OPEC decided to delay this weekend’s meeting to next week because talks between Saudi and African members apparently ran into trouble. Saudi likely sensed in this week’s poor price action - ‘buy the fact that Saudi will double its production cuts’ action - that a 1mbpd extra cut wouldn’t send the oil prices higher, sustainably. Hence, Saudis need other members to put their hand in the mud, and seemingly the negotiations aren’t easy.
A Bit Of History
Saudi has a history of walking away from its role of ‘swing producer’ - a crucial role in balancing global oil markets by adjusting its production levels to stabilize prices. Back in the 1980s, Saudi Arabia has shifted its strategy and opted for a market share approach. Instead of cutting production to support oil prices, Saudi Arabia decided to increase its output significantly, contributing to a glut in the global oil market.
Therefore, if Saudi doesn’t get the support that it needs from the other producer countries after all the unilateral efforts that they put in, they will naturally be tempted to abandon the idea of doubling its supply cut, and eventually reverse it. Such a decision would lead to a sharp decline in oil prices and have a significant impact on the economies of other oil-producing nations.
The barrel of American crude sank to $73.50pb before rebounding to $76 this morning. Brent fell below $80pb before rebounding above this level. Both in Brent and crude, the 200-DMA remains a solid resistance, as the worries of global slowdown outweigh the worries of supply restrictions, even more so as Saudis start giving signs of stress regarding their solo role in cutting production.
Speaking of Morose Growth Projections
Forecasts for German growth in 2024 have been significantly lowered following the recent budget chaos after the German Constitutional Court declared government’s spending plans unconstitutional. Germany – Europe’s growth engine – is now seen growing just 0.4% next year. The UK, on the other hand, cut its own growth forecast significantly in yesterday’s Autumn Statement.
Jeremy Hunt said that the economy would grow only by around 0.7% - still better than Germany, but that projection is down from the 1.7% announced earlier. The good news for British people and businesses is that Hunt announced tax cuts for both individual and companies and lowered the national insurance payroll levy.
The Brits will now make a permanent 100% - yes 100% tax relief – on companies’ capital spending. But don’t be fooled by these beautiful numbers. In reality, the British tax burden will still mount to 38% of its GDP by the end of this decade and will reach its highest since post-WW2 and that 100% tax relief – the so-called ‘full expensing’ - is good for businesses that invest in big machinery but in a service-focused economy like the UK’s, the benefits will likely remain limited.
This is certainly why the market reaction was muted yesterday. The 10-year gilt yield was slightly up, the FTSE 100 closed the session slightly in the negative, while Cable fell below the 1.25 mark, on the back of a broad-based rebound in the US dollar that hit most major peers.
Disinflation Is on This Year’s Thanksgiving Menu.
The US Dollar Index rebounded yesterday, and the rebound was on the back of some data points that cooled down the Fed doves’ enthusiasm. First, the short-term inflation expectations advanced to a seven-month high in November, with Americans expecting a 4.5% jump in prices over the next year. Then, the University of Michigan’s sentiment index improved more than expected, and the weekly jobless claims fell the most since June – all negative for the Federal Reserve (Fed) doves.
Adobe (NASDAQ:ADBE) Analytics said that Thanksgiving shopping will be up by 5.4% this year, and no it is not because of inflated prices. On the contrary, according to Adobe e-commerce prices fell for the 14th straight month, by 6% from last October to this October and if we factor in the online deflation, the Thanksgiving spending growth would be an eye-popping 12%.
But it’s always the same old story. Americans spend, but they spend their savings, and worse, they spend on debt. In this context, the use of buy now spend later options has jumped by 14.5% since last year – and it will certainly hit back, one day. For now, the US 2-year yield remains real steady around the 4.90% level, the US 10-year is headed back to fresh lows since this fall, after a short attempt for a rebound yesterday and the dollar index is back to testing the 200-DMA to the downside.
Happily, for the American people, the Fed doves and all of us, disinflation is on the menu of this Thanksgiving. Turkey prices cost around 5.6% less than last year, stuffing mix costs nearly 3% less, pie crusts are nearly 5% cheaper and cranberry prices are down by more than 18%. It is said that an average 10 people Thanksgiving feast would cost less than $62 - that’s less than $6.2 per person, down from around 4.5% compared to last year.
Last Word
Thanksgiving is one of the calmest trading days of the year. Expect thin trading volumes and higher volatility.