2nd December 2022 / Anthony Cheung

Jerome Powell boosts stocks & what to expect from OPEC+

Piers returns to the podcast to talk with me about the latest rise in US stocks following hints from Fed Chairman Jerome Powell that smaller rate hikes are coming. In fact, US stocks had their first streak of back-to-back monthly gains since 2021, with a gradual upward trend punctuated by a sharp rally on the last day of November.

We also discuss our thoughts on the upcoming OPEC+ meeting which comes amid the EU agreement to place a price cap on Russian seaborne oil. What will this mean for the price of oil? how might Saudi respond? and is the rising number of covid cases in China something to worry about?


This week we were joined by Pierce Curran where we discussed the latest rise in US stocks following hints from Fed Chairman Jerome Powell that smaller rate hikes are coming. We also discuss our thoughts on the upcoming OPEC+ meeting which comes amid the EU agreement to place a price cap on Russian seaborne oil.  
Here is how our discussion went -

Can you share your thoughts on the Keynote speech from Fed Chair Drone Powell?

We're going to discuss a little bit about a keynote speech from the Fed Chair Drone Powell, which sent Equities Rocketing yesterday. So what happened was stocks went sharply higher off the back of what J. Powell was saying. That just meant lots of headlines for the press. The S and P, was up  3.1% on that day and Nasdaq was up 4.4%. These indices closed out November with a positive month, which meant two months in a row of gains for US stocks, which is actually the first time they've strung together two months back to back since last year. So a very positive run into the close last night. 

And this comes just weirdly bang on the anniversary; Yesterday was the 30 November - we're recording this on Thursday 1st. Yesterday happened to be the anniversary of the Fed pivot because back on the 30 November 2021, Powell delivered a speech. With hindsight this speech the turning point in the Fed's  view on inflation and how they were  going to tackle it.  Prior to the 30th November 2021, the Fed were downplaying inflation. They were using that word “transitory” as you'll remember saying that there is no need to worry.  On the 30 November 2021, Powell made a speech and he said that the inflation pressures were high. And he said, “it's appropriate, in my view, to consider wrapping up the tapering of our asset purchases perhaps a few months sooner” But that moment was the pivot. Inflation is higher than we thought. It's not transitory. We're going to have to stop QE much faster. And that then started this super steep tightening cycle. So that was the anniversary of that was yesterday. Anyway, just so happens Powell was speaking yesterday which was quite nice timing because maybe yesterday again is a bit of another pivot, although the pivot was  preempted with the Fed meeting, the last Fed meeting, the Fed minutes and maybe the inflation data that we had a few weeks back.

But what he said last night to make markets rocket higher, he said “the time for moderating the pace of rate increases may come as soon as the December meeting”. So there's not there's nothing new there. Markets are  already thinking they'll drop to a 50 basis point hike in their December meeting, having hiked 75 basis points at the previous four meetings. But this is like the clearest evidence yet from the man himself that December will be a 0.5% hike. So that's obviously good. Just to get even more certainty on that, he said some interesting stuff, like “my colleagues and I do not want to over tighten. I will simply say that we have more ground to cover. History  cautions strongly against prematurely loosening policies” So he  contradicted himself a little bit there basically saying, “look, we're going to slow down. We don't want to overtighten, but we don't want to prematurely loosen either”

So those hoping for our interest rate cuts in 2023,  though a bit ambitious, but obviously that will play out and it's data dependent. So if your view is that inflation is going to come down pretty quickly next year, then even though he said what he said last night(don't expect premature loosening).

If your view is inflation will drop sharply, then we could well start to see the Fed with that data coming through thinking maybe it is time to start cutting rates. So, yeah, a  dovish angle to his speech last night that traders got a hold of and ramped up the equity space across the piece. 

He also spoke specifically about the labor market stating that order to bring inflation back down, he warned that the labor market must become substantially softer and there would need to be a sustained period of below trend growth. So in layman terms, what's  he telling us there?

Well, he's saying that because it's non farm payrolls tomorrow right? So how many jobs were created in November? If you take the last three months so job creation in August, September and October, then the average for the three is 290,000 jobs created per month. Now, if the labor market was flat and the economy was flat, you  need 100,000 jobs created a month just to absorb the population growth. Okay, so that 100,000 a month is like your neutral level. So 290,000, well, that's 190,000 above neutral jobs being created. So he's saying that's still actually super strong and ultimately we're going to need to see the labour market turn and pivot and we're going to need to see job losses, which then results in that demand destruction, which then leads to price pressures falling. So he's basically saying that “look, the labour market is still super strong. So that's why I don't expect any rate cuts anytime soon” .  

So he's put that job creation thing right up at the top of the agenda in terms of incoming data in the future. And I can actually point towards evidence of that. The stocks have been basically flat compared to last night. So they rallied into the close last night off the back of Powell’s comments and then they're flat.  So just hanging on to those gains, but nothing more until 13.30 PM this morning. They've just spiked and ramped higher again because we've just had the challenger job cuts numbers and they have massively gone up. So 76,835 jobs were cut in November, that's the highest number since January 2021. So job cuts look like they're beginning. And that's not a surprise because we've heard from all the big tech firms that they are laying off 10,000 here and 10,000 there and for example Twitter cutting their workforce in half. Also Google thinking about job cuts, 11,000 job cuts at Facebook so it's not a surprise. 

But the fact Powell's put he's put job numbers front and centre now, I think for the months ahead for us now to gauge not when will they end the hiking cycle because we think that's now in and it'll end either with the December meeting and being the last hike or maybe one more hike of 25 basis points thereafter. So we're pretty sure where the top of this hiking cycle is. So now it's all about when is the start of the cutting cycle?

In terms of the equity move that we're seeing at the moment, most banks on the street have been saying that this was a temporary rally and actually we were going to go back down. Have they got that wrong?

Well it I think it's a super hard one to call right now. We were talking about the bottom a few weeks ago and it looks like the bottom is in and the Fed is now saying that we're going to hike at a slower rate. So the question is, was the bottom a few weeks ago, was it THE bottom of this whole thing or not? And it's hard to call. I think the bottom for the year is in, December and I think we just need another soft inflation number out of the US for December or a really soft non farm payrolls number tomorrow just to  continue that upward trajectory.

What happens in 2023? Is this another temporary bounce on what continues to be an onward, going downward, longer term trend? I think that's hard to call and it's entirely based on the inflation beast and it come down sharply.  It's entirely dependent on the geopolitical factors of which obviously Russia's and maybe China too; they're really hard to call and predict. So I don't know. The jury is out on that, and I think we'll assess that in a month or so's time. But for now, I think we're still pointing pretty positively into year end, I would say. 

Speaking a little bit about OPEC because there's a virtual meeting happening on December 4 and, just by fact of it being virtual, sources have suggested the less likelihood of any  policy change. Apart from that Saudi Arabia and other OPEC members are reportedly considering production increases. So everything you've just spoken about in the economic, the macro context was about slowdown rising unemployment, everything that would constitute the opposite, normally from a consumption oil point of view. But the Wall Street Journal was reporting that Saudi specifically and others were talking about considering a 500,000 barrel per day increase to production.  Why are they doing that? And what's the connection with Russia within this in the EU?

So there's something big is just happening. What's happened is today, the 1st of December is  officially the beginning of Europe's  sanctions on seaborne Russian crude oil. Now they made noises about this back in the summer, they said, “right, we're going to stop buying Russian seaborne oil? But we're only going to stop doing that in December to give us a bit of time to shift and adapt and find alternative supplies.” Well, now it's December, so the ban starts today. So EU countries are no longer going to be buying Russian seaborne oil. Now, there's a lot of oil being piped, which is a different matter. What Europe is doing with their sanction is that we will not buy any and we will not ensure any Russian oil tankers that are going to any other country in the world unless the buyer agrees to not buy crude oil above a certain price.

Now, we're not sure what that price is. It's been ranging between as low as maybe even $20, but more likely, probably something in the $60 range.

So let's say if India wants to buy Russian crude oil, they have to adhere to the European price cap if Russia wants European insurers to insure that boat. Now, European insurers are the biggest insurance market, they account for all the boats, but not all of them. But the point being where you could say, well, all right, we'll just do it without insurance. Well, India wouldn't do it without insurance, but you could say, well, Russia could insure it or India could insure it, but the problem is Europe control all the ships. So in order for Russia so we don't know what's going to happen. Will India continue to buy Russian oil? If so, how are Russia going to get it there, and are there any alternative ships that they can use? And the answer is yes, but probably nowhere  near enough to maintain their current supply to India. So we're not quite sure how this is all going to play out. India has said that they are not going to adhere to the price cap.

But it's just more of a question of logistically how they're going to get it there. So there is a genuine risk that Russian crude oil drops off quite sharply, which is why I think the Saudis are considering to increase production to offset that, but there's a of a lot of unknowns in here. So I think in the next month or two, it'll really play out. 

You've got some analysts thinking that oil is going to ramp to $120 here because Russian supply will drop quite sharply and the gap won't be able to be filled by Saudi. So, yeah, I think we're entering into quite an unusual and entirely unique period of uncertainty on supply. So it'll be interesting to see what OPEC do over the weekend or whether it's a month too early because they haven't really got any data on how this is all going to play out particularly. But Russia will be talking to Saudi on Sunday to say what are their alternative plans for getting oil to India and to China. So we'll see how this plays out. Just on that supply side, the other issue is if you're thinking about just global supply generally or US stockpiles of crude oil, because during all this time, Biden has been tapping their emergency reserves, because he needs to win a midterm election and he needs to get the petrol price down. So he's been greedily tapping the US emergency supply to the point where that is now carrying the lowest number of barrels since the year 2000. And actually, if they keep going, they're not far off having the lowest amount of emergency supply since the 1980s. So that's another supply concern. If this Russia supply thing, if it is worst-case and it drops off much sharper than expected, that means not much US emergency supplies, you could get a bit of a ramp higher in crude prices into the new year. So what does that mean for the inflation? Another chapter of high inflation or so.

What about China? There have been quite a few developments happening in China this week, namely that of very unusual public protesting against the government's mandate of zero tolerance COVID, usually because of the fear of reprisal from the government. Any thoughts on that? And whether Xi will move and how so to respond to quell that rise uprising?

Well, I think they've moved, haven't they? It has got a lot of press attention in the west, of course. And then were quite a lot of demonstrations in China this year which haven't got as much attention. There are a lot of demonstrations around mortgage payments related to the fact that the property market was crashing and that there were a lot of unfinished apartments and Evergrande and the rest of them were perhaps defaulting, and that meant that people were paying mortgages on unfinished apartments. And so there was a big demonstration around that and people striking and lots of stuff going on around that. I think what's different here is those demonstrations earlier in the era were squarely focused on the home builders and Evergrand. Now it's not. It's on Xi Jinping himself. And indeed the west was very keen to report that one demonstration was calling for the removal of Xi Jinping in a regime change. It's hard to say whether that was a general theme across all the demonstrations in all the cities. I doubt it, but I don't know. I still think at the moment it'll probably blow over, in my sense. But again, it's so hard to predict, isn't it? And it will be COVID-dependent on whether these lockdowns do ramp up or not. So, yeah, Xi Jinping is treading a tightrope at the moment. 

So if you are going to go one of two ways in terms of the current covert situation, because from a case rate perspective, that has gone up in China, and so whether or not that requires more lockdowns, we'll see it probably will do to some extent. So does that compound the already negative trend for the Chinese economy in the short term or is it actually a positive in a sense that the government will be forced their hand to make some type of change? That change could be monetary or fiscally, it could be in various different forms, even in the actual COVID policy in itself. So actually does COVID reemerging in that way force the hand? Or does it just then make the situation that's already bad worse?

Yeah, I mean, maybe that's his out right? Maintaining a stubborn zero COVID policy and providing fiscal stimulus. I actually wouldn't be surprised if that's the  line he takes to keep everyone happy, But the problem with that is, isn't that inflationary again, though? Because suddenly a massive stimulus check lands on the doormat and everyone is going to try to spend it so you could get another temporary spike in demand and then you got your supply chain issues too. That's why I say 2023, even though we're almost there, I think it's still super hard to call it because there are so many moving parts. Yeah. So I'm in a wait-and-see. I'm at a relatively positive year-end.

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