Markets were bifurcated as the tech heavy NASDAQ fell about 0.30% on inflation fears, concerns arising from an unexpected cut in OPEC+’s production. The Dow advanced about 1.0%. Oil is the ultimate geopolitical weapon, and a strong argument can be made that the West is in a precarious position given its climate policies.
St. Louis Fed President James Bullard stated OPEC’s decision to cut output was “entirely unexpected” and increase in oil prices “could make the Fed’s job of lowering inflation more challenging.” The markets gave Bullard high marks on his statement that “it is not clear what higher oil prices will mean for monetary policy and whether or not it will have lasting impact,”
Treasuries initially sold off on OPEC+’s action but recovered as the ISM Manufacturing Index contracted by more than expected. The bond market focused on the employment component of the ISM which declined to the lowest level since July 2020, its third monthly decline.
The FOMC has stated that increasing unemployment is a major objective of its monetary policy. Will today’s JOLTS Job Openings statistics validate the ISM data? As widely discussed there are almost two jobs available for every unemployed worker. Will this ratio decline?
Commenting further about oil, did OPEC+ cut oil output only to match today’s production levels? The data has consistently indicated OPEC+ is not producing at intended levels, a million barrel plus shortfall occurring daily, partially from the lack of infrastructure spending.
OPEC lowered daily production quotas by 1.16 million barrels.
The New York Times reported yesterday that Russia appears to be struggling to keep production levels elevated, primarily the result of the lack of funding, a view also expressed by Halliburton.
The NYT also stated, “Saudi production has also been constantly below expected levels in recent months.”
The Western Democracies have declared war against its fossil fuel industry via regulatory fiat. Even if there was a change in attitude, it may take years to roll back enacted regulation and restore confidence Government will not again take a similar path. Large oil field production requires 7-10 years to develop.
It is widely accepted alternative energy sources are not providing the yield that was projected as the technology and infrastructure is still perhaps years away.
What will happen today?
Last night the foreign markets were up. London was up 0.02%, Paris up 0.66% and Frankfurt up 0.94%. China was up 0.49%, Japan up 0.35% and Hang Seng down 0.66%. Futures are up about 0.25% amid signs inflation expectations are receding and central banks are no longer in a rush to accelerate monetary tightening. The 10-year is off 14/32 to yield 3.47%. Oil is up another 1% to over $81/barrel.
