Natural gas is one of those commodities that’s rarely discussed except in connection with the weather or inflation. Like oil and gas, it could play an important role in determining what action the Fed takes over the coming months.
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NDX has been on correction watch for over three months, ever since its 200-DMA caught up with the bottom of its never-ending rising white channel.
Does its recent 4.6% slump offer any hints as to what’s next?
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The Nikkei 225 is less a securities index than it is a measure of how much intervention the Bank of Japan feels like throwing its way. It’s what the Dow aspires to be when it grows up.
So, it’s only at times like this that I bother to post it anymore.
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RUT’s chart reminds me of the old country and western song: “How Can I Miss You When You Won’t Go Away?”
The Russell 2000 is down over 10% today, so it’s technically in a correction. Some of its individual components have really taken it on the chin. And, it’s fallen below its 200-DMA, which is typically bearish. Seems like a sure fire shorting opportunity, right?
Not so fast. RUT has fallen over 10% three previous times over the past 21 months, recovering each time to or near its former highs. The most recent peak represented new all-time highs.
How long can this go on? And, what does an Italian mathematician have to do with it?
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Futures are off sharply on comments by Moderna CEO Stéphane Bancel on the effectiveness of existing vaccines against the omicron variant:
“I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good’.”
Bancel’s comments might also apply to this morning’s testimony from Jay Powell and Janet Yellen who head to Capitol Hill to explain why 6.5 inflation is nothing to be concerned about.
BTW, WTI made it official overnight, tagging our 66.81 target.
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Almost a year ago we noted that the rapidly rising price of oil and gas would contribute to alarming CPI prints [see: Don’t Ignore Inflation.]
Punch line? Oil and gas will have to fall significantly by April or we’re looking at a 20%+ YoY increase in gas prices – which has historically produced 2.4-2.7% annual inflation and a 2%+ 10Y.
At the time, it was clear that the base effect would ultimately generate YoY deltas in gasoline that would exceed 40% and, if the correlation held, generate CPI over 3.5%. We were being too conservative. November’s delta should be around 62% and October CPI reached 6.22%.
Then…
…and now.
When inflation spilled over into stickier categories such as food, shelter and wages, CPI accelerated more than the rise in oil/gas prices alone would justify. As the chart above illustrates, CPI’s rate of change outpaced that of gasoline alone.
Investors finally began to notice. Maybe inflation wasn’t transitory after all. Rising interest rates suddenly became a concern rather than a bullish confirmation of the reflation trade.
In our last update on oil and gas [see: Nov 19 Update] we reiterated the fact that oil and gas deltas would need to be held in check if inflation and interest rates were to stabilize.
Regardless of where this correction peters out, November should mark a turning point in CPI, with December and future months declining back towards an “acceptable” level. The trick is to keep interest rates from breaking out, which means the Fed must put the brakes on inflation right here and now.
Friday’s plunge was a good start. CL came within 0.8% of our downside target, shedding nearly 14% on the day and over 21% from its October highs.
It’s too early to say whether the omicron variant will feature the sort of transmission and mortality rates that could send the global economy into another tailspin. But, one thing is clear: non-OPEC+ countries are breathing a sigh of relief at the correction in energy prices – even if it means more downside for equities.
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BTC reached our next downside target, the SMA100 and cloud bottom added just last week [see: Nov 19 Update.]
BTC reached our next downside target, a 17.2% drop from our short call on Nov 8, reiterated on Nov 9 and 10. The cloud bottom and SMA100, currently at 53,160, is the next target/support.
Bitcoin, off 22% since recent highs, is now officially in a bear market. As we discussed last week, there is substantial downside if this support doesn’t hold.
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ES sold through our next downside target in reaction to the new B.1.1.529 COVID-19 variant.
A number of factors have also hit downside targets, making this plunge on a normally quiet day a selloff of interest. Our targets in equities, currencies and commodities remain unchanged.
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Futures have spent the last two days testing the 20-DMA, buoyed by the USDJPY slowly creeping higher but under pressure from rising vol.
The economic backdrop remains mixed, with GDP coming in at a very slight miss (2.1% vs 2.2% consensus) but durable goods orders missing badly (-0.5% vs 0.2 expected.) On a positive note, initial claims hit a new low at 199K vs 270K prior.
The day is young, however, as we still have personal spending, PCE, new home sales, Michigan sentiment and EIA crude inventories to digest later this morning and FOMC minutes at 2pm. The situation in Ukraine is also of great concern.
As everyone heads out for the holidays, remember to be safe. Though COVID cases are down in many parts of the world, we are reminded that 2021 deaths have topped 2020’s and the pandemic is in full bloom in Europe. If you haven’t received your booster yet, do it now instead of after infecting grandma.
There is an excellent article in the NY Times about staying safe over Thanksgiving. Well worth a read. For members outside the US befuddled by our annual fascination with Pilgrims, devouring dry turkey and arguing with one’s brother-in-law, know that the real reason for celebrating is the arrival of Black Friday.
In a heart-warming rebound from their tryptophan-induced comas, Americans stampede to the mall where they trample over one another to get the best deal on a big-screen TV. It’s a tradition more in keeping with the Wampanoag’s experience than the Pilgrims’.
Happy holidays and safe travels everyone.
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World leaders announced the coordinated release of strategic petroleum reserves today in an effort to force oil and gas prices lower amidst rapidly rising inflation. The US, India, China, Japan, Republic of Korea and the UK are among the countries participating.
WTI’s initial reaction hasn’t exactly gone according to plan. Traders, who have seen these attempts fail before, are underwhelmed by the numbers. When attempted in June 2011, WTI fell $5/barrel on the day of the announcement but rallied $11 over the next month [see: Not Terribly Slick.]
It took a severe correction in late July to make a meaningful difference. Even then, it didn’t last.
This time, we didn’t even get the initial dip as there is a very good chance that OPEC+ will simply offset the paltry release by adjusting their own production.
The real solution will need to come, as it always does, from political pressure. Last time I checked, the US is still the principle supplier of military arms to the Saudis. Perhaps if the US were to threaten an arms embargo…
Oh, look, here’s one now.
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