Marketmind: Ebbing oil sustains inflation, retail glow

[November 16, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

Ebbing oil prices are cheerleading this week's renewed optimism on U.S. disinflation - with retail soundings still perky into the Thanksgiving period and as the data diary shifts to housing and industry.

This week's stock and bond surge on news of a fresh decline in headline and 'core' U.S. consumer price inflation last month was underscored on Wednesday by data showing the biggest decline in producer prices in three and a half years.

That drop, which takes annual producer price inflation as low as 1.3%, was driven largely by falling gasoline prices.

And so the ongoing retreat in crude prices keeps coloring that picture, with U.S. oil extending losses on Thursday on a mix of higher supply from the United States and lackluster energy demand from China.

U.S. crude stocks rose by 3.6 million barrels last week, according to the U.S. Energy Information Administration, twice what analysts had expected. And that meets news that China's oil refinery throughput fell back in October as industrial fuel demand weakened.

The overall energy and inflation picture is helping buoy consumption and stokes the 'soft landing' narrative investors are betting on.
 

While U.S. retail sales growth cooled sharply last month, they were ahead of forecasts and upward revisions to prior months underlined the strength of the consumer, along with positive indications about the holiday quarter.

With investors eyeing Walmart earnings later, shares in Target surged almost 20% on Wednesday after the retailer forecast a fourth-quarter profit above expectations on easing supply chain costs. That lifted shares of others including Macy's and Kohl's and the overall S&P 500 consumer staples index.

Even though Federal Reserve officials are refusing to fully rule out another interest rate hike in the cycle, San Francisco Fed chief Mary Daly described the latest inflation picture as 'very, very encouraging."

Futures markets are even more encouraged and have taken another hike completely off the table - and now put about an 80% chance of a rate cut by May. And after consolidating Tuesday's plunge on Wednesday, Treasury yields have resumed their decline.

Many Fed officials have pointed to housing as a key focus and the November NAHB index of housing market sentiment out later will be watched closely alongside industrial readings for last month.

The S&P500 hit its highest in more than two months on Wednesday and stock futures held the line ahead of the bell.

The mood was helped on confirmation a government shutdown this week was finally averted in the U.S. Senate.

The picture in overseas markets, where the economic picture is cloudier, was more mixed.

Word "Oil" and stock graph are seen through magnifier displayed in this illustration taken September 4, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

Chinese stocks fell again as investors were disappointed by a meeting between the leaders of the world's two largest economies and the property bust there smoldered.

China's new home prices fell for the fourth month in October as government support measures did little to lift the gloom hanging over the debt-laden property sector.

There was a flat response to the long-awaited meeting between U.S. President Joe Biden and Chinese leader Xi Jinping in San Francisco on Wednesday and concerns it did not deliver more, despite some signs of detente between the two leaders.

Xi also told Biden that Taiwan was the biggest, most dangerous issue in U.S.-China ties, a senior U.S. official told reporters, while Biden responded by assuring Xi that Washington was determined to maintain peace in the region.

Elsewhere, Japanese exports grew for a second straight month in October but at a sharply slower pace due to slumping China-bound shipments of chips and steel.

Key developments that should provide more direction to U.S. markets later on Thursday:

* U.S. weekly jobless claims, Oct industrial production, NAHB Nov housing market index, Philadelphia Fed Nov business survey, Kansas City Fed Nov business survey, Oct import/export prices and TIC data on foreign holdings of Treasuries

* U.S. corporate earnings: Walmart, Applied Materials, Ross Stores, Bath & Body Works

* Federal Reserve Board Governor Christopher Waller, Fed Board Governor Lisa Cook, New York Fed President John Williams, Fed Vice Chair for Supervision Michael Barr and Cleveland Fed chief Loretta Mester all speak. European Central Bank President Christine Lagarde, ECB vice president Luis de Guindos and ECB supervisor Andrea Enria all speak. Bank of England Deputy Governor Dave Ramsden speaks

* Mexico's President Andres Manuel Lopez Obrador meets China's President Xi Jinping in San Franciso

* U.S. Treasury auctions 4-week bills

(By Mike Dolan, editing by Alexander Smith; [e-mail]. Twitter: @reutersMikeD)

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