OPEC  

Disappointed no doubt by the rather sanguine market response to extra cuts. Members will individually announce their quota reductions in due course – not the most coherent of meeting outcomes, and indicative of the strains that the cartel is under. The extra cuts were in line with what had been reported beforehand too, so no surprise fillip. Opec+ agreed to an extra reduction of 900,000 bpd, whilst also extending the 1.3mn bpd in production cuts already in place, meaning cuts in excess of 2m bpd. Oil prices reacted favourably initially but have handed back gains and crude is set for a sixth straight weekly loss. The market is losing confidence that Opec+ can swing the market like it could in the past – bumper US production is a key factor, whilst Guyana and Brazil are pumping like mad. Once the volatility and uncertainty passes we will see if this is enough to hold the $80 mark. Demand is now key and the signs are pointing to a slowdown.  

Greener Pastures 

Stocks have opened in the green to kick off December after a banner month in November. The DAX added almost 10%, the CAC over 6% and the FTSE 100 enjoyed a more modest return. Yesterday the mood on Wall Street was a little mixed. The Dow Jones industrial average rose 520 points, or 1.5%, for a fresh YTD closing high. SPX was also up 0.4% but the Nasdaq fell a bit – maybe some profit taking, maybe a reaction as yields bounced a tad. Both the Dow and SPX rose almost 9% in November, whilst the Nasdaq rallied almost 11%.  

Behind the curve?  

Inflation is coming down really fast all of a sudden – down to 2.4% in the Eurozone in November, whilst the core slid from 4.2% to 3.6%. In the US the Fed’s preferred gauge, the core PCE, rose 3.5% in October, the lowest since April 2021. The 6-month annualized core inflation rate fell to 2.5%.  

Can it be that the CBs are going to be way too loose on the way in and again way too tight on the way out? SF Fed president Mary Daly, who pretty well speaks for Powell, said it’s too early to know if the Fed is done hiking. Traders may be wary that Jay Powell may use his ‘fireside chat’ today to push back against rate cut expectations.  

Higher for Longer, for Longer 

NY Fed president Williams: 

“I expect it will be appropriate to maintain a restrictive stance for quite some time.” What is ‘some time’? Here was Fed governor Waller putting a time frame on it: "If you see this [lower] inflation continuing for several more months, I don't know how long that might be—3 months? 4 months? 5 months?—you could then start lowering the policy rate because inflation's lower."  

When are Cuts Coming? 

The thing to remember is that the US labour market remains secularly tight, and inflation will be lumpy – it’s not linear and there is a chance inflation picks up at the start of the year as governments withdraw energy support. The market has decided inflation has basically been slayed so rate cuts are coming and risk assets will prosper – premature? It’s a big ask now to switch from ‘higher for longer’ to ‘yeah we are looking at this data and can see the path to cutting’…will they start to make that change at the December meetings?