Wall Street is trying to understand how the US economy will be able to deliver a soft landing as Treasury yields trade at cycle highs. A fourth quarter slowdown is here but that is only happening from a high baseline, which will probably be around 4%. A strong labor market and overall healthy consumer means the final quarter of the year will still see decent growth.
With the 10-year Treasury yield crossing the 5.00% level, it is clear that ‘higher for longer’ is here to stay. Yields are a few percentage points above the Fed’s target and that means parts of the economy are headed towards a recession.
US stocks are struggling given the bond market selloff will fuel credit concerns and as the risks grow for a significant escalation with the Israel-Hamas war. Over the weekend, inaction in the Middle East has led to some relief in the king dollar trade, but that might prove to be temporary. Axios reported that “Top U.S. officials tell us the threats of a war widening from the Gaza Strip are real and rising.” Some Israeli air strikes on Gaza have been reported earlier this morning.
Deal making in the energy space continues as Chevron tries to acquire Hess for $53 billion ($60 billion including debt). The energy space was ripe for consolidation and further deals are likely expected.
Crude prices are lower as Israel has tentatively held off the highly telegraphed ground invasion of Gaza. The situation remains tense but the latest headlines don’t support an immediate escalation: Diplomatic efforts, a release of two American hostages, and a second aid envoy has entered the Gaza Strip from Egypt. Until crude flows are disrupted, it might take a significant escalation in the war for oil prices to surge.
Another deal in the energy space should lead to more production by Chevron. Hess has developments in Guyana, a potential jackpot of liquid gold. As the energy space consolidates, the oil market should get tighter.
Oil is down a couple of dollars from last week’s high but it should not fall much further given how elevated the risks are for a significant escalation in the Middle East.
This could be a big week for the dollar. A plethora of catalysts could send safe-haven flows either towards or away from the dollar. The surge in yields has a large part of Wall Street worried that credit concerns are about to get ugly as a growing wall of maturities approaches. This week will tell us how if both the manufacturing and services part of the economy are in contraction. At the end of the week, The Fed’s preferred inflation reading could show core pricing pressures are proving to be sticky. In addition to major economic data, FX traders will pay close attention to what corporate America has to say about their outlook. Massive earnings outlooks will come from Alphabet, Visa, Meta Platforms, Amazon, and Chevron.
Gold prices are slightly softer after a lack of an escalation in the Middle East. It seems the surge above the $2000 level won’t attract momentum buying until it becomes clear that the geopolitical risks won’t be cooling. The surge in Treasury yields are typically bad news for gold, but confidence is growing that these high rates will break large parts of the economy. The peak in rates might not be determined by US growth exceptionalism, but the supply/demand imbalances with Treasuries.
Gold’s path to $2100 remains intact but a modest pullback could see downside target the $1960 level if the bond market selloff doesn’t not ease up and if the Israel-Hamas conflict does not see a major escalation before the end of the month.