Oil prices rallies above $70 support, Russell 2000 dips on profit-taking

Oil prices appear to have found support at $70 per barrel, with news of US stock building, further OPEC+ production cuts and Middle East tensions spurring buying action. The Fed’s December meeting minutes were cagey on the outlook for interest rates in 2024. JOLTS labor market data pointed to further weakness, good news for inflation.

TODAY’S MAJOR NEWS

Fed minutes give little away on the timing or extent interest rate cuts

Federal Reserve officials were convinced that inflation is under control, balancing fears that policy is that "overly restrictive" with diminished "upside risks" much diminished, according to minutes of the central bank's December meeting. The minutes reported that "almost all participants indicated that...a lower target range for the federal funds rate would be appropriate by the end of 2024 … with a number of participants" citing increased uncertainty about when and by how much to lower rates.

The Fed is approaching a point where it may face a tradeoff between controlling inflation and maintaining high rates of employment, in hopes of achieving a soft landing for the US economy. No comments were made on when rate cuts might commence, other than to reiterate their "an unusually elevated degree of uncertainty", restating their mantra that any change in policy would be "careful and data-dependent.” The Fed’s new economic projections showing most officials expect that the policy rate will need to be lowered by three-quarters of a percentage point over the course of 2024, with forward interest rate forecasts looking for a first quarter point cut in March and the economist consensus looking further out to the summer. We will get a next update when the Fed meets at the end of January.

Weaker home purchase and mortgage applications reflect housing market weakness

• MBA mortgage applications fell 10.7% for the week ending December 29, after a 1.4% increase during the week prior
• Home purchase volumes were down 7.6%, after a 2.4% gain the previous week
• Mortgage re-financings down 18.1%, after a 0.1% decline last week
• The average 30-year fixed mortgage rate rose from a six month low of 6.71% to 6.76% this week  

US activity manufacturing still contracting, prices paid dips

• The Institute for Supply Management’s (ISM) manufacturing conditions index was up to 47.4 in December, in line with expectations, and above 46.7 readings in both October and November
• This is still technically a contractionary reading, below 50, for the fourteenth straight month, and the longest such stretch since 2000-2001
• The ISM index for prices paid dipped to 45.2, below a forecast 49.5 guess, and down on 49.9 in November, with cheaper commodities like oil benefitting manufacturers

Job Openings and Labor Turnover Survey (JOLTS) data falls sharply

• Job openings in the November JOLTS survey fell to their lowest level since early 2021, at 879 million, below the average expectation for 882 million, and an upwardly-revised 885 million in October figure
• Layoffs and hiring declined to the lowest since July 2020, reinforcing evidence of a cooling labor The ratio of job openings to available workers fell to 1.4 : 1.0, still elevated but well below last summers two to one ratio

TODAY’S MAJOR MARKETS

Russell 2000 falls on profit-taking

• The Russell 2000 fell 2.6% this morning, as traders took profits on last month’s winners, with the Nasdaq down 0.7%, and the S&P 500 and Dow Jones down 0.4%
• The DAX was down 1.4% overnight, while FTSE 100 and Nikkei 225 were down 0.5% and 0.2% respectively
• The VIX, Wall Street’s fear index, rose to 13.6

Dollar rally continues, Bitcoin falters

• Bonds were weaker ahead of the Fed minutes being published, with10-year TIPS index-linked yields at 1.72%, and 2- and 10-year yields rising to 4.35% and 3.93%, respectively
• The dollar index rose 0.4% to 102.6
• Bitcoin fell 5.7% to $42,635 on profit-taking after a strong rally ahead of upcoming positive news (the first BTC ETF and the supply ‘halving’)
• Versus the Dollar, the Yen was off 1.1%, the Euro was off 0.2% and Sterling was up 0.2%

Oil prices rally strongly on US reserve building

• Crude oil rose 3.6% to close to $73 per barrel, boosted by US Department of Energy seeking proposals for three million barrels of sour crude to refill the Strategic Petroleum Reserve. OPEC+ is expected to meet in early February and cut repeat the need for production cuts, further supporting the oil price
• Gold prices slipped 1.5% to $2,043 per ounce, while Silver prices fell 3.4% to $23.15 per ounce
• The grain and oilseed sector were mixed

Analysis by Matt Zeller, Commodities Analyst: [email protected] 

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