Daily Insights

Oil in focus, but markets relatively calm. The S&P 500 Index declined 0.3% yesterday with futures pointing to modest losses at the open this morning as markets try to gauge the impact of the weekend attack on Saudi oil facilities. While losses were modest, only energy and the more defensive utilities and real estate sectors posted gains. Oil futures finished the day up about 15% while the 10-year Treasury yield retreated to 1.83% after climbing from 1.45% to 1.9% in less than two weeks. Oil futures have declined slightly overnight while Treasury yields have posted a small decline, signaling potential stability.

Fed meeting starts today. The Federal Reserve (Fed) is expected to announce that it is cutting its policy rate by 0.25% following the meeting’s conclusion tomorrow. With the cut widely expected, markets will be more focused on the Fed’s forward guidance. The Fed will need to walk a fine line, signaling expectations of limited additional cuts while still emphasizing data dependency and its willingness to support the economy if needed. While U.S. data has been stabilizing and recent inflation readings have picked up, the recent attack on Saudi oil facilities may give the Fed room to emphasize the continued need to provide a cushion against downside risks. We will continue our preview on the Federal Open Market Committee’s September meeting in today’s LPL Research Blog post.

Oil uncertainty persists. While the situation remains fluid, it increasingly looks like the disruption to Saudi oil production may extend into the end of the year. Global oil suppliers are looking at ways to replace lost production. Stopgap measures combined with slowing demand may mitigate the impact, but they are unlikely to replace all lost production. We expect higher oil prices to persist for some time, but we currently view this as a short-term disruption rather than a major and lasting oil shock. The potential for further expansion of the conflict remains an important risk, but appears contained for now.

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