Top things to watch this week
The Economic Calendar:
MONDAY: Chicago Fed National Activity Index, Dallas Fed Manufacturing Survey, 3-Month Bill Auction, 6-Month Bill Auction
TUESDAY: Case-Shiller Home Price Index, FHFA House Price Index, Consumer Confidence, New Home Sales, Richmond Fed Manufacturing Index, 2-Yr Note Auction, Money Supply
WEDNESDAY: MBA Mortgage Applications, Durable Goods Orders, State Street Investor Confidence Index, EIA Petroleum Status Report, Survey of Business Uncertainty, 4-Month Bill Auction, 2-Yr FRN Note Auction, 5-Yr Note Auction
THURSDAY: GDP, Jobless Claims, Corporate Profits, Austan Goolsbee Speaks, Pending Home Sales Index, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 4-Week Bill Auction, 8-Week Bill Auction, 7-Yr Note Auction, Fed Balance Sheet, Thomas Barkin Speaks
FRIDAY: International Trade in Goods, Personal Income and Outlays, Retail Inventories, Wholesale Inventories, Chicago PMI, Consumer Sentiment, John Williams Speaks, Baker Hughes Rig Count, Farm Prices
- Inflation will be in focus with U.S. PCE and Tokyo and European CPI reports.
- Economic data releases in the U.S. include new home sales, durable goods, and PCE.
- PMIs from China to gauge momentum in the recent positive economic signals.
- UAW strike continues as rumors of only four weeks until the union is out of money.
- The U.S. Government shutdown deadline approaches on October 1.
- Fed speak from Kashkari, Bowman, Cook, and Powell.
- Notable earnings releases will include Micron, Nike, and Costco.
- Meta (Facebook) hosts investor day.
STOCK INDEX FUTURES
It is worth noting that intermediate-term CTAs trading the S&P 500 triggered sell-stops to initiate new short positions last week.
September and October are seasonally more volatile periods in stock markets.
The higher bond yields also come at a time when there was some concern around extended valuations, particularly in the large-cap technology space and among the “Magnificent 7” (Magnificent 7 stocks include AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA).
Valuations now seem more stretched, and they face the challenge of a higher-rate environment.
In addition, markets have walls of worry to climb around a potential government shutdown and ongoing UAW strikes, which may also create near-term uncertainty.
INTEREST RATE FUTURES
At last week’s meeting, the FOMC decided to keep the Federal Funds Rate target unchanged at 5.25-5.50%.
We have been forecasting “higher interest rates for longer” for many weeks. Last week, we saw many Secured Overnight Financing Rates (SOFR) and Fed Fund futures spreads reflect that view. The longer-term 10 and 30-year treasuries also saw an uptick in yields.
The big news was the change in the 2024 and 2025 dot plots – 2023 dot 5.6% (prev. 5.6%), 2024 5.1% (prev. 4.6%), 2025 3.9% (prev. 3.4%), 2026 2.9%, longer run 2.5% (prev. 2.5%)
The main takeaways are economic activity is expanding at a ‘solid’ pace (previously moderate), job gains have ‘slowed’ (prev. ‘been robust’) but ‘remain strong’, and inflation remains elevated. The central bank remains ‘highly attentive’ to inflation risks.
Fed officials still don’t see inflation back to their 2.0% target until 2026. As the economy dodges recession and unemployment stays low, Chair Jerome Powell said the Fed needs ‘convincing evidence’ its policy stance is bringing inflation back to target.
CRUDE OIL FUTURES
Oil analysts forecast $100 a barrel in the near term, as supply tightening by OPEC+ and recovering demand in the US and China outweigh inflation and monetary tightening concerns.
Goldman Sachs has raised their Brent oil forecast to $100, citing the following factors:
- OPEC+ production cuts: OPEC+ has implemented significant production cuts, which have helped to tighten the oil market.
- Improving demand: Oil demand is recovering in the US and China, the world’s two largest oil consumers.
- Declining stockpiles: Oil stockpiles are dropping at a rapid pace
RISKS TO HIGHER OIL PRICES (DEMAND DESTRUCTION)
While many analysts call for oil prices to reach $100 a barrel, we do not believe this would be “demand destructive.” We base this assessment on the following:
- Oil prices in the $100-120 range broadly align with historical prices when measured realistically, assuming higher interest rates for longer.
- Given the lack of academic literature and explicit methodology, it is notoriously difficult to calculate demand destruction owing to higher, sustained oil prices. However, one way to quantify the relationship is to estimate oil’s share in the world economy (measured as real oil price-times world oil demand-divided by real global GDP).
- Based on our estimates, oil’s share of world GDP peaked during the Iranian revolution in 1979-1980 at almost 10%. More recently, such share reached 5.4% in 2008 and 5.7% in 2011. In all cases, oil prices corrected sharply downwards in subsequent years, indicating that the world economy couldn’t afford such oil prices.
- $80, $100, or even $120 nominal oil prices in the coming years appear manageable in real terms, as they equate to oil’s share of the world economy below 4%.
However, there is a risk that higher oil prices could lead to a recession, which would, in turn, weigh on oil demand. We see energy as a preferred sector relative to the broader equities market, should our house view on recession materialize.
In the past, energy indices outperformed the broader equity index during recession years, except when equities and oil have sold off sharply.
The government is likely headed for a shutdown on Oct. 1 unless Congress can pass a new “Continuing Resolution.”
At this point, that’s unlikely to happen, first because the Republicans in the House haven’t even agreed on a spending plan they can pass internally, and even when they do, that plan likely has no chance of passing the Senate.
Instead, that plan will mark the start of negotiations or compromise that ultimately will pass. But that’s unlikely to occur before the Oct. 1 deadline.
This performance chart tracks the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.
All content published and distributed by Topstep LLC and its affiliates (collectively, the “Company”) should be treated as general information only. None of the information provided by the Company or contained herein is intended as (a) investment advice, (b) an offer or solicitation of an offer to buy or sell, or (c) a recommendation, endorsement, or sponsorship of any security, Company, or fund. Testimonials appearing on the Company’s websites may not be representative of other clients or customers and is not a guarantee of future performance or success. Use of the information contained on the Company’s websites is at your own risk and the Company, and its partners, representatives, agents, employees, and contractors assume no responsibility or liability for any use or misuse of such information.
Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the investor’s initial investment. Only risk capital—money that can be lost without jeopardizing one’s financial security or lifestyle—should be used for trading, and only those individuals with sufficient risk capital should consider trading. Nothing contained herein is a solicitation or an offer to buy or sell futures, options, or forex. Past performance is not necessarily indicative of future results.
CFTC Rule 4.41 – Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.