US railroad companies and the unions representing their workers reached a tentative agreement early Thursday to prevent a rail strike in the US. Unions have to vote now.
The deal includes a pay increase of 7% this year, as well as retroactive increases for the previous two years, and two more raises in 2023 and 2024 of 4% and 4.5%. Plus, an annual $1,000 ‘service recognition bonus.’ (I am not sure Powell was enchanted to hear the salary rises, when he fights so hard to bring inflation down, but hush!)
Of course, avoiding a rail strike is good news, but not good enough to give a smile to investors. The markets remain too focused on inflation.
The S&P 500 closed the session more than 1% lower, and just a point above the critical 3900 support. The fact that the US retail sales, and last week’s jobless claims – which both hinted that the US economy remains relatively resilient to the Federal Reserve (Fed) rate hikes – didn’t help keeping the Fed hawks at bay.
US sales at restaurants and bars last month beat last year’s August by a strong 10.9%. And sales, overall, rose by a solid 18.5% for the first eight months of the year compared to the same period last year. Those are not the numbers that you want to hear if you are called Jerome Powell, and you are trying to cool down demand to cool down inflation.
As a result, the US 2-year yield spiked to 3.90%, the highest levels since 2007, as strong data further spurred the hawkish Fed expectations. The mortgage rates in the US toped 6% for the first time in 14 years. The US dollar consolidated a touch below the 110 level, the higher yields sent the equities lower, and gold dived to $1660 per ounce.
We will likely close this week on a sour note. Next on the economic calendar are the final European CPI read, which will confirm that inflation spiked to 9.1% in August, and the University of Michigan Consumer Sentiment, which will hopefully not print a significantly positive number, because the Fed hawks got strong enough the week before the Fed decision.
Rectifying a beginner’s mistake
Good news for inflation is, recession worries will likely continue weighing on energy prices, and pull at least some pressure off the Fed’s shoulders.
Yesterday, the barrel of American crude took a good 4% dive. But this time, it wasn’t just the recession talk, it was because the Americans rectified a beginner’s mistake that they have made earlier this week, saying that they will refill their strategic oil reserves if prices fall below $80 per barrel.
Obviously, if you want to refill your reserves at a good price, you don’t tell the world your intension to start buying at say, $80, because if you do so, smart people will also position with you, and build a support near the $80, to make sure that the price doesn’t go below that level. So, if you are the US, and you want to see oil prices come down, you just… keep it shut, and say, as they did yesterday, that there is no particular price trigger to refill the US reserves, and the purchasing won’t happen before the end of fiscal year 2023.
Natural gas futures also sold off in the US on news that the rail strike would be averted, as a potential strike would’ve threatened the deliveries of other energy sources, like coal for example. The European nat gas futures were also slightly down.
The mix of strong US dollar, and soft oil sent the USDCAD to above 1.3250. The EURUSD struggles near parity, as Cable keeps pushing lower below 1.15.
It’s nothing to do with the markets, but let’s have a quick laugh before we go: Vladimir Putin and Xi Jinping said they could ‘inject stability and positive energy to a world in chaos’.
Hallelujah.
