US interest rates are now showing a clear bias towards a recession: the long term, 10 year bond rate fell to 4.59 per cent on Friday night: the two year bond is at 4.67 per cent. This is a so-called inverted yield curve and a sign investors in the huge US fixed interest markets believe there's a greater chance of a recession than not.
Last week saw official interest rates remain steady in the US but there was more confirmation that the US housing industryis facing a rough landing.This week brings more information on the health of the industry with the latest figures on new US home sales to be released. If they mirror the sharp fall in US housing starts and the drop in confidence among the country's home builders that we saw last week then oil under $US60 a barrel will not have an impact.
Oil retreated back below $US 61 a barrel last Friday night, our time, with the current Nymex contract, U.S. light crude for November deliveryfalling $US 1.04 cents to $60.55.
That takes the loss since early August to well over 20 per cent and some US analysts are now wondering if OPEC will be forced to move to limit production if the price falls to far under the $US 60 mark.
Figures released in London on Friday suggest that Saudi Arabia and Iran have cut production this month, leading to a 400,000 barrels a day fall in OPEC output.
Helping drive the oil price lower has been higher stocks of product likeheating oil and diesel in the US, which are better placed this year because of the absence of hurricanes like in 2005.A lessening in Middle East tension is also helping.
But what has been driving the price lower seems to have been the departure of speculative money from energy market in the past six weeks: that has intensified in the past 10 days as one US hedge found came near to collapse after making the wrong call on natural gas prices in the US.
Other funds have been caught, but only in a minor way and there has been a large scale quitting of speculative positions in the energy (and other commodity markets as well).
That selling has also seen a lot of money head for the US bond markets for safety and that was behind the sharp fall in the 10 year rate last Thursday and Friday.
In fact 10-year bonds had their best week since April last year according to US reports at the weekend, falling 0.20 per cent to 4.59 per cent.
And because people are now increasingly worried about a US slowdown, US futures markets are showing a firming view that the next move bythe Fed, will be downwards, probably around February-March next year.
If the Fed was to cut before the end of 2006 it would be a sign it believes the US economy is skidding badly and needed to be eased into a soft landing, despite any inflation risks from a rate cut.
