Nasdaq leads the rally and Oil joins on supply cut hopes

Nasdaq stepped back into its role as a market leader, up 1.2% in morning trade, even though the senior team at OpenAI jumping ship to join Microsoft was the only headline from the sector. Bonds rallied modestly on further talk about early interest rate cuts on last week’s inflation-friendly data run. Oil’s resurgence was the big story, up 2.7%, on expectations of more OPEC+ production cut following recent sharp price losses.

TODAY’S MAJOR NEWS

Spring rate reductions?

Equity and Bond markets rallied last week as investors believe the Fed is done hiking rates as inflation seems to be trending down despite unemployment remaining flat. The CME’s Fedwatch indicator, a gauge of where traders think rates will be, puts a 28% probability on the first cut by March and a 49% probability by May. We won’t get much data in this shortened week (US equity markets are closed on Thursday and after lunch on Friday.)

The latest Fed Minutes are due tomorrow and will give insights into how dovish they are.  If officials need more confidence that rates are sufficiently restrictive based on economic data, their first-rate cut will likely come well after a downturn has begun. On the other hand, should officials quickly recognize signs of a cooling economy and act pre-emptively, they may nip an emerging downturn in the bud. Historically, the FOMC has been late in reacting.  While a soft landing may seem in hand, cutting rates early in 2024 would come at the expense of a permanent vanquishing of inflation, and inflation will likely accelerate into 2025. There are no easy choices.

Leading indicators are worse than expected, economy is still strong

The Conference Board attributed October's continuing decline in its Leading Economic Index (LEI) to a deterioration of consumer expectations, softening new orders, falling equities, and tighter credit conditions. Today's Conference Board commentary cited their continued expectations for the US to see a "very short recession" in 2024, with a forecast for real GDP to grow by only 0.8% in the year ahead. US GDP has continued to surprise despite souring expectations throughout 2023. The debate on how long this can last in our current high-rate environment will continue, with the upcoming holiday spending seasons likely to give us more insight into the consumer's health shortly. Many in the trade continue to expect a pivot from the Fed in early 2024, but their consistently hawkish comments may prove otherwise.

• The Conference Board's leading indicator showed a reading of 103.9 in October on this morning's release, a 0.8% month-on-month decline, slightly worse than the market expected, and the sharpest drop seen since April
• The LEI has now posted 19 consecutive monthly declines, the worst streak since the 24 months during the Great Recession of 2007-2009
• Despite these ongoing warning signs, the US economy has continued to show resiliency, evidenced by the shockingly high 4.9% GDP growth last quarter

More oil supply cuts?

Three OPEC+ sources told Reuters that the broader producer group of OPEC and its allies, including Russia, will consider whether to make additional supply cuts when it meets on November 26^th. As noted last week, news of restricted supply from Saudi Arabia and Russia pushed oil to its high point of close to $94 earlier this year, along with weaker demand fundamentals from China, the US, and Europe and increasing production from Venezuela and the US domestic market. However, Harry Altham, StoneX oil analyst, believes the oil market is closer to balance and that OPEC+ production quotas in 2024 would remain unchanged at its next meeting. If we see more supply costs, the oil price could resume its bullish trend.

Microsoft snags OpenAI team

Microsoft is showing strength following the addition of former OpenAI CEO Sam Altman over the weekend, and the stock is up 16% over the past four weeks. Altman will lead a new in-house advanced AI research team, potentially bringing large numbers of employees with him. The advancement of artificial intelligence has been one of the hottest topics in 2023, mainly following the release of OpenAI's popular ChatGPT platform earlier this year. It looks to stay at the forefront of conversation for the foreseeable future. In other tech news, Nvidia, whose stock has more than tripled in value since the start of the year, is set to report its Q3 earnings tomorrow, with expectations high after the company's huge Q2 that was driven in large part by the business segment that houses its AI chips division.

TODAY’S MAJOR MARKETS

Nasdaq leads rally

• Nasdaq rose 1.2% on AI-inspired events, with the S&P 500 and Russell 2000 up 0.8% and 0.5% respectively
• Foreign equity markets were downbeat overnight, with the Dax off 0.8%, the Nikkei 225 off 0.6% and the FTSE 100 off 0.1%
• The VIX, Wall Street’s fear index, fell close to its year-to-date low of 13.0, at 13.6

Bonds yields unchanged, dollar weaker

• 2- and 10-year yields were pretty much unchanged at 4.90% and 4.42%, respectively
• The dollar index was down 0.4% to 103.5
• Versus the dollar, the Yen was up 0.8%, Sterling 0.4%, and the Euro 0.3%

Oil rallies on OPEC+ hopes

• Oil prices rose 2.7% to $77.9 per barrel as traders looked forward to news of OPEC+ supply cuts
• Gold prices were off 0.2% at $1,981 per ounce, while Silver prices fell 1.3% to $23.5 per ounce
• The agriculture complex was broadly lower, save for some strength in the soy products

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]