WEEKLY | OIL: POLITICAL CROSSROADS
Your weekly summary of the most important news for your investments, in this edition:
Speech by Jerome Powell
Interest rates
Position of oil in the monetary landscape
In just a couple of days, expectations about the potential lowering of interest rates by the Federal Reserve (FED) for the second half of the year changed rapidly as a result of:
A verbal intervention by one of its representatives who stated that it might not be necessary to lower the monetary instance rate (currently at 5.5%) if inflation does not ease.
The price of oil continued to rise, pulling the price of gasoline up with it.
Employment data for the month of March came in above market expectations, generating 303 thousand new jobs and bringing the unemployment rate to 3.8% (from 3.9%).
As a result, during the week, the main U.S. stock indexes declined by an average of -1.3%, the 10-year sovereign yield climbed to 4.41% (+20 basis points) and stock market volatility, as measured by the VIX, quickly reached 16 points. Meanwhile, on the political front, Treasury Secretary Janet Yellen is on a trade tour of China, while President Biden will be hosting the heads of Japan and the Philippines at the White House on Wednesday and Thursday to address the Sino-Taiwanese tensions impacting the region. Meanwhile, the U.S. Congress is about to announce another fiscal package to continue financing Ukraine, while six months have passed since the war between Israel and Hamas and diplomacy has yet to find a path to peace. At the same time, the Brazilian government engaged in an unusual legal battle with Elon Musk and X over the weekend, where the entrepreneur asked for the resignation or dismissal of a Supreme Court judge, after the attempt to block accounts on that platform. Eventually, all of the above may take a back seat as the S&P 500 companies' earnings season begins on Friday.
In recent hours, the rebound in the price of oil, as measured by WTI, towards almost US$87 a barrel, accumulating a +21% rise so far in 2024, generated a change in the discourse of some monetary policymakers, in market inflation expectations and in a change in the purchase of strategic reserves by the Biden administration. On the first front Minneapolis Fed President Neel Kashkari had this to say:
If we continue to see inflation move sideways, then that would make me question whether we need to make those rate cuts at all.
Noting that he had estimated two cuts of 25 basis points each in the remainder of the year.
This comment came a couple of hours after Fed Chairman Jerome Powell noted that:
Recent data do not...materially change the overall picture which remains one of solid growth, a strong but rebalancing labor market, and inflation moving toward 2% on a sometimes bumpy path.
But in that same speech Powell was sharply questioned that his speech could be politically motivated, as clearly the spike in inflation expectations was strictly accompanied by the spike in oil and gasoline prices. Being that a couple of hours earlier the government announced that it would stop buying barrels of oil for the country's strategic reserve to avoid pushing the price of oil higher, knowing that a spike will have an impact on the electorate in the November presidential elections.
However, this economic political dissension that is occurring internally within the Fed may not be reflected in the minutes of the latest monetary policy meeting to be released on Wednesday afternoon, as the price of oil was not yet an issue. However, a couple of hours earlier, on Wednesday itself, the previous month's inflation data will be released where the headline figure is expected to have climbed to 3.4% (from 3.2%) and the core figure remained unchanged at 3.8%. For now, the only encouragement on the inflation front came last Friday after wage inflation eased to 4.1% (from 4.3%) despite the robustness of the U.S. labor market.
The fragile point of the market comes from a de-anchoring of inflation expectations resulting from the evolution of the country's energy prices and a divorce from the reality that the FED wants to print about the evolution of interest rates, in an increasingly politicized environment. A monetary intervention to lower interest rates accompanied by a net sale by the Biden administration of strategic reserves, such as the one managed in 2022, to put downward pressure on the price of oil (and therefore gasoline) could undermine the credibility of the FED. A possible concerted move by the Fed to energize the economy while the government seeks to avoid an inflationary energy spike entering the final stretch of the year could detract from the independence of the issuing institution, something that presidential candidate Trump will seek to use during his political campaign with greater insistence.
However, BlackRock, Citigroup, JP Morgan Chase and Wells Fargo will be releasing their quarterly results on Friday, giving us the first glimpse of the country's credit portfolios, particularly consumer loans, which have already been absorbing high interest rates for nine months. According to Factset, sales and profits of S&P 500 companies will grow by 3.5% and 3.2%, respectively, compared to the first quarter of 2023. Delta, for its part, will inform us a couple of hours earlier about the impact that the price of oil is having on its operations.
In conclusion, the price of oil has not only led to the government having to change its plan to replenish strategic oil reserves, but has already generated dissension within the Fed over rising inflation expectations, thus creating a political crossroads in the weeks ahead.
THIS WEEK
Monday (April 08)
Quarterly Reports
Avid Bioservices, Inc.
Economic Reports
Consumer Inflation Expectations Report
Speech by Minneapolis Fed President Neel Kashkari
Tuesday (April 09)
Quarterly Reports
WD-40 Company
Neogen Corporation
PriceSmart, Inc.
Tilray Brands, Inc.
SMART Global Holdings, Inc.
Economic Reports
Annual Red Book Change Report
Wednesday (April 10)
Quarterly Reports
Applied Digital Corporation
GoldMining Inc.
Pure Cycle Corporation
Delta Air Lines, Inc.
CHS Inc
Economic Reports
Monthly Inflation Change Report
Annual Change in Inflation Report
Monthly Change in Underlying Inflation Report
Underlying Inflation Annual Change Report
Open Market Operations Committee Minutes Report
Thursday (April 11)
Quarterly Reports
J P Morgan Chase & Co
Wells Fargo & Company
Citigroup Inc.
BlackRock, Inc.
State Street Corporation
Progressive Corporation (The)
Economic Reports
Producer Price Index Monthly Change Report
Speech by Atlanta Fed President Raphael Bostic
Friday (April 12)
Quarterly Reports
NextDecade Corporation
Byrna Technologies, Inc.
Envoy Medical, Inc
Elicio Therapeutics, Inc.
Fury Gold Mines Limited
Economic Reports
Monthly Import Price Change Report
Monthly Export Price Change Report
Annual import price change report
Annual Export Price Change Report
Preliminary Consumer Sentiment Report, Michigan
Now you have more information about your investments. See you next week with more news.
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