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.
Market vs The FedThere is strongly divided opinion on whether the Fed's decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that's not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming... one of them has it wrong.
Fed’s 2% Inflation Goal: A Long, Slow Fight Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: "Core PCE". Expectations were for 4.3% YoY - it came at white-hot 4.7%. Where is the problem? Simple... services. And until we see unemployment tick higher... core services inflation will remain sticky. The Fed has a long fight on its hands... and the market is only recently connecting those dots
Bear Market Rally? Or Something More?About 100 of the 500 S&P companies have reported Q4 2022 earnings. TL;DR is they are 'average' at best. Most have barely met already lowered expectations. What's more, forward guidance is weak. However, the bulls are betting on inflation continuing to plunge forcing the Fed to cut rates later in the year. I'm not yet prepared to support that thesis... with services inflation still running at 5.2%. There are some signs things are improving.
Peeling the Inflation OnionFed President John Williams uses the analogy of an onion when describing inflation. For example, the outer most layer consists of commodities. The middle layers consists of goods. However, the inner most layer - its core - consists of services. And it's services inflation which generates inflation inertia. And that's the mechanic which the Fed are exclusively focused on...
December CPI – The Good and the BadThere was a little of something for the bulls and the bears with December's monthly inflation report. On the surface, inflation is coming down. However, if we look underneath the hood, most of that inflation is goods. Services inflation however remains doggedly high (i.e. wages). And whilst goods inflation could fall to "zero" - if services inflation remains twice the Fed's 2.0% objective - they will continue to tighten (even if that means simply holding rates at a higher level)
Fed Gets Green Light… Market Thinks OtherwiseThe market ripped higher on news of a softer-than-expected wage inflation report. But haven't we seen this script before? Markets have a recent history of front-running the Fed... only to be bitterly disappointed. From my lens, nothing in this print changes the script for the Fed. And markets are not set up to hear that...
Sorting the ‘Wheat from the Chaff’ in 2023There are two key criteria that every investor should execute in 2023. What worked for the past decade will not be the same for the next decade. Interest rates are going to be higher for longer. This post explores what that means...
A Framework when Thinking about the FedHow fast? How high; And for how long? That's the framework when thinking about the Fed's policy moves. From mine, the market are offside in terms of how high and particularly how long. What we do know is the pace will slow.
“Rip Your Face Off Rally“… But What’s Changed? It's what you might call a "rip your face off rally". Short traders are caught on the wrong side and scramble to cover... that's what happened today as CPI came in slightly lower than expected. But is it reason to be jubilant? Hardly.
