November 4th Financial News

Energy - OPEC supply increase delayed

Oil prices are trading stronger this morning with ICE Brent up around 1.5% at the time of writing after a handful of OPEC+ members over the weekend decided to delay a supply increase by one month. Members were set to gradually unwind their additional voluntary supply cuts of 2.2m b/d from 1 December, translating to a monthly supply increase of around 180k b/d for 12 months. While the delay until January does not change fundamentals significantly, it does potentially leave the market having to rethink the strategy of OPEC+. There had been reports in recent weeks that Saudi Arabia was unhappy about giving away market share and also not pleased by the lack of compliance by some OPEC+ members. This led to suggestions that the group would likely go ahead with supply increases despite the recent weakness in prices. This was also a view that we held. However, this delayed supply increase means that maybe the group are more willing to support prices than many believe.  However, our balance continues to show that the market will be in surplus through 2025 unless OPEC+ continues with cuts through next year.

Preliminary October production numbers for OPEC are starting to come through. According to a Bloomberg survey, the group’s output increased by 370k b/d MoM to 26.9m b/d. This increase was driven by the return of supply from Libya, where output increased by 500k b/d MoM. Meanwhile, Iraqi output fell by 90k b/d MoM to 4.13m b/d, though this still leaves output above Iraq’s production target of 4m b/d.

The latest positioning data shows that speculators reduced their net long in ICE Brent by 40,674 lots over the last reporting week to 93,907 lots as of last Tuesday. The move was largely driven by longs liquidating as they took the view that Israel’s targeted response to Iran opened the door for de-escalation.

European natural gas prices came under pressure on Friday. TTF settled 3.48% lower on the day after reports that European buyers could be moving towards a deal with Azerbaijan which would see gas continuing to transit through Ukraine into the EU after the Russia-Ukraine transit deal expires at the end of this year. The market has been concerned that the expiry of this deal would lead to the EU losing around 15bcm of gas supply annually.

Non-farm employment rose a meager 12k in October, well below the consensus forecast calling for a gain of 100k. Job gains over the two prior months were revised lower by 112k.

The Bureau of Labor Statistics noted that Hurricane’s Helene and Milton “likely” affected estimates in some industries, though did not provide any point estimates.

Over the past three months, payroll gains averaged 104k, well below the 194k averaged over the prior twelve-month period.

Private payrolls were lower by 28k in October, with the largest declines seen in professional & business services (-47k) – all related to a pullback in temporary help (-48.5k) – and manufacturing (-46k), though this was largely due to the ongoing Boeing strike. Meanwhile, education & healthcare (+57k) and government (+40k) recorded solid gains last month. Job creation across most other industries was relatively flat.

In the household survey, a sharp decline in civilian employment (368k) largely offset a pullback in the labor force (-220k), keeping the unemployment rate steady at 4.1%. The labor force participation rate fell 0.1 percentage points to 62.6%.

Average hourly earnings (AHE) rose 0.4% month-on-month (m/m), a modest acceleration from September’s downwardly revised reading of 0.3% m/m. On a twelve-month basis, AHE were up 4.0% (from 3.9% in September).

Key Implications

Between the ongoing Boeing strike and the devastating impacts of Hurricane’s Helene and Milton, we knew this was going to be messy employment report. While the Bureau of Labor Statistics didn’t provide any point estimates of hurricane impacts, they did note that the storms “likely” had some impact on last month’s figures. Putting that aside, revisions to prior months were meaningfully lower, which on top of October’s disappointing reading pulled the three-month moving average down to 104k, well below what’s required to meet current growth in the labor force. However, given the various factors impacting last month’s numbers, it’s too early to draw any meaningful conclusions from last week’s report.

Other data out last week continued to point to a labor market that is decelerating but not necessarily deteriorating. Job openings continued to trend lower in September while hire and quit rates are now at or below pre-pandemic levels. This has helped to pressure compensation growth lower, with the Employment Cost Index slowing to 3.9% on a year-ago basis in the third quarter. Amid the ongoing pickup in productivity, this suggests the Fed’s preferred wage metric is now growing at a pace broadly consistent with 2% inflation. This should give policymakers all the confidence they need to gradually reduce the policy rate by quarter-point increments at each of its upcoming meetings.

Last week’s data showed continued growth in the US and euro area in Q3, with the US GDP rising 2.8% q/q SAAR and euro area GDP increasing 0.4% q/q, surpassing expectations. Growth in the euro area was influenced by the Olympics in France and a revision of Germany’s Q2 GDP. Without these factors, growth in these economies was flat, while Spain showed robust growth. In China, the October composite PMI rose to 50.8, signalling a recovery from the summer slump, driven by gains in both manufacturing and non-manufacturing sectors.

Tensions in the Middle East remain elevated after Israel retaliated against Iranian military sites following an attack on 1 October. However, the targeted response, which avoided energy infrastructure, was seen as less provocative, leading to a drop in oil prices. In Japan, the ruling coalition lost its Lower House majority, creating political uncertainty as it now requires support from other parties, which have criticized recent Bank of Japan (BoJ) rate hikes. Despite this, we expect the BoJ to continue rate hikes in December, as indicated at last week’s meeting, even though rates were left unchanged. In the UK, the Labour government’s first budget revealed a significant increase in borrowing over the next five years, pushing 10-year Gilt yields 20bp higher and reducing expectations for a back-to-back rate cut by Bank of England in December.

Euro area inflation increased to 2.0% y/y in October (cons: 1.9%, prior: 1.7%) driven by energy and food inflation, while core inflation was unchanged at 2.7%. Core inflation rose 0.20% m/m s.a. driven by still elevated service price increases of 0.30% m/m s.a. while goods prices remained unchanged at 0.0% m/m s.a. The October data thus showed that the very soft services inflation registered in September was a “blip” and inflation dynamics remain the same as we saw in the first months of Q3, namely with momentum in underlying inflation heading slowly in the right direction. Services inflation remains sticky on the back of elevated wage growth, which is supported by the strong labour market as also indicated by the unemployment rate, which dropped to an all-time low of 6.3% in September.

This week, all eyes are on the US election. The first state results are expected a couple of hours past midnight on Wednesday European time, and by morning, around 70% of states had been called in the previous 2020-election. Donald Trump is the favourite to win the presidential election according to prediction markets, Republicans are expected to win majority in the Senate elections and House elections remain highly uncertain. The final swing state polls pointed towards a very close race for the White House and results from Pennsylvania, Michigan and Wisconsin, where results are likely to be known only late Wednesday, will likely play a key role in the outcome. We host two webinars on the morning Wednesday 6 November, which you can sign up for here and here.

On Thursday, focus turns to central banks as both Fed, BoE, Norges Bank, and the Riksbank have meetings. We expect both Fed and BoE to cut rates by 25bp in line with analyst consensus and market pricing. In both places, focus will be on forward-looking guidance especially in the UK after the recent jitters caused by the government’s budget. For details, see Fed preview: Navigating uncertain waters, 1 November. On Friday, we should finally get the actual numbers on China’s fiscal stimulus, which Reuters sources last week said could be 10 trillion yuan in extra debt the coming years.

Introduction