Oil Futures

Mr. Powell’s Wild Ride

The central bank roller coaster will get another push this week as we will get more detail on the unwinding of the Fed’s balance sheet and the trajectory of rate increases. Chairman Powell revealed in Congressional testimony this month that they will increase 0.25% on Wednesday. However, there was not much said about their bond buying program and the size of their balance sheet. If the Fed is too aggressive then the economy could contract but if they don’t stem inflation that could also cause a recession. There is no clearer policy mistake by waiting this long to raise interest rates and now there is an exogenous event with Russia’s invasion of the Ukraine and the effect it has had on commodities and oil in particular.

The Oil Chart

The run-up in commodities to this Fed meeting couldn’t have come at a worse time for Powell as higher oil affects transportation costs. Remember, everything you buy travels on a boat, train, truck or plane so sharp oil increases translate into higher prices for goods across the board.

As you can see below, oil has been trending up for two years and has recently traded in a parabolic or “blow-off” top. This means that odds are that prices fall below $100 and back into the trend channel (orange lines) in the coming weeks. Also, a cease fire in Ukraine or clarity to the end of the conflict would add downward pressure to oil plus higher prices always bring on more production from oil producing countries. So, oil could explode higher to $150 but that would mean someone else removed supply from the market and I don’t see that happening as countries like Argentina are happy to sell at these levels. Some of this move was also related to funds/producers getting margin calls so that is a short-term market phenomena.

The Yield Curve

The belly of the curve has shifted in parallel fashion up to 2% and if the Fed policy is going to cause a recession we should begin to see an inversion in the coming weeks/months. The 1-2Yr part of the curve is also very steep so that implies some catch-up moves by the Fed later this year and into 2023.

The S&P 500

The shorter-term charts will show the S&P trading in a 5% messy range over most of this year and on this longer term chart you can see we have been hanging on the 23.6% Fibonacci retracement (red line) and it has been holding as support. The close on Friday was a slide into the lowest weekly close since last June but held above support. The Relative Strength Indicator (RSI) is reading about the same as the pandemic low without the price damage so any break of support may not last very long. If it does break, then $380 is the next level of support but that would put the S&P 500 into an oversold condition on a long-term chart which you can see is rare. I think we will get our answer by this time next week.

Chart of the Week!

Economic & Central Banking Snippets 

  • The JOLTS survey which shows the number of job openings in January totaled 11.26mm which counted as the highest level in the 21 years of data. It amounts to 1.7 open positions for each of the 6.5 million active job seekers who were counted as unemployed in January. (WSJ)
  • Taiwan said its February exports jumped 35% compared to last year which was double the expected amount and led by semiconductor shipments.
  • The initial March University of Michigan consumer confidence index fell to 59.7 from 62.8. That is the weakest print since September 2011. Commentary: “Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid 1940’s.”
  • The February Consumer Price Index came in at +7.9% verses last year. This is the highest read since the 8.4% read in January of 1982, when the nation was in recession and trying to tame what had been double-digit inflation. (WSJ)
  • The European Central Bank (ECB) said it would phase out its large bond-buying program sooner than expected and paved the way for interest-rate increases later this year. The ECB’s surprise decision weighed on the euro and drove up the borrowing costs of heavily indebted European governments. ECB President Christine Lagarde warned at a news conference that the Ukraine war could significantly damp the region’s economic growth by dragging on trade and sentiment, while also pushing inflation considerably higher in the near term. For now, the ECB signaled it is more focused on high inflation than slowing economic growth. (WSJ)

Macro Snippets

  • The European Union said it plans to store more natural gas and diversify its sources, aiming to cut its imports of Russian supplies by two-thirds by the end of this year. The invasion of Ukraine has highlighted Europe’s dependence on energy imports from Russia, which last year accounted for about 40% of its natural-gas consumption. The EU has been under pressure to come up with a plan to survive next winter if Russian supplies are cut off, either by Moscow or because of damage to pipelines that run across Ukraine. (WSJ)

  • Pacific Investment Management Company built up billions of dollars of exposure to Russian debt, opening up its funds to losses as the country faces a possible default. PIMCO has at least $1.5 billion of Russian sovereign debt, according to company filings. It had also placed about $1 billion of bets on Russian credit-default swaps. If Russia fails to pay its obligations to foreign creditors, it will be the first time since the Russian Revolution, when the Bolsheviks defaulted on czarist bonds. In 1998, Russia defaulted on its domestic debt, while foreign debt was restructured.
  • A BlackRock hedge fund which claimed Russian stocks and the ruble were undervalued lost 10% of its value after Ukraine’s invasion. The BlackRock Emerging Frontiers Fund claimed that Russian bonds showed solid returns in February, and that Russian securities in general were undervalued compared to global markets. The fund managed $960 million before losing big in February and is now down 7% this year.
  • Boeing said it has suspended buying titanium from Russia. The plane maker said its other suppliers of titanium have provided sufficient supply for airplane construction.

  • Southern California’s ports are catching their breath during a seasonal lull in imports that occurs when factories in Asia slow or stop production during the Lunar New Year. Terminal operators say a sharp decline in the number of workers calling in sick with Covid-19 has also helped. The result: Containers are moving rapidly off the docks—for now. Import volumes are expected to pick up over the coming months, and operators say many of the underlying supply-chain issues that caused backlogs in 2021 persist, Paul Berger reports.
Paul J. McCarthy III

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.