The long-awaited debut ceiling relief rally was delivered strongly in Friday trading. And there could be more to come over the coming days?
The problem with that idea is that markets appear to be rather quickly figuring out that this is just another shiny credit card for the US to plummet further into historic debt territory. It was only in the 1980s that US debt was nearer 30% of GDP. Compared to the now 130% and fast-rising level.
If ever there was a case of the water slowly boiling without the US frog jumping out, then this is it. Hence my cautionary note that this stock market relief rally could very well end in a crash, remains appropriate.
Oil prices leap
What is leaping on the day is the price of oil. Up strongly in early trading after OPEC+ announced further production cuts over the weekend.
Driven by Saudi Arabia stepping up and reducing its production by 1 million barrels per day. Some other members also maintained previous voluntary reductions. Of particular note was that the Saudi Oil Minister, Prince Abdulaziz bin Salman, stated very clearly that they would continue to do ‘whatever is necessary to maintain price stability’.
They are saying they are determined to keep the price of oil where it is now, or even higher. There are genuine concerns among some OPEC members that the slowing global economy will reduce demand significantly. The organisation, and particularly Saudi Arabia, appears determined to stay ahead of the supply curve. Rather than responding to it.
With China’s post-Covid-lockdown boom now behind it and the US facing persistent recession risk, it is unlikely OPEC will change track in the months ahead. This creates a significant boost to prices, just as the USA is wanting to rebuild its strategic oil reserves. Something we have been warned would be the case for the past year now, and not just in the US either. A global nationalistic reserves-building war is a very real risk.
The outlook for the oil price is therefore decidedly bullish and this too will weigh on the US economy. The US inflation wildcat continues to roam the streets untethered by previous rate hikes. Expect the Federal Reserve tightening bias to be maintained for perhaps a further full 12 months from here.
This means the only thing that will stop further rate hikes, would be a full-blown banking crisis.
Recession with the banking crisis and persistent high inflation, could be the US situation over the next 12 months. Limiting the ability of the Federal Reserve to respond to a slowing economy. This is a matrix the US will find difficult to escape.
Market commentary and analysis from Clifford Bennett, chief economist at ACY Securities
