Dow dropped 143, decliners over advancers better than 2-1 & NAZ retreated 42. The MLP index remained steady in the 226s & the REIT index dropped 5+ to the 364s. Junk bond funds saw some selling & Treasuries continued to be sold, driving yields higher. Oil crawled higher in the 82s & gold pulled back 37 to 2017 although still in record territory (more on both below).
AMJ (Alerian MLP Index tracking fund)
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Consumer sentiment in the US was little changed even as inflation expectations moved up sharply, the results of a closely followed survey revealed. The University of Michigan's headline consumer confidence index came in at 63.5 for mid-Apr, which was up from 62.0 at the end of Mar. The forecast had anticipated a dip to 61.8. According to Joanne Hsu, the survey's director, improved sentiment among lower-income households was compensated for by a deterioration among higher income ones. "While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run. On net, consumers did not perceive material changes in the economic environment in April," she explained. A sub-index tracking views on current economic conditions ticked higher from 66.3 to 68.6 while that for expectations edged up from 59.2 to 60.3. Inflation expectations looking 12 months ahead however surged from 3.6% to 4.6%. "Uncertainty over short-run inflation expectations continues to be notably elevated, indicating that the recent volatility in expected year-ahead inflation is likely to continue," Hsu added. Expectations for inflation over the long run however were "remarkably" stable, printing at 2.9% for a 5th month in a row, having remained at 2.9-3.1% for 20 out of the last 21 months. "The data are often revised by the time of the final release. But with near-term expectations for inflation still elevated and volatile, that is an additional reason, at the margin, for the Fed to press ahead with additional rate hikes," commented Michael Pearce, US economist at Oxford Economics.
Consumer sentiment steady in mid-April but inflation expectations jump
As the national price for a regular gallon of gas inched up 9¢ this week, an AAA spokesperson cautioned about oil market disruptors that are "always lurking" with the ability to push prices even higher. "Something could be happening elsewhere around the world, and it could make the price really go up or down," AAA's Andrew Gross said. "Whether it's fears of an economic slowdown that pushes the price down, or warfare or tensions, or things of that nature, that can cause the prices to go up. And also watch hurricane season. That's always lurking." Elevated oil prices hovering in the low $80s per barrel have mostly fueled the rise in gas prices. For last week, the national gas price average sat at $3.64, up 17¢ from a month ago but 44¢ less than a year ago. The oil market is also still largely reacting to the OPEC+ surprise announcement that it may voluntarily cut production by 1M barrels per day. Gross claimed markets are still trying to gauge OPEC+'s next move. "A lot of oil traders and people in the market are trying to figure out: What's OPEC up to? They didn't really give a clear reason why they did it," Gross explained. "And there are a lot of caveats to it, whether every OPEC nation is going to slash or just a few, and they said it was voluntary. And it's like, what does that mean? You're either going to slash or you're not cutting voluntarily." While global oil prices account for about 55-60% of what American drivers pay at the pump, the AAA spokesperson argued, the other major contributing factor is demand. "Will we have a robust driving season this year? Will a lot of people be hitting the pump and fueling up? That much we don't know," he added. "Demand did drop a little bit last week, and we have not had three weeks in a row of demand being over 9 million barrels a day in two or three years." Even though gasoline prices are likely to continue to move higher incrementally each week, US drivers should not expect a supply shortage as Gross claimed there’s "plenty of oil."
AAA cautions over economic disruptors as gas prices inch higher
The IMF is recommending the Biden administration rein in spending to better balance the US' debt load & help the Federal Reserve's efforts to tamp down inflation. "It seems clear to me that from the viewpoint of medium and long-term prospects, there is a very strong case for fiscal adjustment in the US," Vitor Gaspar, Director of the IMF's Fiscal Affairs Department, said. "It also seems opportune as a way of helping the Fed in the fight against inflation, thereby moderating necessary increases in interest rates." Inflation has proven to be more persistent over than many economists had expected over the last 2 years, with the latest Consumer Price Index showing prices excluding volatile food & energy categories rose 5.6% over last year in Mar. Over the past year, the Fed has embarked on its fastest rate-hiking campaign since the late 1980s, raising its benchmark interest rate 4.75 percentage points. The fed funds rate now stands at 4.75%-5.00%, the highest level since 2007. Investors expect the Fed to raise rates another 0.25% next month. At the same time, the US gov's debt load projected to increase exceed the peak of the pandemic by 2027. The IMF estimates the US debt as a percentage of GDP will stand at 135% in 2028 with the deficit projected at 6.8%, both significantly outpacing other advanced economies. In his first 2 years in office, Pres Biden approved nearly $2T in new spending. The pres signed a more than $1T bipartisan infrastructure bill into law that put new funds into roads, bridges, transportation, broadband & utilities in 2021. Last year, Biden also signed a sweeping $750B health care, tax & climate bill dubbed the Inflation Reduction Act. The pres has proposed a nearly $7T budget for 2024 that calls for reducing deficits by around $3T over the next decade by raising taxes on wealthy individuals & large corps. "We believe that fiscal tightening by moderating aggregate demand makes it easier for central banks to deliver inflation at target in a timely way in the sense that the required increase in policy rates is less," Gaspar said. Without the US, advanced economies would actually have a declining public debt to GDP ratio over the medium term. As rates rise, higher debt levels also means servicing higher interest costs on that debt. Gaspar argues moderating interest rate increases also helps with financial stability because rate hikes can cause fragilities in the financial system, as seen by recent bank failures in the US.
IMF urges Biden administration to rein in spending
Gold futures declined, pulling prices down for the week after 6 consecutive weekly gains. Today's price action suggests gold is overbought in the near term. Futures prices for the metal settled yesterday at their 2nd highest on record. For gold to break through any records, there needs to be some confirmation that the Federal Reserve is done hiking rates. Markets are coming around to this idea, but there's still significant uncertainty. Gold for Jun fell $39 (1.9%) to settle at $2015 an ounce. For the week, prices for the most-active contract declined by 0.5%.
Gold futures decline to finish lower for the week
Oil futures climbed to post a 4th straight weekly gain. High inflation & hawkish Federal Reserve had spoiled the party for oil producers, but the oilmen are now back & the party is in full swing. With the peak inflation appearing in the rear view mirror, traders can shake off the macro risk that had underpinned the oil trade for months. May West Texas Intermediate crude rose 36¢ (0.4%) to settle at $82.52 a barrel. For the week, prices for the front-month contract climbed 2.3%.
Oil futures mark a fourth straight weekly gain
Dow rose a modest 400 (1%) this week. The inflation news was fairly good but interest rates are high & fears about a coming recession are everywhere. And gold continues in strong demand. More earnings reports will dominate the news next week.Dow Jones Industrials
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