Hey There Income Hunters,
Federal Reserve Chairman Jerome “J-Pow” Powell’s first speech since President Biden announced his reappointment wasn’t any different than his previous proclamations.
He’s still lying about how the Fed can “contain” inflation.
I chuckled when I saw this cartoon about J-Pow’s best shot at containment.
Courtesy of Hedgeye.
Today, I’ll update you on the latest inflation numbers and what we can expect in the weeks ahead.
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Global Inflation Continues to Soar
Italy’s Producer Price Index (PPI) continues to surge and has now risen to +25.2% YoY.
This signals higher European inflation in the near-term.
PPI is a leading indicator that signals costs passed onto consumers or corporate margin pressure. Both are headwinds for growth.
Powell’s Transitory Message Has Become Popular in Europe
Pablo Hernández de Cos, governor of the Bank of Spain and chair of the Basel Committee on Banking Supervision, said remaining flexible with the Pandemic Emergency Purchase Program in the future is warranted.
Bruno Le Maire, the French Finance Minister, has echoed Powell by suggesting inflationary pressures remain transitory due to unpredictable energy prices.
In short, European Central Bank members are doing the best they can to avoid tightening policy by continuing their “transitory" narrative.
The need for asset purchases to continue is still their pitch, despite inflation across the Eurozone hitting all-time highs.
Cracks in the US Economic Foundation
The always important treasury and mortgage repurchase or “repo” market is showing a bit of stress this week.
This is where hundreds of brokers, dealers and funds go for loans collateralized with USD treasury and mortgage securities.
This week the mortgage rate set a new high for the month as the overnight rate to fund a business went to .08%.
The other significant signpost for market stress is investment grade credit spreads.
As noted below, we are seeing a breakout in the BBB rated credit spread to Treasury bonds.
I will be watching this spread closely.
Bonds falling out of the investment-grade category can cause tremendous disruptions to the market.
Registered funds must sell non-investment grade holdings from their investment-grade funds and this can trigger a fire sale of assets.
The Fed will do everything they can to keep the economy going, but it is very important to be aware of the signposts that signal a larger correction.
That is a trade you don’t want to miss.
Bring It Home
Energy is still the sector that will drive the global economy and I view the correction in energy as a buying opportunity heading into the heart of the heating season.
Energy companies are in very good shape and are very profitable with oil above $60, while implementing expanded dividend distributions, debt repayments and share buybacks.
At the same time, companies are reporting 15-25% free cash flow. OPEC+ is in total control of the oil market and will use the strategic reserve output to lower its production in the near-term and get the price headed back towards $75.
I think next week will be a good time to pick up some oil stocks. I’ll have a couple of low risk/high reward opportunities ready for you.
Until then …
Live and Trade With Passion My Friends,