slower approach earlier in the week.

    Fixed Income

    • Core debt is pressured across the board with Gilts lagging despite upside from a well-received DMO outing as the benchmark struggles to get a foothold above 98.00.
    • Action which has lifted yields across the board, brining the UK 10yr back in reach of 4.0% while the US curve is a touch more mixed.
    • On this, USTs are slightly more contained than peers with downside of around 20 ticks as participants await key data readings.

    Commodities

    • Crude benchmarks are currently dictated by broader risk and are modestly softer as such, though attention will turn to the OPEC gathering shortly.
    • As it stands, consensus heading into it is that there will be a sizeable production cut announced, the magnitude of which is unknown but source updates are becoming increasingly skewed towards the top-end of a 0.5-2.0mln range.
    • US Private Inventory (bbls): Crude -1.8mln (exp. +2.1mln), Cushing +0.9mln, Distillates -4.0mln (exp. -1.4mln), Gasoline -3.5mln (exp. -1.3mln)
    • US is reportedly pushing OPEC+ nations not to proceed with an output cut and is arguing to OPEC+ that economic fundamentals do not support an output cut, according to a source familiar with the matter cited by Reuters.
    • UN official may visit Moscow, Russia next week to discuss a grain deal, via Ria citing the Russian foreign ministry.
    • Spot gold is once again moving at the whim of the USD which has continued to firm throughout the morning and thus the yellow metal has been pushed back to the USD 1710/oz mark and away from the 50-DMA

    US Event Calendar

    • 7am: U.S. MBA Mortgage Applications -14.2%, prior -3.7%
    • 8:15am: U.S. ADP Employment Change, Sept., est. 200k, prior 132k
    • 8:30am: U.S. Trade Balance, Aug., est. -$67.7b, prior -$70.7b
    • 9:45am: U.S. S&P Global US Services PMI, Sept. F, est. 49.2, prior 49.2
    • 9:45am: U.S. S&P Global US Composite PMI, Sept. F, est. 49.3, prior 49.3
    • 10am: U.S. ISM Services Index, Sept., est. 56.0, prior 56.9

    Central Banks

    • 9:15am: Fed’s Kashkari Takes Part in Moderated Q&A
    • 4pm: Fed’s Bostic Discusses Inflation

    DB’s Jim Reid concludes the overnight wrap

    Another reminder that we’ve recently published our long-term asset study. Yesterday, we updated some of the bond and risk parity charts in the presentation version to account for month-end prices. You can find the link to that in the executive summary of the main report, which you can find here.

    One more plug, we’re hosting a call on the US mid-terms next Tuesday with perspectives from our public affairs group, US economics, and markets. This event will quickly come at us over the coming weeks. Register here.

    The rip-roaring start to Q4 has continued over the last 24 hours, with a significant cross-asset rally occurring thanks to speculation that central banks could soon ease up on their campaign of rate hikes. This positive mood music was evident from the start of the session, having had a significant boost from the Reserve Bank of Australia’s decision, which we covered yesterday, to only hike by 25bps rather than the 50bps expected. We’ll have to see if that proves to be the first in a trend, but investor risk appetite showed no sign of abating as the day went on. Australia probably shouldn’t be a template for the US or Europe but the move perfectly fitted and encouraged the current narrative. Indeed, the rally gained further steam after US data showed an unexpectedly large decline in job openings, thus raising additional hopes that inflationary pressures could be easing.

    Against that backdrop, there were substantial gains for equities, credit, bonds and commodities, with the S&P 500’s gains now at +5.73% over the last two trading sessions, which is the first time that’s happened since April 2020.

    Although the Fed and other central banks have done little to validate this idea we’ll get a dovish pivot, it’s clear that markets are pre-empting the possibility again, in a similar manner to what happened in July. This is mostly manifesting itself in markets moving to take out the rate hikes they’d previously been expecting for next year. For instance, the rate priced in by Fed funds futures for December 2023 came down another -3.8bps yesterday to 4.10%, moving even further away from its 4.50% peak just over a week ago. That drove real 10yr Treasury yields -5.2bps lower as additional tightening got priced out, but that decline was more or less offset by the subsequent increase in breakevens that left nominal 10yr yields just -0.6bps lower. They are flat in Asia.

    We’ll have to see if this narrative shift survives Friday’s payroll data and next week’s CPI print, but in the meantime the JOLTS report for August helped fuel the idea that the labour market is cooling off. In particular, the number of job openings fell to 10.053m (vs. 11.088m expected), which is their lowest level since July 2021, and the ratio of job openings to unemployed workers fell back to 1.67, which is the lowest since November 2021. For reference though the pre-covid levels for these two were around 7.2m and 1.2 respectively so the labour market is still tight but getting less so. The hope is that if these trends continue, that would mean that it might be possible to cool off the labour market with a fall in job openings, but without a simultaneous rise in unemployment.

    Over in Europe nominal sovereign bond yields had a more sustained decline, with those on 10yr bunds (-4.6bps), OATs (-5.1bps) and BTPs (-6.3bps) all moving lower on the day. Those moves were supported by a fresh decline in European natural gas prices, with futures down by -4.69% yesterday to hit their lowest level since late July. That followed weather forecasts suggesting that temperatures are set to be higher than normal over the next couple of weeks in Europe, which would help reduce demand for gas and lower the risk of shortages occurring. In addition, one official who did openly float the idea of a new phase of rate hikes was Bank of France Governor Villeroy. He said that the ECB should get to neutral “without hesitation”, but beyond that he said “We could start then a second part of the journey, a more flexible and possibly slower one”. On the other hand, President Lagarde didn’t explicitly mention any easing yesterday, saying that inflation was “undesirably high” and that it was difficult to tell if it was at its peak.

    With all said and done, equities soared on both sides of the Atlantic, with the S&P 500 (+3.06%) surging even more than it did on Monday. The advance was incredibly broad-based, and the 497 companies that moved higher in the index was actually the highest number so far in 2022. The more cyclical sectors did particularly well, including tech as the NASDAQ (+3.34%) saw even larger advances. Elsewhere in the tech space, news that Elon Musk was planning to finally move ahead with his much discussed purchase of Twitter saw the stock advance +22.24%, after having traded halted intraday. Meanwhile in Europe, the STOXX 600 (+3.12%), the DAX (+3.78%) and the CAC 40 (+4.24%) all saw their strongest daily performances since March.

    Here in the UK, there were further developments on the policy side, as Chancellor Kwarteng reiterated that the government would still be releasing their medium-term fiscal plan on November 23, contrary to reports from multiple outlets that it was set to be brought forward. That came as sterling strengthened for a 6th day running, gaining another +1.35% against the dollar to move back above $1.14 again, which also marked its longest run of consecutive gains in nearly 18 months. There were some interesting movements in gilts too. The 10yr yield came down by -8.6bps, but those on longer maturities saw sharp rises after the BoE said that they didn’t buy any of the gilts tendered on Tuesday as part of its emergency intervention, and yields on 30yr gilts (+14.9bps) closed back above 4% for the first time since the intervention began. Keep an eye out for any further developments today, as Prime Minister Truss will be delivering her speech to the Conservative Party conference.

    Overnight in Asia, major indices are higher. The Nikkei (+0.41%), KOSPI (+0.20%) and Hang Seng (+5.38%) are notching gains as Chinese markets remain closed for holidays. Hong Kong markets are catching up after Tuesday’s holiday. Futures are showing some pullback in the US (S&P 500 -0.5%) and Europe (Stoxx 50 -0.4%) though.

    There wasn’t much other data of note yesterday, with the US factory orders for August remaining unchanged, in line with expectations. Otherwise, Euro Area PPI hit a record high of +43.3% in August on a year-on-year basis, just above the +43.2% reading expected.

    To the day ahead now, and data releases include the final services and composite PMIs for September, as well as the ISM services index from the US. Otherwise, there’s French industrial production for August, the ADP’s report of private payrolls from the US for September, and the US trade balance for August. Finally from central banks, we’ll hear from the Fed’s Bostic.

    Tyler Durden
    Wed, 10/05/2022 – 08:07

  • OPEC+ Meeting Preview: Output Cut Between 0.5 And 2.0 Million bpd
    OPEC+ Meeting Preview: Output Cut Between 0.5 And 2.0 Million bpd

    Submitted by Newsquawk

    OPEC+ Preview

    • OPEC+ is likely to agree to cut oil, output, with expectations ranging from 0.5-2.0mln BPD; more recent expectations tilt towards the top end of the range.
    • The JMMC is set to meet at 13:00BST/08:00EDT, with the OPEC+ ministerial meeting slated for around 13: 30BST/08:30EDT. A press conference is then expected to take place (time TBC).
    • Expectations thus far point to a smooth meeting.

    EXPECTATIONS:

    OPEC+ is likely to agree on output cuts, with expectations ranging from 0.5-2.0mln BPD, as per several source reports, with the more recent reports tilting towards the top end of the range. The most recent reporting points towards a 2mln figure.

    • Bloomberg and Reuters reported that OPEC+ is considering a cut to targets ofReuters as much as 2mln BPD.
    • Saudi Arabia, Russia and other producers are set to announce deep cuts at the OPEC+ meeting on Wednesday, according to the FT citing sources, who are reportedly pushing for cuts of 1-2mln BPD or more – these could be phased in over several months
    • Reuters and Bloomberg sources over the weekend suggested cuts could exceed 1mln BPD, and Saudi Arabia may also opt for an additional voluntary cut.
    • Reuters then cited sources saying that OPEC+ was discussing a potential oil output cut in excess of 1mln BPD, excluding any voluntary cuts.
    • Energy Intelligence said talks among delegates thus far indicated a cut of 1.5mln or more was under consideration, though it is unclear if this would be phased in.
    • It’s also worth being aware of an OPEC source cited by Reuters who suggested that the likely figure would be closer to 500k BPD. Sources via Reuters last week suggested Russia was likely to propose a reduction of around 1mln BPD. Talks are expected to continue ahead of the meeting.

    SCHEDULE:

    OPEC+ will be meeting in person in Vienna for the first time since March 2020. The Joint Technical Committee (JTC) meeting was scrapped for this month.

    • The JMMC is set to meet at 13:00BST/08:00EDT.
    • The OPEC+ ministerial meeting slated for around 13:30BST/08:30EDT.
    • A press conference is then expected to take place afterwards (time TBD).
    • Expectations thus far point to a smooth meeting, according to Energy Intelligence

    FACTORS :

    PRICES: Crude prices have been volatile and on a downward trajectory throughout the second half of the year due to demand woes emanating from deeper recession fears – with Brent prices down almost USD 15/bbl from the high seen at the prior meeting.

    • According to FT an report in early September, the Saudi Energy Minister was under pressure from the Saudi Crown Prince to keep prices near to USD 100/bbl, whilst Reuters suggested Saudi and Russia both saw USD 100/bbl as a fair price.
    • “Saudi Arabia is keen to lower output both to prop up prices and so it can keep some production capacity in reserve. The kingdom fears that Russian output could fall sharply later this year when western sanctions against its oil exports tighten”, according to the FT citing people brief on Saudi’s thinking.
    • Although, when questioned by Energy Intelligence, the Saudi Energy Minister said “OPEC+, as is well known,Energy Intelligence does not target prices or prices ranges. Its aim is to support market stability and supply and demand balance”.
    • From a geopolitical standpoint, significant cuts to output targets are not likely to sit well with Washington, which has been attempting to pressure Saudi Arabia to raise oil production levels in a bid to push down prices and tame energy inflation. On this front, the NOPEC bill (No Oil Producing and Exporting Cartels) may resurface in wake of the meeting.
    • The US is reportedly pushing OPEC+ nations not to proceed with an output cut and is arguing that economic fundamentals do not support an output cut, according to a Reuters source.

    DEMAND: The fear of recession against the backdrop of rising interest rates from major economies has provided a double whammy to the demand side of the equation.

    • The September Oil Market Report (OMR) maintained its 2022 and 2023 forecasts, with a “recently observed trend for additional oil demand growth due to fuel switching in power generation.”
    • That being said, since then the Purchasing Managers Index (PMI) metrics out of Europe painted a bleaker growth picture for the continent – “A eurozone recession is on the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs”, the release said.
    • In China, the “zero COVID” policy remains a headwind to demand, with holidaymakers this week bracing for more disruptions during the Golden Week holiday as the Chinese government attempts to contain COVID cases ahead of the Communist Party National Congress mid-October.

    SUPPLY: Limited spare capacity has been an ongoing burden for the group of oil producers.

    • According to an internal document cited by Reuters, OPEC+ fell short of its target by 3.58mln BPD in August having missed the target by 2.89mln BPD in July. As a reminder, the IEA estimates Saudi has a short-order capacity (reachable in less than 90 days) of around 1.2mln BPD, with the longer-term capacity predicted to be nearer to 2.1mln BPD. The argument OPEC watchers have been flagging is the state of confidence within the group (to stabilise the oil market) if they have no spare capacity, with oil traders warning of a potential upward spiral in oil prices if this “worst case” scenario were to occur. Cutting output targets would water down the issue of over-compliance. It’s also worth distinguishing between target cuts and actual barrels coming off the market (likely to be lower than proposed cuts given the over-compliance).
    • Elsewhere, FT sources suggested that Saudi Arabia was concerned that “Russian output could fall sharply late this year when western sanctions against its oil exports tighten”.
    • Furthermore, Iranian barrels do not look set to return to international markets just yet as nuclear deal talks remain at a standstill; neither Tehran or Washington are willing to provide enough concessions to move forward.
    • On the other side, US Strategic Petroleum Reserve (SPR) sales could be utilised to offset some effects of OPEC+ production cuts, although the SPR has seen continuous drains with levels reported to be down to those seen in 1984.

    HOUSE VIEWS:

    • JP Morgan suggested in recent days a cut of around 1mln BPD was on the cards and could help arrest the price decline.
    • UBS said that only a production cut by OPEC+ can break the negative momentum within the oil market in the short-term, and to provide a stronger floor in oil prices, Saudi would need to make extra voluntary cuts.
    • RBC sees a ‘significant chance’ of substantial OPEC+ supply cut and said OPEC+ may cut by 500k-1mln BPD at the October 5th meeting.
    • Goldman Sachs said an OPEC+ supply cut would reinforce its bullish oil price view, and would help to limit downside to prices in the scenario of disappointing economic growth.

    Tyler Durden
    Wed, 10/05/2022 – 07:29

  • European Gas Demand Set For Record-Breaking Decline In 2022
    European Gas Demand Set For Record-Breaking Decline In 2022

    By Tsvetana Paraskova of OilPrice.com

    Soaring natural gas prices, demand destruction in the industrial sector, and energy-saving measures are set to reduce gas consumption in Europe’s developed economies by 10% this year, the biggest drop in European demand in history, the International Energy Agency (IEA) said in its quarterly Gas Market Report on Monday.

    The forecast of a 10% decline in natural gas demand in OECD Europe reflects the expectation of higher gas prices and the EU’s ambition to reduce gas consumption by 15% between August 2022 and March 2023 compared to its five-year average.

    “Assuming average weather conditions, gas demand in the residential and commercial sectors is expected to remain below 2021 levels,” the IEA said in its report.

    Due to sky-high high prices and a very tight gas market, natural gas usage in the power generating sector in Europe is forecast to drop by nearly 3% this year. Industrial gas demand is expected to plunge by as much as 20%, the IEA said.

    Energy-intensive industries in Europe, including aluminum, copper, and zinc smelters and steel makers, have already warned EU officials that they face an existential threat from surging power and gas prices. 

    After a record slump in gas demand this year, Europe faces another year of gas consumption contraction in 2023, when OECD Europe’s demand is forecast to decline by 4% amid high prices, according to estimates from the IEA.

    The agency also noted that “Further potential disruption to the supply of Russian gas provides additional downside risk to this outlook.”

    Keisuke Sadamori, the IEA’s Director of Energy Markets and Security, commented on the report:

    “The outlook for gas markets remains clouded, not least because of Russia’s reckless and unpredictable conduct, which has shattered its reputation as a reliable supplier. But all the signs point to markets remaining very tight well into 2023.”

    The IEA’s Executive Director Fatih Birol said last week that the gas market could be even tighter next year compared to already tight LNG markets in 2022.   

    Tyler Durden
    Wed, 10/05/2022 – 07:20

  • New Hedge Fund Formation Falls To Lowest Since 2008
    New Hedge Fund Formation Falls To Lowest Since 2008

    Persistent and mounting volatility in stocks, currencies, government bonds, credit, cryptos, and just about everything has intensified fears among a generation of money managers entirely dependent on a “Fed put.” Though no such pivot has yet come into play (yet) this year as the Federal Reserve is hellbent on tightening financial conditions to combat the highest inflation in forty years.

    When the Fed injects liquidity into capital markets, everyone is considered a genius, but when conditions tighten, you’ll “find out who’s been swimming naked,” as Warren Buffet once said two decades ago. And for many unseasoned money managers, which there is a lot, who haven’t traded in the mid-70s, late 80s, Dot Com bust, and GFC, it’s been a oneway ticket up for them as they only know one trading strategy: ‘buy the dip.’ 

    Perhaps the Fed-induced market turmoil this year, which has left every dip buyer deeply underwater, could be one of the reasons why new hedge fund launches in the second quarter were at the lowest levels since the 2008 GFC. 

    Data from Hedge Fund Research showed new hedge fund formation slid to only 80 between April and June, down significantly from 185 in the first quarter of the year. The last time hedge fund formations were this low was 56 in the fourth quarter of 2008. 

    During the quarter, there were 156 hedge fund liquidations, a 24% increase over the prior quarter. The total number of hedge funds declined to 9,237 in the second quarter from 9,313 in the first. 

    It was May when we told readers that 2022 Has Been The Worst Year Ever For Hedge Funds. Melvin Capital was one of the most closely followed hedge fund closures during the quarter. 

    HFR data shows market turmoil in the year’s first half resulted in $7.7 billion in net outflows across the hedge fund industry. Even with firms going bust and firm formations at decade lows, hedge funds managed to outperform the broad equity indexes. 

    Through August, the HFRI Fund Weighted Composite Index – a global index of the world’s largest hedge funds – fell about 3%, compared with a 17% plunge in the S&P500 over the same period. 

    Underperformance, hedge fund closures, and lack of new firm formation have occurred in a Fed-induced down cycle for markets. Former Fed Dallas Fed President Richard Fisher said earlier this year that money managers must remove their “beer goggles” after years of ZIRP and QE because ‘Powell isn’t coming to a rescue.’ 

    “The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, and even 2007-2009.. and have only seen a one-way street… of course they’re nervous.” 

    “The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?” Fisher told CNBC in January. 

    Money managers can only hope for one thing: A Fed pivot to revive markets. 

    https://platform.twitter.com/widgets.js

    … that could be coming soon. If not, the hedge fund industry will shrink some more. 

    Tyler Durden
    Wed, 10/05/2022 – 06:55

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