The Week Ahead — 04 Apr 2022
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Yield curve inversion is on everybody’s mind and it only seems to be intensifying. It’s happened 4 times over the last 22 years. What does it mean, how does it impact Fed policy and how will it impact markets more broadly?
Energy prices are still a big problem and the Biden administration this week announced a very large release from the strategic petroleum reserve. Will this really bring down prices on a sustained basis? And what are some of the unintended consequences of the SPR release?
We’ve seen tech names rally pretty hard since mid-March like Alphabet and Meta. What’s happening and how long will the tech rally last?
Key themes from last week
- Inverted yield curve and Fed policy
- SPR release and crude market impacts
- Tech’s comeback?
Key themes for the Week Ahead
- Rubles for O&G. When will Europe give in?
- Housing stocks and the housing market
- Mixed messages of simultaneous stimulus and tightening (rate hikes with energy stimulus)
This is the 13th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
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1:00 Key themes of last week
1:29 What the yield curve means and how it impacts the Fed policy
4:50 The Fed has to break something?
6:33 Large release from SPR, will this bring down the crude prices?
8:30 Viewer question: Will Biden’s threat to US drillers produce the desired results?
12:19 Tech rally?
14:16 Key themes for the week ahead.
14:44 How long before Europe pays ruble for oil and gas?
18:52 Home builders VS real estate
21:00 What do people read from tightening, easing, and all the stimulus?
TN: Hi and welcome to The Week Ahead. I’m Tony Nash. I’m joined by Albert Marko, Sam Rines and Tracy Shuchart. Thanks for joining us. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Also, want to let you know about CI Futures, our subscription product. We cover thousands of assets and economic concepts on CI Futures. Our forecasts are refreshed every weekend. You come in Monday morning and have a brand new forecast each week. Right now we’re offering a special subscription price of $50 a month. Please go to completeintel.com/promo and find out more.
So this week we had a few key themes. First is the inverted yield curve curve and Fed policy. Second is the SPR release and crude market. And the third is around tech. Is there a comeback in tech?
Sam, you’re up first. Let’s talk about the yield curve. It’s on everyone’s mind and it only seems to be intensifying. It’s happened four times over the last 22 years. So Albert and Sam, can you help us understand what does it mean? How does it impact Fed policy? Are they going to be more cautious going forward and how will it import markets more broadly?
AM: Well, Tony, concerning the inverting the yield curve, Jerome Powell doesn’t really want to do that. However, Janet Yellen does want to invert the yield curve. This is the divide that’s been throwing off the market analyst for quite a long time, quite a while now, actually, myself and I just found out and realized where the divide was. And normally in a deep quad for to take something from hedgeeye’s commentary, the only things that you can buy are Treasuries and gold. And right now Powell will be fighting a tide because of the long dated treasure is the number one thing to own in that scenario. So trying to protect stocks while hurting housing, and then you have Yellen that’s trying to protect housing. It’s quite a mess. And it’s probably something like Sam can actually detail the inverted yield curve on.
TN: So why are there are two camps just to go into that down that trail for a second?
AM: Well, it’s a policy, it’s ideology, basically. Yellen did this before in 2013, 2014, I believe. And Powell is not really an economist. He’s a lawyer. So he’s probably hearing it from his little circle of miscreants. So that’s where that’s coming from.
TN: People, whoever is listening.
AM: I’m sure they’re fine people. I’m sure they are. I think Yellen is probably correct in this instance, but we’ll see how that plays out.
TN: Okay, Sam, what do you think?
SR: Yeah, in inverted yield curve, generally, everybody’s like, hey, recession on the horizon. In reality, yeah. I mean, there’s always a recession at some point on the horizon. And what the yield curve tells you is that there’s one coming in the future. No kidding. But it’s not good for one timing, a recession period.
TN: So we’ve got the 2/10 spread on the screen right now. So can you tell us what does that mean and how much importance does that hold with that two and ten yield spread going negative?
SR: I mean, it’s something to pay attention to. I mean, the market is telling you something with that. There is some signal, even if there’s noise in there as well, that the Fed is going to go very, very quickly and is likely to break housing or break something else or break housing and something else. And that’s going to probably cause inflation to come back down. Right.
The market does not believe that or at least fixed income market does not believe that inflation is going to be a problem in ten years, does not believe that the Fed is going to be able to hold interest rates very high for very long. And that’s why you get the 2/10s inverted. Right. The Fed is going to go above what the “natural rate or the stall rate” is for the US economy.
TN: Right. So we’ve been saying for several weeks the demand destruction is the only way that the Fed is going to solve supply side inflation. And the last couple of weeks you’ve talked about the Fed breaking something at this point, the Fed almost has to break something. Right? I mean, Volker broke something in the early 80s. Right. Something has to be broken.
SR: Yes. Something has to be broken or you’re not going to solve the inflation issue. And you have to do it. You have to do it in a pretty rapid manner of tightening in order to get the inflation levels that we have now back to something somewhat reasonable in a time frame that is adequate. But again, it doesn’t tell you what’s going to break. We talked about it last week. Housing looks sick. Housing equities look sick. It does not look great, but it doesn’t tell you much about the broader market. Right. It’s a lot of noise. You can say that it’s bad for equities, but generally it takes a while for it to be bad for equities.
TN: Okay, great. Now, JPMorgan put out a note this week. Everyone’s putting out notes about when rates are going to rise. They said 50 in May 50 in June. Are you thinking that or is that kind of on the edge of aggressive?
SR: I mean, it’s aggressive, but the Fed has very little choice but to be aggressive in this instance or it’s going to lose credibility further. And that’s an issue for it. Right. It doesn’t want to lose that little bit of credibility it has left to raising rates too slowly in an environment where it’s getting the green light to do so from markets. Markets have it priced in. Why not do it?
TN: Yeah. If someone said in January that we’d be raising 50 in May, 50 in June, I think you’d be laughed at. But now it’s taken seriously. So it’s just really interesting to see the iteration of that expectations.
Okay. Speaking of inflation, let’s move on to energy prices. Tracy, obviously, there’s still a big problem. And this week, the Biden administration announced a very large release from the Strategic Petroleum Reserve. You’ve been all over this, including the Tweet you sent out on Thursday, which is on our screen talking about logistical issues.
So the main question I think for most people is will this bring down oil prices on a sustainable basis? So can you talk to us about that and some of the unintended consequences of the SPR release?
TS: Yeah, absolutely. It’s not enough to keep oil prices sustainably lower. Right. It doesn’t fix the structural supply deficit that we have years to come. Also, this slows shale growth because it disincentivizes shale producers from drilling more, which actually needs to be done and also creates potential logistical bottlenecks because we’ve never released this much before. That could cause congestion on the Gulf Coast. And that Tweet is up I think, talking about the bottlenecks there.
And then there’s another issue that has not been discussed yet broadly. And that’s because the SPR is aging. Right. And so we’ve had releases before where we’ve seen degradation in oil. And in 2015, they approved the $2 billion upgrade to the SPR, which is not going to be done until 2025. That said, what they did is they did everything except for the distribution centers. So what will happen is we need to see if we can actually get a million barrels per day pushed through. So there’s a lot of obstacles here.
TN: So it’s a sentimental kind of downside for oil right now. Nothing’s really released yet. And it doesn’t seem all that feasible that it’ll come out soon. Right. So supply chain issues like we’re seeing everywhere else.
So we had a viewer question from @VandanaHari_SG. It says, to what extent will Biden’s threat to us drillers to drill or get off the lease, produce desired results? You mentioned Frackers earlier. Will we see much movement there?
TS: No. Biden did call for Congress to make this decision. Personally, I do not believe that this will actually get passed by Congress. That said, again, this disincentivizes oil companies from producing more because it’s not that easy to just turn on wells. They’re facing labor shortages. They’re facing supply chain shortages. It’s not that easy to do that.
So if you tell them we’re going to tax you on this, then if they abandon those wells, then it’s going to take that much longer to get them back online when they are ready to. So all in all, it’s a horrible idea. Again, I do not see Congress passing this whatsoever.
TN: It’s complicated. And I think that’s the thing that we live in a world that likes to simplify things a lot. Right. And we like to say we’re going to do X, we’re going to do Y, we’re going to do Z. And the implementation of this stuff seems to be a lot more complicated Than we hear from, say, these non experts that talk to us all day long on TV or social media.
TS: Exactly. I mean…
TN: We can’t just wave a wand fixed supply.
TS: And turn on oil wells. I mean, regardless, we run through our DUC supply. Right. And that’s why we’re seeing slower oil production. The monthly EIA monthly just came out yesterday. It was 11.37 million barrels instead of 11.6 million that they were estimating in the weekly. And so what happens is that you’re pulling down DUC wells, which are the ones that you can get up easily, and then you’re putting all these restraints on oil companies and threatening them with taxes and things of that nature.
To get a well online from start to finish is six to twelve months. People don’t realize it’s not let’s snap our fingers and tomorrow we’re spreading oil.
TN: It’s not exactly a nudge. Right? Remember, under the Obama administration, they really focused on condomin and the nudge and all that stuff. This is kind of the opposite of that. It’s like the bludgeon.
TN: Yeah, exactly.
TS: Doing what they want. Right. Sorry. Go ahead.
AM: No, this is just political rhetoric. I mean, they’re better off just jumping into the oil futures market and trying to drive it down. This is just talk by the Biden administration. There’s really no substance to it.
TN: Can they jump into the futures market and short it and drive the price down?
AM: Who says they haven’t? Okay. You’re looking at 127 price and all of a sudden it’s down in the 90s. Is this crypto crude? What are we doing here?
TN: Okay, that’s a good point. All right.
SR: Just one last point to that. I know Tracy actually think Tracy tweeted this out a couple of weeks ago. The latest Dallas Fed survey of oil companies made it pretty clear that a lot of them at no, they don’t care where the prices. They’re not increasing their output. They put that on paper and put that in the survey. I think that’s worth remembering is that this is a less price sensitive reaction than people are going to give credit for.
TN: Okay, great, guys. That’s fantastic. Let’s move on to equities. Albert, we’ve seen tech stocks rallied pretty hard for the last couple of weeks since about March 14th. We’ve got chart for Alphabet and Facebook on the screen right now. Sorry. Meta on the screen right now. What’s happening to tech? What’s happened over the last couple of weeks and how long do you expect them to rally?
AM: Well, they’ve used tech, maybe a dozen names to rally the market. This is well known. I mean, if you look at those names that you have listed along with AMD, Nvidia and Adobe, they can be up to 30, 40% of the call action on a given day. It’s kind of silly, but honestly, it’s like this is a zero rate economy at the moment. So as our rates go up. Yeah. So as our rates go up, I don’t see how tech is going to rally much further.
TN: Okay, Go ahead.
TS: I’ll just throw in that just because BAMO came out with their weekly flows that we’ve had, tech market was $3.1 billion, which is the highest in two months.
TN: Okay. Interesting. All right. So if we go with the note that came out that in May and June will see 50 basis point rises, and you’re saying tech can’t continue to rally into higher interest rates, are you saying we’re looking at that type of horizon for tech to not be as attractive?
AM: Yeah, unless they reverse course come June or July. I don’t see how tech can really rally to what their all time highs were a couple of months. I don’t see it.
TN: Sam, does that make sense to you?
SR: It does make sense to me. I think the only saving grace for tech thus far has been that the long end of the curve hasn’t done much, and it actually looks a little sick at the moment in terms of yield. And that’s been a little bit of a semi tailwind, at least prop them up.
TN: Great. Okay, perfect. Let’s look at the week ahead. Some things we have for the week ahead are rubles for oil and gas. When will Europe give in? Housing stocks and the housing market? Sam mentioned that earlier. We’ll dive a little deeper into that and then the mixed messages around simultaneous stimulus and tightening, which I think is confusing some people.
So first, let’s dive into rubles for oil and gas. I did a quick Twitter survey earlier, which is up on your screen asking people how long before Europe caves and pays for oil and gas and rubles. Something like 70% of people think they’ll do that within two weeks. It’s just a Twitter survey. Some of those guys are experts. Some of those aren’t. Tracy, what do you think? Is that realistic?
TS: Putin actually came out today and said this is the plan. There is no backing out. However, it doesn’t include what you pretty much already bought. That means. So deliveries until most delivery until April 15, and then really in May 1 is where that really starts, where Europe will really have to start paying in rubles.
TN: So May 1 is when you think the rubles?
TS: May 1 is really when the bulk of this situation will come in hand because it’s not for what has already been ordered. Right.
TS: Does that make sense?
TN: You think we could see a trickle in mid April?
TS: Yeah, exactly. But I think that they’re going to have to do that. They really have no other choice unless they kind of want to plunge into the dark ages. Right there’s just not the backup plan is forming, but it’s just not there yet. So I think that they will concede even though they have a little bit of a time. They have 15 to 30 days to really. But you can’t move that fast. It’s not that easy to change suppliers that quickly.
TN: But we’ve talked about this a little bit. But what happens to say industrial output? German manufacturing if they decide not to do this? To be honest, it sounds like a pretty trivial thing to me to pay in another currency. There is a transaction cost to it. But if you’ve got a major economy, it doesn’t sound like something that you can really stand by insisting to pay in dollars. So what happens to German manufacturing? What happens to industrial cost Europe.
TS: It’ll actually plummet. I mean, BASF already came out and said we’re going to have to cut production if this happens. The German plan is basically to shut down manufacturing and to give residential the leeway if they have to start rationing. So that means if manufacturing starts shutting down in Europe, you’re in recession territory immediately.
AM: Yeah. They’ll find a way. They’ll find some special vehicle to sort this out. They got a little bit of time, like Tracy said, they got about two months really to sort this out. And anyways, the weather is starting to get warmer, so the less gas will be used. Anyway, I don’t see this to be really of a big problem. It’s just a lot of noise and a little bit of leverage from Russia on the sanctions that they are getting hit by well.
TN: But conceivably because of the embargoes on some of the banks in Russia, it could be a real issue with having funds rubles in Russian banks. No?
AM: I don’t think so. They can go between the Swiss, London will do it. It’s the same thing as the Yuan, renminbi, it’s like when they trade it for oil, the Saudis sell it in renminbi and goes to London, gets converted instantly and it’s dollars almost immediately to the seller. So I don’t think it’s going to be a problem.
TS: I 100% agree that the currency doesn’t really matter because it’s still factored into what is the dollar value. Right. It doesn’t really matter or any in Europe’s case, what is Euro per megawatt hour?
Regardless, it’s not really the currency that matters so much. The fact is the currency is helping. What Russia is trying to do is that if you have to sell euros to buy rubles, that keeps the currency afloat.
TN: Right. Which we’ve seen it surge back this week to pre war levels. Okay, great. Let’s move on to homes and home builders. Sam, you mentioned the housing market and housing stocks earlier, and we’ve got on the screen a chart about US real estate and home builders and the divergence between those. And they’re usually pretty correlated. Can you talk us through your expectations for real estate relative to where homebuilders are trading right now?
SR: They’ll look like homebuilders pretty quickly here. It’s what the Fed is basically able to do in terms of the economy quickly. Right. If you’re going to tighten rates by two and a half percent in a year, plus quantitative tightening, that’s what you’re going to hit. You’re going to hit home builders and real estate. That’s generally what you’re going to hit and you’re going to hit it fast.
In particular, the shorter duration type real estate that’s benefited the most from zero rates. If the long end of the curve stays somewhat subdued, you’re probably fine if you have longer duration type retail or that type of lease. But the shorter term duration real estate type plays are going to be in some trouble here.
TN: Okay. And so you say it’s going to happen pretty quickly. Last week you said it’s going to happen in Q2. When I first heard that, I was a little bit surprised. But just seeing what’s happened over the past week, it’s been really surprising to me that things have moved so quickly. So I think you’re right. I’m really interested to see that happen.
Now. You also mentioned QT. So let’s talk a little bit about kind of the tightening and easing, the simultaneous tightening and easing that we have going on. And how do we expect that to move over the next week? So, Sam, you’ve been pretty insistent that QT is going to start in May, is that right?
SR: Oh, yes. Little doubt.
TN: Definitely going to start in May. Now we’ve got countries and States giving energy stimulus and other things happening. I wouldn’t be surprised if different forms of stimulus come out. So how does it work where we have really fairly significant stimulus coming out as we’re tightening? What do people read from that?
SR: I would say confusion. Right. If you’re trying to actually tackle if you’re trying to tackle inflation with monetary policy, that really has to break something in order to get it under control, and yet you’re giving people more leeway to not have something break more money in their pockets. It’s counterproductive. Right. So you begin to either have to tighten more or tighten quicker or both to get it under control or you have to stop it with the fence full fiscal.
TN: What are you hearing about that Albert out of DC?
AM: I was on this program. When was it? About a year ago, talking about tapering with Andreas, and I was against tapering. I never think it was going to happen, but because the fact that we just keep going on QE, how do you tighten when you have QE and the Fed balance sheet is still expanding by 100 billion plus a week. I mean, that’s not.
This is why there’s so much confusion in the market. Like Sam was saying, it’s just you talk about tightening. Meanwhile, you secretly spend $160 billion to pump the market. So which one is it? As an analyst, how do you even assess what you’re going to do over the next 30 days when the Fed’s confused? The Fed and Treasury is confused.
TN: So can we have that where we’re say doing tightening but helping equity markets continue to rise?
TS: I mean, is that just weird? Of course it does. It is weird. You can’t have monetary policy going head to head with fiscal policy. Right. So you’re having fiscal policy loosening. At least let’s look at the energy markets right now. You can’t have all of this stimulus and it’s not just from the United States. It’s from across the world is doing this and we’re going to see more of this every week of new countries come out and save money.
TN: Not in Japan. Japan is easing across the board.
TN: Everyone else.
TS: True. But of course, I agree completely with the Sam said it’s confusion in the markets because you are literally having central banks butting heads with governments right now.
AM: Yeah. And that’s something people don’t really pay attention to. It’s not simply the US federal reserve with the US economy, but it’s the federal reserve with all of anglesphere. They can have the Canadians or the UK do tightening while we do expansion and vice versa. They can do it unending. It’s unbelievable.
TN: So when do we know the direction? When do we know whether we’re tightening or easing? Do we come to a point like is May the end point for easing?
AM: I don’t know, Tony. I can’t really tell you that because they can say that they’re doing that and then we find out two months later that they didn’t do it and they can use all sorts of weird little gimmicks that they have control over.
TN: Okay, Sam, what do you think?
SR: I think the comment about the Anglosphere was really interesting because it’s 100% true, right. If you look at a lot of the EMS, they’ve been talking lightning for a year or at least nine months. So I think that’s the really intriguing kind of comment for me is the US is probably so late to the game that EM is going to be easing by the time the Fed actually accomplishes any sort of tightening.
TS: They’ll have to, they will have to.
SR: Which sets something interesting up, by the way.
SR: Which sets something interesting up for when that happens. But that’s down the road.
TN: It really does. Yeah. Remember synchronized easing and synchronized tightening a decade ago? I just feel we have so many mixed messages out there that it’s no wonder we have the volatility that we have in market. Okay. Thanks very much for this. I really appreciate it. Have a great week ahead.
AM: Thanks, son.
SR: Thank you.
This Week Ahead is originally published at https://www.completeintel.com/weekahead/the-week-ahead-04-apr-2022.