The US Dollar Index continues to decline for a fifth consecutive day and has dropped below 110.00 for the first time in 38 days. Pressure continues to be piled onto the US Dollar as an economic slowdown is starting to show in their economic figures. For example, the latest US NFP figure declined to 263,000 which is the lowest in 9 months.
Additionally, this week the CB Consumer Confidence fell again significantly along with both the Service and Manufacturing PMIs which also dropped sharply below 50.0. A figure below 50.0 indicates a high chance of economic contraction. Overall, we can see the chances of a US recession are increasing as previously advised by economists such as the CEO of Goldman Sachs and Nouriel Roubini.
However, the chances of the Federal Reserve pivoting from their monetary policy stance is still unlikely. Inflation still remains above 8% and economists advise that it is unlikely for the inflation to fall next month considering the higher cost of fuel. We can also see from the latest earning reports that consumer spending remains strong and shows no real significant decline.
Higher fuel costs are also evidenced by the price of crude oil which had increased by over 14% at some point this month. Yesterday, the price also saw its highest increase since the 7th of October. We will look at the reason behind this below.
Lastly, the DowJones remains the best performing index this month so far. The DJIA has increased by almost 9% over the past 3 weeks outperforming both the S&P500 and NASDAQ. The NASDAQ has increased by 6.8% and the S&P500 by 7%. The DowJones is specifically supported by the earning reports of certain companies which have performed better than expected. This includes companies such as Visa, Chevron and 3M Co. The stock market is also clearly receiving a boost from the weaker US Dollar, making the US stock market more intriguing for foreign investors.
DowJones 6-hour chart on 27th October
Crude Oil
The price of crude oil had managed to form a bullish breakout and maintain momentum to form a new higher swing. The price has been supported by multiple factors including the weakening US Dollar. However, investors should still be cautious and not forget other factors.
Crude Oil 1-hour chart on 27th October
A weaker USD results in cheaper supply for buyers holding other currencies. Overall, this has led to an increase in demand as buyers look to take advantage of this situation. The price per barrel is also being supported by earnings reports which indicate that consumer demand still remains strong regardless of low confidence, high inflation, and higher interest rates.
In addition to this, the price has possibly been supported by the fear of lower supply from December onwards. It is expected that the European Union will ban oil imports from the Russian Federation and restrict Russian ships from specific insurances. Economists believe this could lead to Russia producing between 1 to 2 million less barrels of oil. The lower supply is known to support prices as long as demand remains at the same level.
However, as mentioned above there are also possible complications. Although the price of oil has been increasing this month, the price had been declining in the months leading up to October, specifically since April this year. The change in monetary policies and higher interest rates is known to lower demand.
Currently, there is no sign of a weaker policy being taken by any Central Banks, except possibly from the Turkish Central Bank. Today the ECB is expected to increase interest rates by 0.75% once again. This is also likely to put a lot of pressure on consumers. Consumers will now be under significant pressure not only from inflation but also from the cost of borrowing. The Bank of England and the Federal Reserve are also expected to increase interest rates. If this does indeed result in lower economic activity it can reduce the need for energy.
Quick Summary:
- Earning reports show high consumer demand, but economic figures show frailty.
- The Federal Reserve and ECB are both expected to stick to interest rate hikes for now.
- Stocks and commodities traders look to take advantage of a weaker USD.
- The US is expected to put further restrictions on Russian oil and ships leading to supply fears.
- Market’s expect the ECB to increase interest rates by 75 basis points.
