Saudi Arabia and Iran come to terms; U.S. and Europe improve; money market mass migration in the U.S., driven by new post-crisis regulations
"OPEC made an exceptional decision."
OPEC: Many a slip The agreement reached on Wednesday in Algeria to cut total cartel production to 32.5 million barrels a day was provisional; the next formal meeting of OPEC takes place at its Vienna headquarters on November 30. Making the production agreement possible was Saudi Arabia's reported willingness to take the bulk of any needed production cuts in order to allow Iran to make up for years of sanctions-limited output. If the agreement holds, it would be the first time Saudi Arabia agreed to limit its own production since it began to pump at full-capacity two years ago to maintain market share at the expense of plummeting prices. OPEC has a mixed track record when it comes to enforcement of its own production caps. But Saudi Arabia's faltering economy, added to Venezuela's diminished production capacity, may make it easier than in previous years to make it stick.
U.S. growth: Less lackluster The third (and final) estimate of GDP growth for 2Q 2016 came in somewhat stronger than the second estimate, at 1.4% annualized, vs. 1.1%. The changes, due to data that came in since the second estimate, showed a relatively large swing in non-residential fixed investment, up 1% vs down 0.9%. Household consumption, though down slightly, still came in at 4.3%; at roughly 70% of the U.S. economy, that figure confirmed the strength of overall consumer spending for the period.
Inflation watch: Less bad in Europe, U.S.: German inflation, viewed as a driver of overall European figures, rose 0.5% for September, year-over-year, the highest rate since May 2015 – but still well short of the ECB-s target rate of 2%. The story was slightly better in the U.S., with the Fed's favorite gauge, the Core PCE Deflator, rising 1.7% year-over-year. German consumers appear to be driving the country's change, with retail sales up 3.7% year-over-year, well above consensus expectations. But industrial prices could follow suit; German business confidence also reached a 2-year high.
Money markets: In motion Behind the hundreds of billions of dollars flowing out of prime money-market funds and the spike in short-term rates: the mid-October change in regulation of money market funds, intended to reduce the risk of crisis-driven redemptions, which were a proximate cause of the 2008 financial crisis. The flow from so-called prime funds, which can buy commercial paper as well as short-term government debt, is due to the new prohibition against fixing their per-share net asset values at $1.00. The flows are headed, for the most part, into other money-market funds that are permitted to have fixed $1.00 NAVs, but limited to investing in government paper. The demand for short-term paper to facilitate this relatively orderly change is driving up some short-term yields, with 3-month US dollar LIBOR at 0.8377 percent.1