Diesel Dilemma, Betting on Banks, Storm Clouds Over Iran?
Let’s check on calls to release diesel reserves, the buildup of troops in the Middle East, crude prices and … why the banks could rally.
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Friday morning… You made it. Or is it… Did you make it?
Domestic equity indexes have been strong overnight. That’s likely the first thing you’ll notice as you rip that greasy melon of yours away from that smelly thing you call a pillow. Next, you’ll notice oil’s wild ride through the zero-dark hours as Thursday melted into Friday. September jobs? That’s coming. In several hours, those almost certainly inaccurate numbers will impact our marketplace, but that has nothing to do with this.
Front-month crude oil prices moved higher on Thursday and appeared to move even higher overnight. Reports circulated on Thursday afternoon that the U.S. Navy was in the process of deploying a third aircraft carrier to the Middle East. With the USS George Washington and USS George H. W. Bush already in the region, the USS Theodore Roosevelt left its home port of San Diego, California on Sunday. That carrier is believed to be headed to join the other two in the Persian Gulf arena by the end of November. CENTCOM has not commented.
The USS Theodore Roosevelt is being joined by three amphibious warfare ships that make up the 13th Marine Expeditionary Unit. This deployment will broadly add between 9,000 and 10,000 U.S. troops of all types to make as many as (maybe more than) 50,000 people in theater. More importantly, this move would add a rough 2,200 Marines to a force already totaling between 4,000 and 5,000. This came after U.K. Maritime Trade Operations received reports of yet another civilian tanker being hit by an unknown projectile while attempting to navigate the Strait of Hormuz.
The threat here is obviously that hostilities will accelerate after the midterm elections. The presence of up to three reinforced Marine Corps infantry battalions equipped with artillery, supported by naval gunfire and overwhelming cover from above is clearly meant to intimidate what’s left of Iran’s armed forces. You would think that oil prices might have held those Thursday gains on news like this. If you did, you were wrong.
Down, Periscope…
Front-month crude prices fell out of bed overnight, despite the threat of increased kinetic warfare in the Middle East. WTI Crude for November delivery was very likely trading with a $93 handle when you packed it in on Thursday night. This morning, you see WTI trading with an $89 handle. Reuters is reporting this morning that European Union member states are discussing a French proposal to release additional strategic reserves of diesel fuel after being pressured to do so by U.S. Pres. Donald Trump.
The report, which cited just one unnamed source familiar with details of the discussion, said that France had proposed that E.U. nations release 50 million barrels of diesel, while International Energy Agency members release 50 million barrels of crude oil. The E.U. is set to hold talks on Friday to discuss the crisis with an aim toward coordinating a response to soaring diesel prices.
On Thursday, U.S. Treasury Sec. Scott Bessent called on European countries to urgently release some of the continent’s reserves. Bessent posted to his X account, “Our European partners should accelerate delivery on their existing commitments and make additional supplies immediately available to address ongoing disruptions. American farmers, truckers, and businesses should not be left carrying the burden of a global diesel shortage. America is doing its part. We look to our allies to match their commitments with action.”
E.U. Inflation
This morning, Eurostat released its September Flash Consumer Price Index for the Eurozone. The results were ugly. For nations using the euro as their common fiat currency, September Consumer Price Index landed at +3.8% year over year, above expectations and up sharply from +3.2% for August. The core rate, which does not include energy prices, printed at +2.5%, up from +2.4%. Based on this news alone, it should not be too hard to get European politicians to play some ball. Especially since 2027 is a presidential election year in France and the incumbent, Emmanual Macron, is up against his constitutional term limit.
Dog Show: Nike
Anyone else notice that Nike (NKE) reported another lousy quarter and issued awful guidance. Do investors have to consider that maybe Nike just isn’t cool anymore? The stock is trading down 10% overnight and is now down 80.4% from its October 2021 apex.
Just a Thought: Bonds and Banks
Bond traders actually bought Treasury debt securities on Thursday. The U.S. Two-Year Note paid 4.77% by day’s end. That yield was down about 11 basis points over 24 hours. The yields on the Ten-Year Note and Thirty-Year Bond dropped five and two basis points respectively to 5.23% and 5.6% in that order.
Now that it appears that the Fed will potentially be less hawkish than thought just recently, will the yield curve steepen? The flattening of that curve and narrowing of spreads over the past couple of months has put the whammy on bank stocks as investors priced in reduced net interest margin going forward.
If the market has to reprice expectations for net interest margin to the upside, and the large banks post better-than-solid earnings in two weeks (catalyst alert!!) … then this may be where the next face-ripping rally comes from. Just a thought. I’m going into the season long JP Morgan (JPM), Bank of America (BAC) and SoFi Technology (SOFI). I have made purchases this week at these lows. Maybe Wells Fargo (WFC), too. Still on that fence, depending on how much exposure I want to have.
Anyone Else Notice…
That on Thursday, even as equity markets came under moderate pressure, Tech was hot and the cyclicals soundly outperformed more defensive sectors. The economic data has been mostly positive this week and that includes the ADP Employment Report for September on Wednesday. Wall Street is expecting the jobs report this morning that supports the “improving economy” narrative.
Readers will see below that I am projecting non-farm payroll job creation of a seasonally adjusted 100K positions for September. Professional consensus is for between 85K and 89K, making me an upside outlier, at least for now. I am being a little conservative. A print at or above 115K would not surprise me. Then again, right or wrong, can we even trust numbers published by the BLS?
Note to Readers… The kid will be out next week. No Market Recon. You’re on your own. God bless.
September Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 100K, Last 162K.
Unemployment Rate: Expecting 4.1%, Last 4.1%.
Underemployment Rate: Expecting 7.7%, Last 7.7%.
Participation Rate: Expecting 61.4%, Last 61.6%.
Average Hourly Earnings: Expecting 3.1% y/y, Last 3.1% y/y.
Average Weekly Hours: Expecting 34.4, last 34.4 hours.
Other Economics (All Times Eastern)
10:00 – Factory Orders (Aug): Expecting -0.1% m/m, Last 0.9% m/m.
1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 599.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 455.
The Fed (All Times Eastern)
10:00 – Speaker: Dallas Fed Pres. Lorie Logan.
Today’s Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long JPM, BAC, SOFI equity.
