What’s driving markets

Investors returned Tuesday from the Labor Day holiday in a generally risk-off mood after upbeat Friday close.

Last week, the S&P notched its biggest weekly gain since June on the heels of the U.S. August jobs numbers that economists said could be regarded as a just-right amount of job growth.

But on Tuesday came word that Saudi Arabia is extending a production cut of 1 million barrels a day for three months. The country’s official press agency reported the supply cut. At the same time, Russia is extending its own crude supply cuts.  West Texas Intermediate crude for October delivery and  November Brent crude both rose after the news.

Energy XX:SP500.10 is the best performing sector among S&P 500 stocks, up 1.3% on Tuesday, while most other sectors are in red.

“Today is all about oil and interest rates,” said Kent Engelke, chief economic strategist and managing director of Capitol Securities Management. The investor question after the supply cut news is how higher energy costs filter into prices and the Federal Reserve’s efforts to tamp down on increases, Engelke said.

“What does this do to inflation fundamentals?” he said. The result could be a bump back to higher inflation–albeit nothing like the year-over-year highs reached last year, Engelke added.

Whatever the impact, it’s not going to help consumers pinched by rising costs, said Andrew Lipow, president of Lipow Oil Associates. Tuesday’s news caught Wall Street by surprise, he said. The countries announced the cuts through the end of the year instead of re-evaluating on a monthly basis, he noted.

“The consumer is going be paying more, certainly for gasoline, but diesel is a hidden tax on the consumer, which is used for all the goods and services that are being purchased,” Lipow said.

Federal Reserve governor Christopher Waller, a key proponent inside the central bank on pushing interest rates higher, said Tuesday the Fed can afford see what happens next. “There is nothing that is saying we need to do anything imminent, anytime soon, so we can just sit there [and] wait for the data,” Waller said in a CNBC interview.

The next Fed meeting on interest rates is scheduled for Sept. 19-20.

Despite the headwinds, the chance of an upcoming recession keeps narrowing, according to Goldman Sachs. The chances of a recession in the coming 12 months dropped to 15% from a call of 20% odds in July and 35% chances in March. That’s not to say there will not be a slow down — just that the year-end slowdown will be “shallow and short-lived,” according to the note from Goldman’s chief economist Jan Hatzius.

U.S. factory orders dropped 2.1% in July, marking the first decline after four months of gains.

Read also: Stocks and bonds are out of balance. Here’s what could come next.

Investors are also weighing downbeat news internationally.

A Caixin survey showed China’s service sector expanded in August at its slowest pace in eight months, providing further evidence that the country’s post-pandemic recovery is faltering.

Meanwhile, a eurozone survey showed output in the bloc contracting at its fastest pace in nearly three years.

“Sentiment has turned downbeat again on China as fresh brushstrokes are painted on the picture of its slowing economy,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“The data has overshadowed relief that the struggling property giant Country Garden 2007, -0.98% has managed to make key interest payments on its debt, reducing, for now, concerns about contagion in the financial sector. China appears to be taking one step forward, but two steps back, as optimism one day turns to pessimism the next,” Streeter added.

Companies in focus

• Blackstone Inc. BX, +3.94% rose more than 4% while shares of Airbnb Inc. ABNB, +7.87% were up almost 8% after S&P Dow Jones Indices announced that both names would gain inclusion in the S&P 500 index. The changes take effect before the start of trading Sept. 18.
• Warner Bros. Discovery WBD, +2.55%  shares were 3.4% higher after the media company lowered its 2023 financial guidance in light of continuing strikes by the Writers Guild of America and the SAG-AFTRA actors in Hollywood. The company is “hopeful” the strikes will end soon, but the financial impact could be an estimated $300 million to $500 million impact on full-year adjusted earnings before interest, taxes, depreciation and amortization.

— Jamie Chisholm contributed to the report.