After completely missing the slowdown in economic growth last year, the Fed is now behind the eight ball on inflation.
Click here to receive our daily cartoon for free.
The U.S. Energy Information Administration on Wednesday reported crude-oil inventories climbed by 13.8 million for the week ended Feb. 3. Oil prices rose on the day, a move confounding many who thought the increase would send prices lower.
No need to be confused.
"The market as a whole is focused on the OPEC deal," says Hedgeye Senior Energy Policy analyst Joe McMonigle. Secondary OPEC sources say the deal to cut the 14-member country's oil production, from 33.8 million barrels a day to 32.5 million barrels a day, has been 90% compliant.
"I'm still a skeptic on that point," McMonigle says.
The more important thing to watch, he says, is how higher oil prices (up 11% in the past three months) are affecting U.S. shale production, McMonigle says.
Active U.S. rig counts rose from 729 versus 571 a year ago. "The U.S. shale producers are really responding to the higher oil prices as a result of the OPEC deal," McMonigle says.
Click here to watch McMonigle's entire interview on BNN.
For years, Fed watchers have been getting antsy as unemployment falls toward NAIRU — the Fed’s estimate of the bound below which inflation rises. But as shown in the graphic above, each time unemployment has threatened to break through NAIRU the Fed has lowered NAIRU rather than raise interest rates. Why?
The answer would appear to be in wage growth. As shown in the small inset graph, there is a strong relationship between wage growth and slack in the labor market—as measured by the difference between unemployment and the Fed’s NAIRU estimate. What this suggests is that the Fed has consistently overestimated wage growth, leading it to lower NAIRU when new wage data come out.
As the yellow highlighted part of the graphic shows, we appear to be at a turning point. Unemployment is now near the bottom of the Fed’s NAIRU range. This supports the case for Fed rate hikes.
But beware. Though the Atlanta Fed measure of wage growth remains strong, at around 3.5 percent, it is slowing. Should it fall to 2.5 percent, we can, on past experience, expect the Fed to lower NAIRU again, such that its measure of labor market slack rises from zero to as much as 0.8 percentage points. That would mean putting rate hikes on hold.
This is a Hedgeye Guest Contributor piece written by Benn Steil and Emma Smith and reposted from the Council on Foreign Relations’ Geo-Graphics blog. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. It does not necessarily reflect the opinion of Hedgeye.
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
Stock market volatility has been absolutely smashed. That's bullish for stocks.
"The Euro trend remains bearish as ECB head Mario Draghi continues to remind markets that he has no intention on tapering anytime soon," Hedgeye CEO Keith McCullough writes.
Click here to receive our daily cartoon for free.
Just eighteen days after Inauguration Day and President Trump is embroiled in controversy. His immigration directive banning refugees and travelers from seven predominantly Muslim countries sparked protests and was temporarily upended.
Here's a quick, distilled look at related issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.
Less than one week after the Congressional Review Act (CRA) was revived for this first time in over a decade, Republicans on the Hill trotted it back out again. An SEC rule that required American companies that extract natural resources to file public reports detailing payments to foreign governments was overturned along party lines.
Expect to see this tool used more and more in the early stages of this Congress to eliminate Obama-era rules enacted in the past 60 legislative days - which takes us back to June 2016. According to some on the Hill, the potential exists for the CRA to extend back even further...
#Trump #Gorsuch #SupremeCourt
Now that we’ve witnessed the pace President Trump has set in his first few weeks in office, expect him to go on the offensive and on the road throughout the legislative season to see his agenda through. Whether it’s money for the wall, votes for tax reform or an infrastructure package, Trump will go after Republicans on the Hill to ensure they aren’t going wobbly on him.
We’ve already seen him single out Senators Lindsey Graham and John McCain on immigration and there’s no reason to believe he’ll rein it in. As the year progresses (particularly if the Gorsuch nomination lingers) expect Trump to hit the road and go to places where he won big like WV, ND, MT, and IN to drum up support and ratchet up the heat on Democratic Senators from those states who oppose him.
President Trump was in full defense hawk mode at U.S. Central Command and he directed Defense Secretary James Mattis to conduct a readiness review to guide the military’s budget requests and plans to give them new planes and new equipment. While Trump will need congressional approval for any defense appropriations and he will certainly have allies in some of his biggest critics - like the aforementioned Graham and McCain.
President Trump’s immigration ban has given him his first taste of the system of checks and balances our Founders established. Trump’s handling of the judiciary may cause him to be his own worst enemy if he wants to get Neil Gorsuch through the Senate. By using the phrase “so-called judge” over the weekend to refer to the Appeals Court judge who overturned the rule, he has given Democrats fuel to resist Trump’s nomination at all costs. All eyes will be on the 9th Circuit Court of Appeals this evening at 6 pm.
Republicans have long had their eye on CFPB Director Richard Cordray. Now President Trump and his allies are starting to make moves against him. Firing him though could ignite yet another fire under the Democrats as well as use up the president's precious political capital particularly since he campaigned against Wall Street - and some think it may just be better to sit out this fight and wait for Cordray’s term to expire next summer. We don’t think Trump is one of them.
Our Senior Telecom & Media Policy Analyst Paul Glenchur writes that reversing the net neutrality policy of Obama's FCC, new Chairman Pai signals "all clear" for the zero-rating plans of T, VZ and TMUS. You can read the full piece here.
*Email email@example.com for more access to and information on our institutional research.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.