Oil Hits $95, Diesel $6 as 10-Year Yields Push Further into the Danger Zone Ahead of $39B Auction – Try the Cremita de Maiz

Things You Need to Know

• Well, it’s happening…Oil is kissing $95/barrel and likely gonna test $100.
• Diesel is now $6/gal up 56% since February.
• Bond yields push further into the ‘danger zone’ – 10 yr at 4.81%.
• 10 yr – $39 billion bond auction at 1 pm…The street is watching.
• PPI & CPI later this week.
• Try the Cremita de Maiz (Delicious!)

Ok – so yesterday I told you that oil was THE story. Well, guess what? It still is.

Stocks got sold yesterday…the Dow lost 630 pts or 1.2%, the S&P down 45 pts or 0.6%, the Nasdaq gave back 85 pts or 0.3%, the Russell gave up 15 pts or 0.5%, the Transports gave back 211 pts or 1%, the Equal Weight S&P gave back 95 pts or 1.1% while the Mag 7 lost 126 pts or 0.4%.

Overnight – Brent crude pierced $100 as the Middle East situation escalated again, while WTI kissed $95. Oil is now up 39% off the July lows (when we were told we had a deal) – and you know what that means…. The inflation fight just got a whole lot more complicated.

And here is something you don’t hear the talking heads discuss…. yes, oil is grabbing the headlines…but diesel may in fact be THE bigger inflation story….. The national average for diesel has now hit about $6/gallon – an all-time record – up nearly 56% since February.

Why does that matter? Because gasoline moves YOU. Diesel moves EVERYTHING ELSE.

The trucks that deliver your groceries, the farm equipment that harvests the food, the trains that move goods across the country, the equipment on construction sites – they all need diesel.

So, when diesel goes to $5.90, the increased cost doesn’t stay at the pump. It works its way through the supply chain and ultimately shows up in the price of the stuff we buy. Which brings us right back to inflation.

Now, yesterday US forces reportedly destroyed five Iranian tankers carrying crude after two attempts by the Iranians to hit a US Navy warship with ballistic missiles. Iran responded by firing missiles at Jordan and this follows yesterday’s attacks on parts of the Saudi energy infrastructure and the growing concern over disruptions to production and shipping in the region.

So, the temperature just got turned up again…. The risk premium is alive and well and the risk to energy supplies coming out of the gulf is real.

$95 WTI, $100 Brent and $6 diesel just amplified the inflation narrative. And here’s the problem – oil doesn’t need to go to $150 tomorrow to matter. It just needs to stay here long enough for the second-round effects to start showing up

And THAT is why oil matters. Because energy prices can’t just keep rising without eventually showing up somewhere. The question is what happens NEXT. We are about to find out when we get the latest reads on both Producer and Consumer Price Inflation – both eco data points will be reported this week on Thursday and Friday.

And that’s got the bond market’s attention. This morning the 10 yr is up 2 bps at 4.81% – levels last seen 2023. Fed Fund Futures are now pricing in a better than 61% chance of a September rate HIKE – and that decision comes next Wednesday. Just a reminder – I’m still in the camp that the FED sits still. Yes, there will be dissension among the ranks, but I think the majority votes to hold.

And remember Scotty Bessent telling us that he expanded the Treasury buyback program because he was trying to break the “fever” in the bond market? Yeah, how’s that working?

And if we haven’t had enough – Yesterday – the treasury auctioned off $58 billion of 3 yr notes at 4.474%. It was pretty solid. Today we have a $39 billion 10-yr auction today followed by $22 billion of 30-yr bonds tomorrow. That’s $61 billion of ‘long-duration paper’ (industry lingo) the market has to swallow and remember – the 10-yr is already yielding 4.81%, oil is at $95 (Brent at $100), and inflation anxiety is rising. So yeah, expect the street to be watching.

A sloppy 10-yr auction – meaning demand was weaker than expected – could be a market-moving event today. If demand is weak, investors will demand a higher yield than the market was expecting, dealers will get stuck taking more of the bonds – and that’s the risk. With $95 oil, ($200 diesel) inflation concerns and a ‘load’ of Treasury supply already hanging over the market, a weak 10-yr auction could push yields toward 4.85% or higher – putting even more pressure on stocks.

Conversely, a strong auction at these levels sends a very different message. Buyers are essentially saying – “4.80%, yeah, that’s enough”. So, pay attention to 1 pm – because the bond market is going to speak.

Gold got slapped – falling 1.1% to end the day at $4,355 – landing right on the intermediate term trendline as it remains caught between the geo-political safe haven bid and rising yields. This morning gold is up $42 at $4,395 after bouncing off of the trendline…. something I think will prove to be short lived IF the bond market goes into spasm mode at 1 pm.

Eco data today is about Mortgage Apps – but it is tomorrow’s PPI and Friday’s CPI that the markets are waiting for….as discussed – PPI is expected to be higher…+0.4% m/m up from 0% last month and +5.3% y/y up from 4.7% last month. Core PPI of +0..3% and +4.6% – both higher than last month.

CPI though is not expected to show a dramatic increase in August – something that I find confusing, But if PPI comes in this hot and energy prices remain elevated, then the risk is that some of those producer-level pressures begin bleeding into consumer prices in the months ahead.

The FED is in ‘blackout mode’ – do not expect to hear from any of the FOMC members, but the other FED members NOT on the FOMC committee are free to speak, the question is – will Kevy allow them to? My gut say’s NO.

Ok – so today’s it’s pretty simple- Watch Oil and the bond auction…..because that is the focus for today…Recall, I think the danger zone started at 4.7% – we’re now at 4.81% and likely going higher….so the danger zone is about to get more dangerous.

US futures are as you might expect weaker…. Dow futures down 300 pts, S&P’s down 27, Nasdaq down 150 while the Russell is down 17 pts.

European markets are also lower…. playing catch – up…. Spain down 2.4%, Euro Stoxx down 2%, France down 1.8%, Italy down 1.6% Germany down 1.5% while the UK is down 0.9%. The ECB announces tomorrow.

Remember – September is historically one of the most difficult months of the year for stocks, and it appears that – at least for now – that history may be repeating itself…. It’s time to ‘return to your seats and make sure your seatbelts are fastened’.

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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OMG – Sooooo Good! I’m gonna make it Saturday morning.

Buon Appetito