Market 09/05: Oil prices surge after surprise decision by Saudi Arabia and Russia

US Factory Orders Decline in July

After a surge (2.3% MoM) in June, US factory orders were expected to drop sharply in July (down 2.5% MoM). However, the figure declined less than expected - down 2.1% MoM.

This is the largest monthly decline since November 2022 and it caused orders to fall 0.7% year-over-year.

Transportation orders were one of the main contributors to the decline, as Core Factory orders rose 0.8% MoM - the strongest increase since January - higher than expected.

Durable Goods Orders fell 5.2% MoM (due to non-defense aircraft parts and engine orders dropping 43.6%).

Oil Prices Surge After Saudi Arabia and Russia Cut Decision

Saudi Arabia said it will extend the voluntary cut of 1 million barrels/day until the end of December. The extension decision aims to bolster OPEC countries' efforts to stabilize the oil market. Over the next three months, Saudi Arabia will have daily production of approximately 9 million barrels. Russia also announced it will extend oil export cuts of 300,000 barrels/day until December.

Brent crude then hit $90 for the first time since last November, while WTI for October 23 delivery rose from $85.55/barrel to $87.00/barrel, also the highest price of the year.

Goldman Sachs Lowers US Recession Probability from 20% to 15%

Since June 2023, Goldman Sachs has continuously adjusted downward the probability of the US economy falling into recession over the next 12 months.

Jan Hatzius, Goldman Sachs' chief economist, said positive developments in inflation data and the labor market are the reasons the bank lowered the above forecast probability.

China's August Services PMI Drops Sharply

Caixin Services PMI in August fell to 51.8 from 54.1 in July, below expectations of 53.6. Services activity continued to expand but at a slower pace due to a slowdown in new job growth.

RBA Holds Rates Steady in Final Meeting of Current Governor

The Reserve Bank of Australia paused rate hikes for the third consecutive time and kept the cash rate at 4.1%, maintaining the highest level since 2012, in line with market expectations.

Governor Lowe said in the post-meeting statement: "Further tightening of monetary policy may be needed to ensure inflation returns to target in a reasonable timeframe, but this will continue to depend on the data and the evolving assessment of risks.".

Eurozone PMI Hits Over 2-Year Low

S&P Global: Eurozone Composite PMI at 46.7, the lowest in 33 months. Services PMI at 47.9, the lowest in 30 months. Input price inflation accelerates for the first time in nearly a year.

Fed Official Statements

Fed Official Waller: Need to be very cautious to make the appropriate move

Unemployment rate shows no major change from last year
Recessions are usually caused by unexpected shocks but economic data so far remains quite good
Need to monitor data for "a few more months" to determine if tightening policy has ended
Need to be very cautious to take appropriate intervention action
Does not think continuing to raise interest rates will push the economy into recession
Data will decide if the Fed raises rates again as recent indicators have the Fed on alert
Fed is seeing the economy slow down
Government bond yields are at appropriate levels
US economy is '80% closed' so external impacts will be smaller than other countries
Fed is closely monitoring commercial real estate

Cleveland Fed President Mester: Fed may need to raise rates a bit higher

Labor market is becoming more balanced
From what I see now, the Fed may need to raise the policy rate a bit more
There is still plenty of time from now until we make our final decision at the September meeting, and more economic data to be released