Oil rally resumes, Nasdaq dips in quiet trade

Nasdaq’s modest dip, off 0.2%, was the only highlight in morning trading. Oil prices continued last week’s rally, up 1.6%. Stocks marked time ahead of a slew of critical economic data on inflation and consumer spending and, on Friday, a possible shuttering of the US government and consequent threat to the US credit rating.

TODAY’S MAJOR NEWS

Fed gets economic data to decide interest policy

This week, the Federal Reserve policy will get the economic data it wants when the committee meets again in 30 days to decide on interest policy: Consumer Price Index (CPI) inflation, Retail sales data on Tuesday, and Producer Price Index (PPI) inflation on Wednesday. The market currently places just 14% odds of a rate hike at next month’s meeting, with those odds rising to 28% at the January meeting.

The Cleveland Fed, which seeks to predict inflation trends, currently forecasts less than 0.1% month-on-month growth in CPI inflation for October due to declining energy prices, with core inflation rising 0.3% month-on-month. That would put headline inflation at 3.3%, with the core CPI up nearly 4.2% on the year. The latter remains a concern of the Federal Reserve, with its eyes fixed on lowering the “super-core” data of services minus shelter. Fed officials will likely retain a tightening bias until monthly core CPI consistently runs at a 0.2%-0.3% pace for several months, which has only happened once this year.

Consumer Price Index (CPI) inflation forecast slows

• Headline CPI is expected to rise just 0.1% month-on-month in October compared to 0.4% last month
• CPI is forecast to increase 3.3% year-on-year in October compared to 3.7% last month
• Inflation ex-food and energy is expected to remain flat at 4.1%, still a long way from the 2% target

Producer Price Index (PPI) is expected to slow

• Factory gate or PPI inflation is expected to rise just 0.1% month-on-month in October compared to 0.5% last month
• PPI is forecast to slow to 2.0% year-on-year in October compared to 2.2% last month
• PP ex-food and energy is expected to remain unchanged at 0.3% -on-month in October and 2.7% year-on-year

Retail sales forecast expected to show fall

• The Census Bureau estimate is for consumer spending to decline 0.4% month over month, compared to a 0.7% increase in September – exhibiting the negative impact of higher interest rates
• Excluding autos, sales are expected to fall 0.2%, compared to a 0.6% rise in September
• Retail majors Walmart and Target publish Q3 earnings this week and are expected to report 4% and flat revenue growth compared to the same quarter last year
• In an independent survey, October retail sales, excluding autos and gas, fell by 0.1%, according to the new CNBC/NRF Retail Monitor, a joint product of CNBC and the National Retail Federation based on 9 billion annual credit and debit card transactions
• This data differs from the Census Bureau’s retail sales report as it is the result of actual consumer purchases, while the Census relies on survey data

Moody’s dims the rating outlook for US debt

Moody’s Investor Service cut its rating outlook on US government debt from stable to negative on Friday. Markets don’t care much whether the government shuts down unless it’s a prolonged shutdown, but they do care if the US credit rating is lowered. S&P and Fitch have already lowered their US credit ratings by one notch: S&P in 2011 and Fitch last July. Moody’s affirmed the long-term issuer and senior unsecured rating of the United States government at Aaa. Still, they highlighted challenges to its fiscal strength: its sizeable fiscal deficit, higher interest rates, and the lack of an effective fiscal policy to reduce government spending or increase revenues.

Congress again risks a government shutdown

Moody’s pointed to the political brinkmanship in Washington that makes solutions challenging to achieve, stating that the “continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.” Moody’s went on: “(Thus the US) retains its exceptional economic strength,” and that “further positive growth surprises over the medium term could at least slow the deterioration in debt affordability.”

Risks of a credit downgrade continue to linger in the background. The July downgrade by Fitch resulted in a sharp “risk-off” day in the commodity markets despite bullish news in the fundamentals that day. Newly elected House Speaker Mike Johnson released a funding plan on Saturday that was quickly criticized by members on both sides of the aisle, reinforcing Moody’s concerns of deadlock ahead.

TODAY’S MAJOR MARKETS

Nasdaq dips in quiet market

• Nasdaq fell 0.2% on light trading, with the S&P 500 and Russell 2000 unchanged
• Foreign equity markets made gains, with the FTSE 100 and Dax up 0.9% and 0.7%, respectively
• The VIX, Wall Street’s fear index, was unchanged at 14.8 (the year’s low was 13.0)

Bonds yields and the dollar unchanged

• 2- and 10-year yields were unchanged at 5.04% and 4.46% respectively
• The dollar index was down 0.2% at 105.7
• Versus the dollar, Sterling was up 0.4%, the Yen 0.2%, and the Euro 0.1%

Oil rally resumes

• Oil prices rebounded 1.6%, continuing last week’s rally, rising to $78.4 per barrel
• Spot gold prices rose 0.7% to 1,951 per ounce, while Silver was unchanged at $22.3 per ounce
• The grain and oilseed markets are mostly higher in active trade

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com