October 2, 2018
Crude oil prices soared last week over concerns that Russia, Saudi Arabia and other crude oil producers may not be able to make up for the lost production from troubled Iran and Venezuela. At an OPEC meeting in Algiers, Russia reiterated that they should adhere to current production quotas, which helped to propel Brent crude oil prices over $80 per barrel. Meanwhile, at the United Nations (UN) on Tuesday, President Trump said that OPEC is “ripping off the rest of the world by pushing crude oil prices higher.”
U.S. sanctions on Iran are scheduled to be imposed on November 4th and are expected to cause a temporary global supply crunch. During his UN speech, President Trump also said that “everything about Iran is failing right now,” adding that Iran is in the “worst economic trouble of any country in the world.” President Trump concluded that due to these troubles, Iran would eventually need to negotiate a new deal.
Further adding to the tension in the crude oil market, President Trump said in his UN speech that the chaos in Venezuela is “unacceptable,” which raised concern that the U.S. might aggressively intervene in that troubled nation. President Trump also meet with Colombia’s President on Tuesday, which was widely viewed as indicating that the U.S. is formulating its policy on Venezuela by coordinating any action with Colombia, which is Venezuela’s closest (and much more affluent) neighbor.
The probability of military intervention in Venezuela is rising, especially since some Venezuelan military leaders (who were also on the U.S. sanction list) reportedly met a few months ago with the Trump Administration. But before such a move, the U.S. likely wants to coordinate any action with Colombia.
The Fed Raises Rates – and Signals (Maybe) One More
As anticipated, on Wednesday, the Fed removed the word “accommodative” from its Federal Open Market Committee (FOMC) statement. The Fed signaled that a fourth key interest rate hike in 2018 is likely in December, but that depends on inflation and market interest rates. In the past several days, Treasury bond yields have meandered higher after the bid-to-cover ratios on Treasury auctions dropped to 2.4 from 2.8 a month ago. Typically, the smaller the bid-to-cover ratio, the more likely yields will rise.
The FOMC also forecasted that the Personal Consumption Expenditure (PCE) inflation index would remain at 2.1% over the next several months, which is close to their 2% target rate, so the Fed is not forecasting that inflation will accelerate. I have to add that Fed Chairman Jerome Powell was very calm, transparent and exuded confidence in his Wednesday press conference, which helped to reassure financial markets that the U.S. economy would continue to grow without excessive inflation.
Overall, now that the Fed has painted a picture of steady economic growth in sync with its 2% inflation target, Wall Street can refocus on earnings announcements. We remain in a Goldilocks environment of stable interest rates and reasonable stock valuations, so the overall stock market is poised to finish 2018 on a strong note, especially since the seasonably strongest time of year is fast approaching.
There was a lot of important economic news released last week, which may color the Fed’s future policy decisions. On Tuesday, the Conference Board announced that consumer confidence soared to 138.4 in September, up from 134.7 in August. Since economists were expecting a decline to 132, this came as a massive surprise that may cause some economists to revise their third-quarter GDP estimates higher.
The catalyst behind the highest consumer confidence in 18-years was optimism about short-term business conditions over the next six months, plus improving conditions in the labor markets as jobless claims hit the lowest level in 49 years. Since consumer spending accounts for about 70% of GDP growth, third-quarter GDP should remain over a 4% annual rate, and the holiday shopping season should be robust.
On Thursday, the Commerce Department reported that orders for durable goods soared 4.5% in August, the biggest monthly increase since February and substantially higher than economists’ consensus estimate of a 2.2% increase. July’s total was revised to a 1.2% decline, up from a 1.7% drop previously estimated. Commercial aircraft orders soared 69% in August, causing overall transportation orders to rise 13%. Naturally, this is good news for Boeing (BA) and aviation suppliers like HEICO Corp. (HEI).