Month: January 2022

As we reported on Sunday (in “Atlanta Fed President Pours Gasoline On Fire With 50Bps Hike Comment, But There Are Reasons To Fade It“), Atlanta Fed president Rafael Bostic (2024 voter, hawk) sparked a fresh round of Fed fears (and catalyzed much of the overnight weakness in US futures) when in an interview with the FT, he suggested that a more aggressive approach is possible if the data warranted it which would mean rate hikes at every remaining policy meeting this year, adding that a 50bp hike is possible if inflation remains stubbornly high. Although, as we explained, not only is that not his base case – he maintains his call for three 25bps hikes in 2022 – but there were various mitigating factors suggesting that investors should not equate his comment with a Fed trial balloon that a 50bps rate hike is coming in March.

Sure enough, fast forward to this afternoon, when perhaps seeking to ease market nerves, Bostic was interviewed by Apollo’s Yahoo Finance, and said clarified that “a 50bps hike is not his preferred policy action for March“, adding that the “Fed is not fixed on a set policy progression” and that we “should get a few rate moves in hand then reduce size of the balance sheet.”

“I would adjust my policy to maybe not be as aggressive in terms of raising interest rates” if inflation decelerates more than expected

The walkback was enough to reverse the spike in rate hike expectations earlier on Monday, prompted by his weekend statements.

Bostic also reiterated that his personal preference is for three hikes in 2022, but caveated that there is lots of data ahead. Echoing what he told the NYT, he again said that he is laser focused on the next meeting and how data on inflation and jobs is evolving.

Noting that it is hard to anticipate too much what the “long arc” of policy will be at this point, the Atlanta Fed president said that he is not set on any particular trajectory. In terms of what he does expect, he said that he sees 3% inflation for FY22, and expects labor and supply disruptions will ease.

He then used the usual hedges, saying that if inflation responds quickly, he Fed could go slower but that is not his base case since businesses appear to have built in price increases already.

Looking ahead, Bostic said that this Friday’s jobs report will likely be a little lower than recent months (translation: brace for a negative print) showing the influence of Omicron, although he remains hopeful job growth will rebound in February and March.

Shifting away from rates, the Fed president said he wants to get the balance sheet unwind underway as soon as possible, can be more robust.

“Let’s get interest-rate moves in order,” and after moving away from zero it will be time to start reducing size of balance sheet

Last, but certainly not least, Bostic claims that the Fed should manage to avoid undue flattening of the yield curve, adding that the risk the Fed’s policies will cause a recession is “relatively far off.” Well, unfortunately for Bostic and the Fed, it’s not “far off” at all, and instead has arrived, because as the 2s30s forward chart shows, the curve is now on the verge of inversion, which means the countdown to the next recession has essentially begun.

Color us not surprised, but Tesla has been accused of inflating its sales numbers in Australia, a new Drive article reported this weekend. 

As a reminder, Tesla claimed that it had sold 15,000 vehicles locally in Australia in 2020 – but the company’s official number doesn’t jibe with registration data out of the country.

Official Australian data “revealed 12,000 Tesla cars were added to the nation’s roads in 2021,” the Drive wrote, leaving an obvious delta of 3,000 vehicles from Tesla’s reported numbers. 

The numbers hold extra weight in Australia because Tesla’s reported numbers would end the 28-year winning streak of the Toyota Camry in the mid-size sedan class, the report says. But Australia’s official numbers would put Tesla below the Camry:

Based on unsubstantiated figures released by Tesla and the Electric Vehicle Council, the Tesla Model 3 sedan has scuppered the 28-year winning streak of the Toyota Camry in the mid-size sedan class in Australia (15,054 versus 13,081 sales).

However, based on national registration data, the Tesla Model 3 finished a close second behind the Toyota Camry last year (12,058 versus 13,081 sales) and the 28-year winning streak still stands.

Either way the number of deliveries for Tesla was a record for 2021, representing more than triple of what the automaker sold in 2021. The figures made the Model 3 the most popular electric car in Australia by an order of magnitude: it outsold the next closest competitor by 8:1, the report says. 

But “industry insiders are concerned about the sizeable discrepancy of 3000 vehicles,” the report said. Especially since the “official” number came from registration data sourced by the National Exchange of Vehicle and Driver Information System (NEVDIS). Drive also cross-checked the NEVDIS data for its report. 

An industry insider commented that the gap “raises questions about the accuracy of the numbers supplied by Tesla … it would appear they are inflated.”

“Tesla could avoid this confusion if it would just provide its Australian sales data to the Federal Chamber of Automotive Industries, as with the rest of the car industry, so it can be counted alongside every other mainstream automotive brand,” they continued. 

We’ll look forward to a prompt clarification from Elon Musk during his next Twitter bender, we’re sure…

By Irina Slav of OilPrice.com

• The current move in oil prices is largely attributed to geopolitical risk.

• The next major move in oil could be triggered if inventories fall to critical levels.

• Wall Street’s consensus seems to be that Brent will reach $100 by the summer

Brent crude touched $90 per barrel briefly this week for the first time in years. This latest jump was attributed to tensions around Ukraine, but this is the most transitory reason for oil price rises. The bigger reasons all have to do with fundamentals. And $90 per barrel of Brent may be only the beginning. A lot has been written recently about OPEC’s spare capacity and the not too rosy outlook for it. That spare capacity is in decline for several reasons, but chief among them appears to be underinvestment. As a result, JP Morgan earlier this month warned that Brent could rise to $125 per barrel as OPEC’s spare production capacity falls to 4 percent of total capacity by the fourth quarter of 2022.

The International Energy Agency has gone even further, warning OPEC spare capacity could fall by half to just 2.6 million bpd in the second half of the year. The agency then went on to say that, “If demand continues to grow strongly or supply disappoints, the low level of stocks and shrinking spare capacity means that oil markets could be in for another volatile year in 2022.”

It is not just OPEC, however. The biggest non-OPEC producer of oil—and biggest oil producer globally—is pumping less than it can. Pressure from shareholders on public oil majors in the United States has increased, as has an insistence that companies focus on greening up their operations instead of looking for more oil and gas to extract. As a result, the U.S. is pumping less oil than it could and, many would argue, should.

As a result, the stage seems set for another expensive year in oil, which happens to coincide with an expensive year overall as central banks begin tightening monetary policies in response to stubborn inflation that, like the IEA’s oil demand forecasts from the early days of the pandemic, proved to be far from the transitory glitch the Fed said it was last year.

“The oil market is heading for simultaneously low inventories, low spare capacity and still low investment,” Morgan Stanley analysts wrote in a note cited by the Wall Street Journal this week, summing up the situation quite nicely. In this situation, $90 for a barrel of Brent may be just the beginning.

Indeed, the Wall Street consensus seems to be that Brent will reach $100 by the summer because of all the reasons listed by Morgan Stanley and also because breakeven costs are also on the rise, thanks to inflation trends and labor shortages, at least in the United States. Yet the biggest driver of prices will remain physical demand.

The International Energy Agency admitted physical oil demand has proven stronger than previously expected in its latest Oil Market Report. Based on this surprising turn of events, the IEA revised up its 2022 oil demand forecast by 200,000 bpd. And based on its track record, it might well turn out it has once again underestimated demand robustness. Even with this estimate, oil demand will not only return to pre-pandemic levels but exceed them, reaching 99.7 million bpd by the end of the year.

In such a situation, higher prices for oil are all but certain since there is precious little—bar another round of lockdowns which is highly unlikely—anyone can do about them. The question, then, becomes how high oil can go before it begins to go down?

The answer is tricky. U.S. public oil companies are still beholden to their shareholders, who seem to be taking to heart forecasts that oil has no long-term future. They have limited space for doing what they want. Private companies will be drilling as WTI continues climbing higher. And OPEC will be drilling as well, but it may choose to keep controls on production rather than switching to “pump at will,” mostly because only a few OPEC members actually have the capacity to pump at will.

Excessively high prices tend to discourage consumption, regardless of the commodity whose prices are getting excessively high. However, there is a caveat, and it is that the commodity must have a viable alternative to discourage consumption when prices rise too high. Judging from Europe’s nightmare autumn and winter this year, alternatives to fossil fuels are not yet up to par. This basically means that the impact of high oil prices on demand will be slow to manifest and slow to push prices down.

Where does this leave the world? The short answer is “Not in a good place.” Higher oil prices will lift the prices of everything else, and this is the last thing you want—if you’re a government—when you’re already struggling with inflation. It may well be that the pandemic will end for good this year, but the real fallout from it may only be starting to show.

It’s that time of the week (i.e., Monday) when JPMorgan’s head stock permabull, markets cheerleader and chief equity strategist, Marko Kolanovic, publishes his weekly JPMorgan View note and we doubt that it will come as a surprise to anyone that Marko’s market assessment – as last week, and the week before, and the week before that – is to buy the dip.

Echoing what JPMorgan’s trading desk said earlier, when as we reported the bank’s trader Andrew Tyler said that in the “near-term, we go higher” (even though “over the longer-term”, the the JPM trader thinks “investors will need to see Liftoff, at a minimum, before feeling comfort in being maximally deployed”), Kolanovic dispenses with the hedging and writes that “the equity market sell-off is overdone in our view, and we reiterate our call to buy the dip, particularly in cyclicals and small caps.”

According to Kolanovic, “stocks are in bear market territory and erased their post-pandemic re-rating, small cap valuations are at 20Y lows, and investor sentiment is bearish. Many market metrics such as recent performance of high vs. low beta stocks and valuations of small caps are already fully pricing in a recession – something we do not see materializing.”

In addition to those, the JPM strategist also sees very attractive risk-reward in China and EM equities, and notes that “while jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly–i.e., we could see a reversal of systematic outflows, pickup in buyback activity as we exit blackout windows, and magnification of flows by weak liquidity and short-gamma hedgers”, echoing what Goldman’s flow trading desk said over the weekend.

Medium-term, the Croat says that JPMorgan “favors China, EM, Eurozone and UK equities vs. the US given growth convergence, interest rate sensitivity, attractive valuations, and favorable positioning.”

And while he agrees that Powell’s tone “which was more hawkish than the Fed statement, prompted a sell-off in bonds, stocks and other risk assets” spooked investors, and with reason since even JPM’s economists now forecast five hikes in 2022, he thinks that “the risk is that inflation-related data improve and fewer hikes are ultimately delivered.”

Drilling down on the bank’s rates expectations, Kolanovic writes that “last week’s FOMC meeting delivered another step in a hawkish direction via Powell’s remarks in the post-meeting press conference. He strongly hinted at a March lift-off, which in of itself was not surprising, but rather in emphasizing differences between the current conjuncture and the 2015 start to the hiking cycle in terms of the strength of labor markets and growth, in a response to whether the Fed would hike every meeting.”

Following Powell’s hints towards a faster pace of hikes, JPM now looks for five rate hikes this year, which is roughly in line with current market pricing.

Indeed, after the meeting, market pricing shifted to price in some probability of a 50bp hike in March and the Fed funds futures for Jan23 (the first full month after the Dec22 meeting) shifted from pricing four of hikes the day before the FOMC meeting to pricing in nearly five hikes currently. In turn, Kolanovic notes that “this implies that the hurdle for additional hawkish surprises this year has increased.” That said, as per JPM’s revised rate forecast, while markets price in a faster pace for 2022, pricing flattens out markedly in 2023 with only just over 50bp of hikes priced in and less than 10bp priced in for 2024.

For interest rate markets to price in less hikes than the Fed eventually delivers is not unusual. Indeed, this is precisely what happened during the 2004-2006 hiking cycle. Figure 8 shows the 1-month forward USD OIS rate starting in 2 years’ time vs. the realized fed funds rate – i.e. the funds rate two years later – during that hiking cycle. It shows that throughout 2004 and most of 2005 the market priced in a lower Fed funds rate than the Fed eventually delivered, though note that from late 2005 onward the realized Fed funds rate shown in Figure 8 covers the financial crisis.

Kolanovic then rhetorically asks how did the equity market perform during the 2004-2006 tightening cycle, and answers:

From the start of 2004 to the end of 2006, the S&P 500 index delivered annualized total returns of around 10% supported by annualized 12-month trailing EPS growth of around 15%, and this allowed P/E multiples to gradually de-rate through the expansion without hurting the equity market.

Clearly no two cycles are identical, and the starting point for equities is somewhat different with a current P/E multiple above that seen in the run-up to the first hike in 2004. But, given the approaching Fed tightening is set to occur against a backdrop of well-above trend growth and tight labor markets, we believe 2004-2006 is the closest comparison to the current backdrop. And similar to 2004-2006, above-trend EPS growth should allow the equity market to easily outperform cash and fixed income over the coming years, even if one assumes some gradual derating.

It is this longer-term picture that keeps Kolanovic overweight equities in his model portfolio and he believes “it would be a mistake to over-interpret short-term equity market gyrations, especially given the recent deterioration in market liquidity.” As we highlighted every day last week…

Liquidity level: catastrophic. Moderate-sized order moves ES 10 ticks pic.twitter.com/U2TP8ZIgKS

— zerohedge (@zerohedge) January 28, 2022

… and as also JPM discussed in the latest issue of its Flows & Liquidity publication, proxies for market depth, market breadth and the share of ETFs in equity trading are all pointing to severe deterioration in liquidity conditions this year to levels last seen in March 2020. In particular, the market depth metric for the S&P500 e-mini futures contract based on the average number of contracts at the tightest bid/ask – our preferred market liquidity indicator – has been deteriorating steadily since last September and currently stands at its lowest level since March 2020 at the peak of the pandemic correction…

Liquidity is as bad as when the Fed had to inject $5 trillion to kickstart the market. https://t.co/IH5kv02m7j

— zerohedge (@zerohedge) January 26, 2022

… something which Kolanovic also pointed out in his note today .

This poor liquidity picture raises the probability of large equity market moves either way, and we thus advise clients to not get carried away by short-term fluctuations in equity markets and to instead focus on the longer-term picture.

Looking ahead, and for the next few months, Kolanovic again agrees with his trading desk, writing that the March FOMC meeting is the next obvious risk event as the FOMC dots could be raised by more than the market expects for 2023 and 2024: “This is especially true if the next two payroll reports show further tightening in US labor markets. Until then, i.e. until the March FOMC meeting, we believe the balance of risks for equity markets is skewed more to the upside due to potential re-emergence of buybacks following the January blackout period as well as quarter-end rebalancing flows by pension funds into March.”

But even if the Fed surprises to the hawkish side, Kolanovic already hints at what his take will be: why Buy the Dip of course:

If the March FOMC meeting proves hawkish and causes another correction in equity markets, that should be seen as another temporary dip/consolidation within a bull market.

One other reason cited for his endless supply of permacheer and market optimism, is that “credit markets have shown remarkable resilience to this month’s equity market correction. Credit spreads are up by only 7bp in US HG and by 30bp in US HY.”

Here Kolanovic admits that this resilience reflects in large part “more bearish investor positioning in credit vs. equity markets. Indeed the short interest on the two biggest credit ETFs, HYG and LQD, has been elevated since last March.”

One interesting point made by the Croat strategist is that the lower participation of retail investors in credit vs. equity markets, “might have cushioned credit markets from retail investor positioning unwinding, which hit hard both equity and crypto markets YTD.” Beyond these position and retail flow differences, Marko believes that credit markets are sending an overall positive message that the Fed tightening would not derail the credit or economic cycle “and that fears of Fed policy mistake or of an early end to the current cycle are overdone in a backdrop of above average nominal income growth.”

So putting it all togetger, Kolanovic – unlike both BofA’s Michael Hartnett, Morgan Stanley’s Michael Wilson and – of course – SocGen’s Albert Edwards – disagrees with fears of a Fed policy mistake or an early end to the current cycle, and instead believes “that similar to 2004-2006 Fed tightening cycle the current cycle is taking place in a backdrop of above average nominal GDP and EPS growth, which should allow the  equity market to easily outperform cash and fixed income over the coming years even if one assumes some gradual de-rating.”

We disagree… and so does the market, because one look at the 1 year forward 2s30s shows that we already have an inversion.

And once the curve has pancaked, the countdown to a recession has begun; the only question is when?

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

We all remember where we were when the Berlin Wall came down. While it may have seemed that communist rule would go on forever, when the people decided that they had enough suddenly the wall fell. Just like that.

Thus it is after two years of Covid authoritarianism that in Canada the largest truck convoy in history has smashed through the Berlin Wall of tyranny. I have watched as the Canada I once respected as a haven for antiwar Americans in the 1960s turned into one of the most repressive countries on earth. I wondered how a freedom-loving people could allow themselves to be abused by these mini-Stalins without a peep.

But then Canada stood up and showed the rest of the world that freedom can triumph over tyranny if the people demand it. As I say, no army can stop an idea whose time has come.

Canadian prime minister Justin Trudeau had been basking in his ability to terrorize the population in the name of fighting a virus. He was so confident in his seemingly unlimited power that he felt he could ridicule any Canadian with different views. The prime minister said in a recent interview that unvaccinated Canadians were “extremists,” “misogynists,” and “racists.”

When the Canadian truckers stood up to his tyranny and began their historic convoy to Ottawa, he thought he could continue ridiculing people. The truckers and their supporters were just a “small fringe minority” who hold “unacceptable views,” he confidently claimed. For Trudeau, love of liberty is just an “unacceptable view.”

Less than a week later, as tens of thousands of trucks began entering the capital with millions of supporters behind them, the “brave” Canadian prime minister had fled the city and shuffled off to an undisclosed location.

As Elon Musk Tweeted, “It would appear that the so-called ‘fringe minority’ is actually the government.”

The Canadian mainstream media is obviously just as obedient to the regime as ours. They ignored the Freedom Convoy for as long as possible. There was almost no reporting. Then, when it became impossible to ignore, they began to attack and ridicule instead of trying to report it accurately. It was disgusting and almost comical to see a “reporter” from the Canadian Broadcasting Corporation suggest that the Canadian Freedom Convoy was cooked up by Putin and the Russians!

Thousands of trucks have arrived in Ottawa. They demand an end to covid tyranny. They are backed by millions of citizens, who braved the Canadian winter at night to cheer the truckers on.

This protest is so important because it’s not limited to Canada. The truckers are being supported worldwide, and a similar convoy is being planned from California to Washington, DC. In a US where grocery store shelves are increasingly bare, the truckers have more leverage than the powers-that-be would like to admit.

If I were prime minister of totalitarian Australia or New Zealand – or most anywhere in Europe – I would be getting pretty nervous right now. Just as the Covid tyranny descended across the globe in a seemingly coordinated fashion, now that the Berlin Wall of the tyrants has been breached, it’s just a matter of time before the shockwaves are felt far and wide.

We owe a debt of gratitude to the Canadian truck drivers. Let’s all do whatever we can to help the freedom movement continue to gather steam!