Global Economy & Markets, Weekly Roundup 07/10/24
Geopolitical risks are rising, while US labor market data for September surprised to the upside
Geopolitical risks have risen, in view of the broadening conflict in the Middle East. Upside risks for international oil prices with the respective ramifications for inflation, and, if materialized, for the monetary policy easing cycle, have particularly come into focus by investors. Oil prices spiked in the past week (Brent: +8.4% to $78/bbl and WTI: +9.0% to $75/bbl).
Iran’s crude oil production of c. 3.3 million barrels per day, represents slightly above 3% of global oil supply. One of the tail risk scenarios entails a disruption in trade flows (c. 20% of global oil production) via the strait of Hormuz, located between Oman and Iran and connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea.
The manageability of a possible major disruption in flows, is linked, inter alia, to OPEC+ policies, and especially of Saudi Arabia. Note that Saudi Arabia’s producers currently operate well below capacity, with supply being voluntarily held down to c. 9 mn brl/day (10.5 mn brl/day in 2022), to support international oil prices. Reportedly, Saudi Arabia contemplates a strategic switch of focus from price targeting to securing a larger market share.
On economic activity, the US labor market data for September were much stronger than expected, with solid job creation (non-farm payrolls: +254k) and the unemployment rate falling by -0.1 pp to 4.1%. At the same time, September’s PMI suggest that a services-led growth continues, with the index up by +3.4 pts to 54.9.
All told, the Atlanta Fed’s GDPNowcast model points to +2.5% qoq saar (+2.6% yoy) real GDP growth in Q3:2024 from +2.3% qoq saar on average in H1:2024. September’s CPI report due in the current week, will be closely monitored.
Mr.Powell cautioned against investors misinterpreting the recent -50 bps cut as a precursor of similarly aggressive moves to come. A repricing higher of inflation expectations, as the escalating Middle East conflict entails upward risks for oil prices and strong economic data sent US Treasury yields significantly higher in the past week (10-Year: +23 bps to 3.98%).
Global equity markets were mixed in the past week (MSCI ACWI: -0.6%), with the S&P500 slightly up by +0.2% wow as the support from solid economic data (+0.9% on Friday following the labor market report), offset the concerns related to the Middle East developments, whereas the EuroStoxx lost -2.2% (unlike the US, the euro area is a net importer of oil).
Recall that the breadth of the gains of S&P500 has improved recently. In the event, in Q3:2024, c. 65% of the S&P500’s constituents overperformed the headline index (+5.5% qoq), compared with just 24% in H1:2024 (S&P500 gains of 14.5% in that period). The equal weighted S&P500 index gained +9.1% in Q3:2024 from +4.1% in H1:2024.
Attention will now also gradually turn towards the Q3:2024 earnings season, due to enter full speed for the S&P500 as of Friday October 11th with prominent Banks reporting. According to consensus analysts, the annual growth of S&P500 EPS is estimated at +5.0% from +13.2% in Q2:2024.
Geopolitical risks have risen, in view of the broadening conflict in the Middle East. Upside risks for international oil prices with the respective ramifications for inflation, and, if materialized, for the monetary policy easing cycle, have particularly come into focus by investors. Oil prices spiked in the past week (Brent: +8.4% to $78/bbl and WTI: +9.0% to $75/bbl).
Iran’s crude oil production of c. 3.3 million barrels per day, represents slightly above 3% of global oil supply. One of the tail risk scenarios entails a disruption in trade flows (c. 20% of global oil production) via the strait of Hormuz, located between Oman and Iran and connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea.
The manageability of a possible major disruption in flows, is linked, inter alia, to OPEC+ policies, and especially of Saudi Arabia. Note that Saudi Arabia’s producers currently operate well below capacity, with supply being voluntarily held down to c. 9 mn brl/day (10.5 mn brl/day in 2022), to support international oil prices. Reportedly, Saudi Arabia contemplates a strategic switch of focus from price targeting to securing a larger market share.
On economic activity, the US labor market data for September were much stronger than expected, with solid job creation (non-farm payrolls: +254k) and the unemployment rate falling by -0.1 pp to 4.1%. At the same time, September’s PMI suggest that a services-led growth continues, with the index up by +3.4 pts to 54.9.
All told, the Atlanta Fed’s GDPNowcast model points to +2.5% qoq saar (+2.6% yoy) real GDP growth in Q3:2024 from +2.3% qoq saar on average in H1:2024. September’s CPI report due in the current week, will be closely monitored.
Mr.Powell cautioned against investors misinterpreting the recent -50 bps cut as a precursor of similarly aggressive moves to come. A repricing higher of inflation expectations, as the escalating Middle East conflict entails upward risks for oil prices and strong economic data sent US Treasury yields significantly higher in the past week (10-Year: +23 bps to 3.98%).
Global equity markets were mixed in the past week (MSCI ACWI: -0.6%), with the S&P500 slightly up by +0.2% wow as the support from solid economic data (+0.9% on Friday following the labor market report), offset the concerns related to the Middle East developments, whereas the EuroStoxx lost -2.2% (unlike the US, the euro area is a net importer of oil).
Recall that the breadth of the gains of S&P500 has improved recently. In the event, in Q3:2024, c. 65% of the S&P500’s constituents overperformed the headline index (+5.5% qoq), compared with just 24% in H1:2024 (S&P500 gains of 14.5% in that period). The equal weighted S&P500 index gained +9.1% in Q3:2024 from +4.1% in H1:2024.
Attention will now also gradually turn towards the Q3:2024 earnings season, due to enter full speed for the S&P500 as of Friday October 11th with prominent Banks reporting. According to consensus analysts, the annual growth of S&P500 EPS is estimated at +5.0% from +13.2% in Q2:2024.