Market News

• Price of oil could go down relatively quickly, but deeper problem is getting refineries back online
• The fact we have been 5-1/2 years above inflation target is playing with fire
• Need to revisit the logic of looking through supply shocks
• Nothing in the Federal Reserve Act says make sure bond market is happy, stock markets aren't surprised

Chicago Fed President Austan Goolsbee is sounding more like a hawk.

The key line is that the Fed needs to "revisit the logic of looking through supply shocks." That's a direct challenge to one of the core tenets of central banking. The textbook says energy shocks are temporary and you don't tighten into them. Goolsbee's point is that the textbook assumes inflation expectations are anchored, and after five and…

omments from BoE’s Taylor cross the wires:

• Does not know if the BoE can do a single “insurance hike” that would not be misinterpreted as the start of a series.
• Every time oil futures curves rise, the greater the risk they get to a 2022-type inflation scenario.
• If wage growth expectations stay near 3%, that would be reassuring.
• Not seeing any clear signal of building second-round effects.
• BoE agents’ survey of firms’ wage intentions, due in January 2027, will be a very significant data point.
• The current policy stance is restrictive enough.
• Evidence points against a general inflation shock.
• Case for further rate increases is not compelling to him unless energy prices remain high for an extended period and generate clearer signals of broader…

From the St Louis Fed President:

• A predictable, explained framework is part of what makes a central bank democratically legitimate
• If the public understands the framework, private expectations line up with the Fed's intentions, improves trade-offs between inflation and employment
• A well-communicated framework also guards against inflationary and deflationary spirals
• Delegated power over interest rates also obligates the Fed to explain 'how and why that power is used'
• Market guess 'adds noise,' and results in higher and more volatile interest rates and financing costs for businesses and households
• The 'hall of mirrors' occurs when the Fed announces a forecast, not a framework
• Communicating the framework makes policy more effective, lowers costs…

Comments from Fed’s Barr cross the wires:

• Expects GDP growth to pick up a bit in the second half of the year, from a 2% pace in the first half.
• Risks to achieving the inflation target have increased; risks to the labor market have receded.
• There is a need to recalibrate policy; base case is that further policy adjustments likely will be needed.
• Labor market solid, supported by business investment and consumer spending.
• Inflation is a key concern; Fed has been “knocked off course” to its 2% goal.
• Does not see a clear trend toward a timely return to 2% inflation.
• Makes sense to pencil in an AI productivity boost in the medium term, but difficult to project how or when.
• Is optimistic AI will boost productivity in the longer term.
• Too early to know if…

The price of crude oil has moved to new lows for the day, helped by news that the US is offering to release 40M of inventory from the Strategic Petroleum Reserves (see post here). The news is bearish.  

Technically, crude oil has covered a lot of ground in September. Futures climbed from a low near $85.75 to a high of $107.46 on September 15. That rally then gave way to a sharp move lower, with the price bottoming near $88.72 on September 22 and 23. Since then, trading has been choppy as buyers and sellers look for the next sustained move.

Buyers had their shot at the 200-hour MA

The sideways trading allowed the falling 200-hour moving average to catch up with the price. Yesterday, buyers pushed above that average for the first time since…

US 30-year yields are now up to the highest since 2002 as 30-year yields rise 5 basis points to 5.61%.

There is a simple story here, the combination of inflation, too-high fiscal spending, rising energy prices and a glut of debt is making it more-costly to borrow. There is only so much money in the world to go around for lending an the AI capex boom soaked up as much as it could while the US government runs a deficit at +6% of GDP.

Borrowing costs have now risen more than 30 basis points in a week and 70 basis points since it briefly looked like Iran peace in June.

I don't like the look of that chart. It's rising every day and it seems as though there are no buyers for debt, despite the increasingly-attractive yields. Worse yet, the higher…

Last week’s question: Was the high in place?

In last week’s video, I asked whether the USDCAD’s high was in place (see video from last week by clicking on the image below).

The question centered on a swing area between 1.41297 and 1.41488. After a move from the September 8 low at 1.37588 to the September 24 high near 1.41488, buyers had covered a lot of ground in a short time. That area looked like a reasonable place for the rally to stall.

The test for sellers was whether they could push the price below 1.41297 and keep it there. They could not. The pair waffled around the area on Friday, then started to stretch higher yesterday. That move has continued today, taking USDCAD to a new high going back to July 7.

Buyers defend the rising…

Breaking news: 

Oil is under pressure as the US offers up to 40 million barrels from teh strategic oil reserve.

Deutsche Bank is out with a highly-aggressive copper call, arguing that the market is moving from a traditional supply-and-demand story into something closer to an inventory/liquidity squeeze.

Their target is eye-catching: $22,050 per tonne, or roughly $10/lb, by Q2 2027, nearly 50% above current levels.

"We expect copper to face acute scarcity over the coming months as unencumbered inventories shrink to critical levels," DB writes. "Demand destruction appears to be the most likely rebalancing mechanism, requiring prices to reach a level at which demand is destroyed sufficiently quickly."

The bank argues that headline copper inventories badly overstate how much metal is actually available to the global market.

China has accumulated an…

• Prior was 89.4

This is a terrible reading and reflects an increasingly dark mood regarding inflation and energy prices. It's a sharp drop through the Liberation Day and pandemic lows near 85. 

There is some real divergence in economic data in the last week as the S&P Global services PMI was very strong last week and this is very weak. I tend to think of the sentiment surveys now as more political but there are still knock-on effects for spending.

For background, The Conference Board's Consumer Confidence Index is one of the two big monthly reads on US household mood, and it tends to lean more on jobs than its University of Michigan cousin. The survey asks five questions: views on current business conditions and current employment (these make…

• Job openings: 7.079 million vs 7.225 million expected. July revised up to 7.335 million from 7.271 million.
• Job openings rate: 4.3%.
• Hires: 5.2 million. July revised up to 5.1 million.
• Quits: 3.1 million; quits rate 1.9%. Both unchanged.
• Layoffs and discharges: 1.6 million; rate 1.0%. Both little changed.

US job openings came in 146,000 below expectations in August and fell by about 256,000 from July’s upwardly revised level. The Bureau of Labor Statistics described openings as little changed, but the miss against the market estimate points to softer demand for workers.

The rest of the report was steadier. Hires held near 5.2 million, while quits remained at 3.1 million and layoffs and discharges were little changed at 1.6 million. That…

The Reserve Bank of Australia raised its cash rate target by 25 basis points to 4.60% today, as expected. The RBA said inflation remains too high and left the door open to further tightening if needed. RBA

You might expect a rate hike to send the Australian dollar higher. Instead, AUDUSD extended the decline that began after its September 9 high at 0.7237. The move has been driven in part by US dollar strength as US yields rose on expectations of a more hawkish Fed. The technical picture has also turned progressively more bearish.

Sellers leaned against the 200-day moving average

AUDUSD initially bounced from its 100-day moving average on September 17, but broke below it with momentum last Wednesday. It then closed below the 200-day moving…