David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Fed Scraps `Patient' Rate Approach in Prelude to Potential Cut

    This article by Craig Torres for Bloomberg may be of interest to subscribers. Here is a section:

    While inflation near the goal and a strong labor market are the most likely outcomes, “uncertainties about this outlook have increased,’’ the Federal Open Market Committee said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

    The FOMC vote was not unanimous, with St. Louis Fed President James Bullard dissenting in favor of a quarter-point rate cut. His vote marked the first dissent of Powell’s tenure as chairman.

    Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

    In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from “solid” at their last gathering.

    The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.

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    Musings from the Oil Patch June 18th 2019

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

    When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

    With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

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    Email of the day on gold in other currencies and stock market/commodity ratios:

    I am enjoying the commentary as usual. 

    I had two questions for which I would be grateful for your opinion:

    I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

    The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

    I thank you and look forward to hearing from you in due course. 

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    U.K. Inflation Returns to BOE Target on Air Fares, Car Prices

    This article by Jill Ward and Andrew Atkinson for Bloomberg may be of interest to subscribers. Here is a section:

    The figures come a day before the BOE’s latest policy decision. As many central banks around the world shift into a more dovish mode, U.K. officials have been trying to push in the other direction, repeating a message that interest rates may have to rise more than the market currently anticipates if there’s a smooth Brexit.

    Investors haven’t taken much heed given the continuing uncertainty over Britain’s exit from the European Union. Certainly in the short term, the latest inflation figures give policy makers breathing space to wait and keep interest rates on hold.

    The BOE expects inflation to fall back below target this year. In May, it forecast that price growth would average 2.1% this quarter, easing to about 1.6% by late 2019.

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    ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action

    This article by Paul Gordon and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

    ECB President Mario Draghi appeared to set a low bar for action on Tuesday when he said additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation. He specifically cited rate reductions as an option, sending the euro lower and prompting money markets to price in a 10 basis-point cut by December.

    Investors subsequently brought forward their expectations to September after Bloomberg’s report. Commerzbank now predicts such a policy step in July.

    “Draghi is going to finish his tenure with a cut,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “The door is now open and I don’t see how they can not walk through it.”

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