By: John Caruso
#1. My eyes will be focused on today’s ISM PMI data – expectations are for another m/m slowdown to 54.5 – I won’t be shocked to see this much lower than expectations. ISM is working its way down towards sub 50 we think, which of course signals contraction inside of Manufacturing.
#2. A couple of very big “shoes” have yet to drop (and may be in the beginning stages – still early to tell) – Energy and Agriculture – And the Agriculture complex just had a very bad day with Soybeans -3.00%, Wheat -6.00% (Limit Down), Corn -3.63% to finish the month. Energy and Food prices are obviously heavyweights inside of our inflation monitoring tool. We highlighted a headline late last week suggesting Russia is considering opening 2 Ukrainian sea ports to allow the flow of grain – whether this is part of the move or not remains unclear.
#3. Quantitative Tightening (QT) officially begins today AKA the balance sheet run-off AKA the Fed begins allowing their securities holdings to mature without replacing them.
Oil: the big rally in Oil yesterday morning off the EU ban on Russian Oil, was also met with an adverse headline around the 1pm hour yesterday. OPEC is now considering suspending Russia from OPEC Plus which would allow the Saudi’s to crank out more Oil. Whether OPEC even has the capacity to do so remains a question. Nevertheless, prices shook off $5 dollars top to bottom yesterday. As aforementioned, Oil is a heavy weight in our inflation model. Whether that’s and intermediate-term peak for Oil, I’ve no idea – but we do think on the whole inflation has likely peaked.
Bond yields/Oil: if you run an overlay of Crude Oil prices and Bond Yields – you’ll find a close relationship, for obvious reasons. Higher Oil begets higher inflation expectations begets a tight Fed/higher rates. And yes, as mentioned several times – we think the Fed eventually has to fold its “Hawkish-hand” – which likely is preceded by falling energy and food prices (perhaps modestly or aggressively relatively speaking – I don’t know which), and of course a receding Consumer Price Index. I think these questions will a get answered over the next 4-8 weeks. And you ready for this…..I think there’s a chance we only see 50bps in June, and then a pause, wouldn’t that be something. Buying more Red 2023 Eurodollar’s.
Bank of Canada: They’re raising 50bps today with the odds favoring another 50bps in July – baked in. Canadian Dollar has tracked Oil prices higher, and from our vantage point is immediate OB right now/top of the range. There’s a notable slowdown happening in the Canadian R/E market which could prompt a more “dovish” or “neutral” response by the BOC and will not need to take their key rate past 2.5%. Sell Canada.