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On May 7th, Chicago Federal Reserve President John Goolsby warned against instinctively lowering interest rates due to faster productivity growth, as this phenomenon can sometimes push up inflation. In prepared remarks delivered before a panel discussion at the Milken Institute Global Conference on Wednesday, Goolsby stated that the Feds response to faster productivity growth "depends largely on whether productivity growth is unexpected or anticipated." He explained that in the first case, inflation might be contained, allowing for lower interest rates. In the latter case, the additional investment and spending resulting from productivity growth could push up inflation, necessitating higher interest rates. Furthermore, he emphasized the need to be wary of consumption and investment driven by expectations of future growth. "The more hype there is, the greater the need to raise rates to prevent overheating," he said.Federal Reserves Goolsby: If artificial intelligence is as good as advertised, that would be "wonderful," but the Fed still needs to be wary of an overheated economy.Federal Reserves Goolsby: If people withdraw expected future earnings in advance for todays consumption, it could lead to an overheated economy.The Federal Reserve accepted a total of $1.633 billion from seven counterparties in its fixed-rate reverse repurchase operations.On May 7th, it was reported that on May 6th local time, Mohsen Rezaei, military advisor to Irans Supreme Leader, stated in an interview that Iran will not allow the United States to extricate itself from the crisis without paying a price. Rezaei stated that the United States is currently attempting to make a "show" by raising the issue of reopening the Strait of Hormuz and then withdraw from the region, but Iran will not allow this. He emphasized that the United States must compensate Iran for the losses incurred, and Iran "will certainly obtain its rights and reparations."

Global Macro and Crude Oil Analysis - Today, the Market Feels Even More Capitulatory

Daniel Rogers

May 12, 2022 10:58

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Global Macro

Inflation may have declined from its prior record, but the sluggish rate of decline will further increase fears that, despite statistics and the CPI peak, the Fed still has a problem with persistent inflation.

 

Inflation in the United States almost definitely peaked in March, but a little decline in April statistics does not suggest the inflation menace has passed. If anything, the concentration on data is generally intensified on the way down.

 

Still, the core CPI climbed by 0.57 percent month-over-month in April, considerably above expectations and the highest pace since January; the market will be concerned that the Fed's hawkish tone will not soften, and it will want to continue with 50bp rate hikes. It will also keep rumors of a 75bp rate hike alive in the market, despite the Fed's efforts to stifle this chatter in order to avoid a severe market shock.

 

Today, the markets are even more despondent, as they are confronted by three significant difficulties. First, investors will need to account for a longer Fed raising cycle. Two, the danger that the Fed may become excessively hawkish, so stifling growth and creating a recession. And third, traders still must navigate QT.

 

For the greater part of a decade, stock pickers have relied on quantitative easing (QE), and now, without it, nobody knows where equities will settle; therefore, traders will continue to conduct the reverse of QE trades until proven differently.

 

In the interim, there is always the relief rally crew, but even if volatility rolls in, stocks may not experience a significant bounce. "TINA" no longer applies.

Fundamental Analysis of Oil

Oil prices rose as the European Union argued over a crude oil embargo against Russia, while fuel supplies fell predictably ahead of the US summer driving season.

 

However, the favorable downward bend in China's covid curve looks to have reversed the trend for oil markets this week, at least until oil traders experience another mood swing toward a bearish outlook.

 

As the Fed works to reduce inflation, a US recession is practically certain. Rates of interest are an extremely blunt instrument, and QT's tightening of financial conditions is a prescription for economic calamity.

 

Until we see substantial policy support from China or authorities embrace an alternative strategy to Covid (which seems highly improbable), oil prices could stay constrained in the near future.

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