Market Resilience Amid Inflation Concerns, Exxon's $59.5 Billion Deal, and Gold's Rally | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Aug)
• USA - Core CPI (MoM) (Sep)
• USA - CPI (YoY) (Sep)
• USA - CPI (MoM) (Sep)
• USA - Initial Jobless Claims
• USA - Crude Oil Inventories

On Wednesday, the Dow Jones Industrial Average concluded the day on a positive note, showing resilience in the face of data indicating an increase in the pace of inflation. Investor attention has now shifted to consumer inflation data for September, which is likely to influence the Federal Reserve's decision on whether to maintain its stance on interest rate hikes next month.

The Dow registered a 0.2% gain, equivalent to 65 points, while the Nasdaq saw a 0.7% increase, and the S&P 500 rose by 0.4%.

Despite an unexpected upside surprise in producer price inflation earlier on Wednesday, the focus quickly turned to the forthcoming September consumer inflation report. Forecasts suggest that the consumer price index for September is expected to have moderated to 0.3%, with the core measure, which excludes food and energy and is closely monitored by the Fed, projected to remain steady at a 0.3% pace.

The initial reaction from both stocks and the dollar to the robust producer price index (PPI) report did not result in a sustained movement, as the overall message from the report was that companies may be encountering challenges in passing on cost increases to consumers. With indications of increased activity in US manufacturing, subdued spending patterns are expected to support the argument that the disinflation trend will persist.

Meanwhile, the US dollar index, measuring the US currency against six major rivals, stood at 105.67, remaining close to its lowest level since September 25, which it reached on Wednesday. The index is down 0.4% for the week.

According to the minutes released from the September 19-20 meeting, Federal Reserve officials cited uncertainties surrounding the economy, oil prices, and financial markets as factors supporting a cautious approach in determining the extent of any further policy tightening.

As the Fed appears to have temporarily paused its interest rate hikes, the possibility of rate cuts in the event of a mild recession in 2024 is on the horizon. While the Federal Open Market Committee (FOMC) minutes may hold less significance given the shift in the Fed's stance, they could still provide valuable insights into how the Fed views the potential impact of a government shutdown.

Meanwhile, Exxon Mobil Corp (NYSE: XOM) experienced a decline of over 3% following its agreement to acquire Pioneer Natural Resources (NYSE: PXD) in an all-stock deal valued at $59.5 billion. The transaction, expected to close in the first half of 2024, is anticipated to significantly boost Exxon Mobil's total upstream production and enhance the combined entity's operating cash flow and free cash flow in 2024, as stated by Goldman Sachs.

The agreement would essentially solidify Exxon's position as one of the foremost US oil companies, granting the Houston-based corporation expanded entry into the Permian Basin, a vast oil field in the United States. It also brings with it a decade of cost-effective production. Pioneer, a prominent beneficiary of the decade-long surge in US shale production, holds the distinction of being the third-largest producer in the Permian Basin.

However, any potential merger is expected to undergo a thorough examination by US competition regulators. Recent trends indicate heightened scrutiny by these regulators in response to prominent corporate mergers.

Meanwhile, falling global bond yields continue to drive the price rally in gold. Gold is attracting inflows due to uncertainty stemming from the Israel-Hamas conflict and the Fed's efforts to cool the economy. Over the past month, gold has recouped approximately 40% of its losses, and if Wall Street becomes convinced that interest rates have peaked and further tightening in 2024 is unlikely, gold could rally back above the $1920 level.