Bessent Wants a Lower 10-Yr Yield… But How?The new US Treasury Secretary - Scott Bessent - is focused on the right goal. He wants a lower US 10-year yield. The former Hedge Fund manager knows how important a lower US 10-year treasury is to the growth of the economy (and the government). His direct language reflects a reality - as most people don't borrow at the short end (i.e., the rate set by the Fed)
Decoding the Drop in OilMiddle East tensions are rising. However, oil prices are dropping. Why? The Israeli missile attacks on Iran, while not entirely unforeseen, triggered a negative response in the oil market. Now this may seem curious... contrary to expectations of a price surge due to heightened geopolitical tensions, crude oil prices plunged ~5%. In short, market sentiment tends to prioritize economic supply and demand concerns over (short-term) geopolitical risks
Are Commodities Telling Us Something?Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool's errand - there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation... whilst not perfect - there are a set of reasonably strong correlations which exist over extended periods. And it's these types of correlations we can use to our advantage.As I will demonstrate - over the past 5 decades (after the US dollar removed its peg to gold in 1971) - inflation levels have largely correlated to what we see with commodity prices.
Are Bond Yields and Oil Cracking?Today was an important day in the bond market. The US Treasury auctioned $40B of 10-Year notes. Coming into the auction - I was worried there would not be a decent bid. For example, if we faced further buyer's strike - these yields were likely to resume their path higher. However, we saw the opposite. The 10-year yield drifted lower. So what does this tell us about future economic growth? Are investors worried? In addition, the price of WTI Crude is also sharply lower... back below US$80/bbl on concerns of weakening demand. Are equities slow to connect the dots - as they are headed in the opposite direction.
Fed Trying to Thread a Narrow NeedleTomorrow we will hear from the Fed. It's very unlikely the world's most influential central bank will raise rates this month. However, it's my view Jay Powell is not about to drop any dovish hints. Remember: just because they may be closer to the end of rate hikes - that doesn't mean they are about to cut. Rate cuts are dovish. However, rates staying higher for longer is hawkish. And as inflation comes down, this means real rates are rising (with the Fed on hold). From mine, we hear a hawkish Fed tomorrow. And the market has not priced that in.
Have Jobs Slowed Enough for the Fed to Pause?Last week offered plenty of macro data for traders (and the Fed) to consider. Core PCE remains stubbornly higher at 4.2% YoY - moving higher month on month. However, there is signs of a slowing labor force - with job additions missing expectations. The question is whether the jobs market is now slowing enough for the Fed to end rate hikes? For example, total unemployment is very strong at 3.8% and there are almost 9M open jobs. That's not a weak labor market...
Oil: Headed Back to $100?November last year I felt there could be an oil supply shock in 2023 - sending the price back over $100. This week OPEC+ surprised the market by announcing cuts of 3.7M barrels of oil per day - around 4% of global supply. The price of WTI surged back above $80. I think we go higher from here... which won't help Jay Powell's fight with inflation.
Oil: 2023 Supply Shock Coming?2022 delivered the market a nasty oil shock. But will it be the last? I don't think so. The oil price shock in 2023 will be due to massive underinvestment from the US in hydrocarbons (which still power 80% of all our energy needs). And if oil should fall to $65 to $70 - that spells opportunity for the year ahead - where I see oil back above $100.
Will Falling Commodities Help Drive Inflation Lower?Commodity prices are well off their peaks. In theory, this should lead to lower CPI in coming months. But is this more an indication of a recessionary risk? I think so...
Dollar Index, Gold and Oil all SurgeRussia's invasion of Ukraine is driving the demand for safe-haven assets such as the US dollar, gold and bonds. Where to from here?
