Oil prices have taken a significant hit recently, causing Treasury yields to reach their lowest point in two months. Despite this, Wall Street stock indexes have remained relatively stable, even with notable drops in individual stocks like Walmart, Cisco, and Alibaba.
On Friday, US two-year Treasury yields fell below 4.80%, a level not seen since September 1. Similarly, 10-year yields dropped below 4.40%, reaching September lows. Although there was a slight rebound on Friday, US crude oil prices have been on a downward spiral this week, hitting four-month lows. This drop can be attributed to rising US inventories and global demand levels that are estimated to be running at only half of their November forecasts. Furthermore, the gradual lifting of oil sanctions on Venezuela has contributed to a nearly 25% loss in crude oil prices over the past six weeks.
The US is not the only country experiencing a softening demand. Signs of a weakening labor market have emerged, with a surprising rise in jobless claims and a decline in homebuilder sentiment and manufacturing activity. However, there was some positive news on Thursday, with the Philadelphia Federal Reserve reporting better mid-Atlantic business optimism than anticipated.
The overall impact of these developments is a newfound optimism regarding disinflation. Many believe that these economic indicators will dissuade the Federal Reserve from raising interest rates again and may even lead to a decrease of up to 100 basis points next year, according to futures markets.
The Labor Department reported a significant decline in import prices in October, falling 0.8%, the largest drop in seven months. This has deepened the annual deflation of import prices to as much as 2.0%.
Despite Walmart’s stock falling nearly 8% on Thursday due to cautious consumer behavior during the holiday season, the company’s outlook is seen as positive by the Federal Reserve. Walmart stated that consumers are becoming more selective and cost-conscious, seeking significant discounts, especially in food.
Despite the impact on the dollar from the drop in Treasury yields, borrowing rates have also decreased globally, affecting markets in Europe and Japan.
Elsewhere, British retail sales volumes unexpectedly declined in October as consumers tightened their spending. Italian yields and bond spreads also fell, and there is little concern that Moody’s will downgrade Italy’s sovereign credit ratings.
Chinese stocks, on the other hand, underperformed once again, with Alibaba’s Hong Kong shares plummeting 10% on Friday due to the company’s decision to cancel plans to spin off its cloud business. This move was driven by uncertainties caused by US restrictions on semiconductor exports to China for artificial intelligence applications.
Looking ahead, the day is relatively quiet on the economic calendar. However, market participants will closely watch speeches from key central bank officials and the release of housing starts numbers for October and an update on the Atlanta Fed’s real-time GDP estimate.
In summary, the recent decline in oil prices and signs of a cooling economy have led to lower Treasury yields. Despite some negative indicators, overall market sentiment remains relatively stable, and there is growing optimism regarding disinflation and potential interest rate cuts by the Federal Reserve.
