Markets hesitate on Saudi Arabia's oil price cuts

Dow dropped 116, advancers over decliners 2-1 & NAZ gained 165.  The MLP index was off 2+ to the 254s & the REIT index rose 3+ to the 392s.  Junk bond funds were mixed & Treasuries had modest buying which reduced yields.  Oil was off 3 to 71 on Saudi price cuts (more below) & gold fell 10 to 2039.

AMJ (Alerian MLP Index tracking fund)

Oil declined more than 4% after Saudi Arabia slashed its prices, raising renewed worries that the market is oversupplied at the same time as demand is weakening.  The West Texas Intermediate futures contract for Feb lost $3.67 (4.9%) to trade at $70.17 a barrel & the Brent futures contract for Mar shed $3.44 (4.4%) to $75.32 a barrel.  The selloff comes after Saudi Aramco yesterday sharply cut the price of Arab Light Crude to Asian customers by $2 per barrel.  The Saudi price cut comes amid persistent market weakness due in large part to record US crude production & softening demand in China.  OPEC & its allies are cutting their production by 2.2M barrels per day this qtr in an effort to balance the market.  “While it is possible that the price reduction was to maintain market share in the face of production cuts, the market is taking it as a clear sign that the economy is slowing. Maybe the landing might not be so soft,” Phil Flynn of the Price Futures Group wrote.  US crude & Brent, the global benchmark, both ended the first week of 2024 more than 2% higher on mounting tensions in the Middle East, but supply & demand concerns have persistently overshadowed geopolitical risks in the market.  “The market seems to feel that geopolitical risk will not impact supply and if it does, demand is weak so it will not matter,” Flynn added.  Repeated attacks by Houthi militants, who are allied with Iran, on commercial vessels in the Red Sea have forced shipping giant Maersk to avoid the crucial waterway for the foreseeable future.  The situation is also deteriorating in Lebanon, where a Hezbollah commander was killed today in an apparent Israeli airstrike.  Analysts say a regional war that draws in Iran could lead to a disruption in the Strait of Hormuz which would have a material impact on the market.  So far, however, rising tensions in the region have not led to a disruption in crude supplies.  Meanwhile, the US pumped an estimated 13.2M barrels per day of crude oil in the last week of 2023, & its inventories of gasoline & distillate both soared by more than 10M barrels.

Oil falls more than 4% as Saudi price cut heightens global demand worries

Congressional leaders announced a $1.59T deal on top-line spending as the gov races to avoid a potential shutdown.  The deal establishes an overall spending budget of $1.59B for the 2024 fiscal year, allocating $886B to military spending & $704B for non-defense spending, said Rep House Speaker Mike Johnson said in.  “After many weeks of dialogue and debate, we have secured hard-fought concessions to unlock the FY 24 topline numbers and allow the Appropriations Committee to finally begin negotiating and completing the twelve annual appropriations bills,” he wrote.  The deal comes as the House & Senate inch closer to a key Jan 19 deadline, when funding runs out for many federal agencies.  Funding for the rest of the gov expires on Feb 2.  While the deal paves the way for a potential funding decision, & signals that both Johnson & Schumer are working in unison, a shutdown isn't out of the question as parties continue to clash over key policy issues.  “The framework agreement to proceed will enable the appropriators to address many of the major challenges America faces at home and abroad,” wrote Senate Majority Leader Chuck Schumer & House Minority Leader Hakeem Jeffries (D-N.Y.) in a letter.  “It will also allow us to keep the investments for hardworking American families secured by the legislative achievements of President Biden and Congressional Democrats.”  Johnson acknowledged that the spending levels would “not satisfy” all parties, or cut as much as many had hoped for, but offers a way to “move the process forward; 2) reprioritize funding within the topline towards conservative objectives, instead of last year’s Schumer-Pelosi omnibus; and 3) fight for the important policy riders included in our House FY24 bills.”  Some of the concessions made include a $10B cut to IRS mandatory funding under the inflation Reduction Act & a $6.1B of the “COVID-era slush funds.”  In a separate statement, Schumer & Jeffries said the deal allocates $772.7B toward non-defense discretionary funding, aimed at safeguarding “key domestic priorities like veterans benefits, health care and nutrition assistance from the draconian cuts sought by right-wing extremists.”  In a statement, Pres Biden seemed to approve of the deal & the progress it makes toward averting a shutdown, while taking into account funding levels negotiated last year.  “Now, congressional Republicans must do their job, stop threatening to shut down the government, and fulfill their basic responsibility to fund critical domestic and national security priorities, including my supplemental request,” he said.  “It’s time for them to act. ”

U.S. congressional leaders reach deal on a top-line spending agreement to try to avoid a government shutdown

Treasury yields held steady as investors looked to key economic data slated for this week, including fresh inflation insights that could affect the direction of interest rates.  The yield on the 10-year Treasury was higher by less than 1 basis point at 4.038% & the 2-year Treasury yield was last less than 1 basis point lower to 4.389%.  Yields & prices move in opposite directions & one basis point equals 0.01%.  Dec's consumer price index reading is due Thurs, followed by the producer price index for the month on Fri.  The data is set to provide clues about whether higher interest rates are taking effect & slowing inflation as well as the economy.  That could inform the Fed's interest rate policy & offer hints about when interest rates may be cut & at what pace.  Following its latest meeting in Dec, the central bank indicated that 3 rate cuts were likely to be announced in 2024, but did not specify when this might happen.  Some traders have been hoping that rate cuts could start as early as Mar & be more extensive than the Fed has suggested.  Economic data published last week has, however, cast doubt over that prospect, with Fri's nonfarm payrolls report coming in above expectations, indicating continued resilience & strength in the economy.  The report showed that 216K jobs were added in Dec, higher than the 170K increase expected.  That reflected a significant rise from Nov's 173K figure.

Treasury yields are little changed as investors await key economic data

Dow was dragged lower by Dow stock Boeing (BA), plunging $17 on on its latest problem with its 737 MAX 9 disaster.  Markets are assessing Saudi Arabia's price cuts for oil.  Inflation data for Dec is coming by the end of the week & should be mild as it has been in recent months.

Dow Jones Industrials