The two day FOMC meeting concludes today with a 2:00 P.M. statement. Will the phrase “considerable time” be omitted? I will argue no given the impact of the collapse of oil prices is not yet known. Speaking of which, will the Central Bank comment about the sudden implosion of oil?
The two day FOMC meeting commences today. Much has changed since its last meeting held in October and their mid-September forecasts. Oil has been crushed, the dollar has rallied and more Americans have jobs than expected. Will the Fed be dovish or hawkish? The sharp drop in oil can create a strong argument for either case.
Friday I noted the drop in oil is not only threatening the existence of companies but also of countries. Perhaps the countries that are facing the gravest threat are Libya, Iran, Iraq, Nigeria, Venezuela, and Russia. Will there be unrest that leads to anarchy that leads to regime change and curtailed production? Will the Arab Spring be nothing as compared to a potential Arab Winter?
As written several times, the $50 drop in crude has transferred about $1.5 trillion from oil consumers to oil producers. It is a defacto stimulus to Europe, Japan and US, a stimulus that is more powerful than any government program given the monies saved goes directly to the consumer and business.
The Russell 2000 surged 1.8% yesterday on the strength of commodity companies, more specifically the energy issues that rose 6.1%. Unless one has been living in a cave, all commodity companies have been crushed, decimation that has not spared the debt. Bloomberg writes the Russell 2000 oil companies plunged 7.2% on Monday. Personally I have not witnessed such a myopic destruction during my 30 years in the industry.
Will 2015’s be the carnage of Treasury and investment grade rated bonds, carnage similar to the one that is occurring today in the energy sector? Many, me included, have been decimated by the collapse of oil, a collapse that few had suggested even as recent as October 1. Today the oil narrative is incredibly negative.
In my view November’s unemployment report was strong in all dimensions, a strength few had expected. The large 321,000 gain in non-farm payrolls, together with the 44,000 upward revision to the two proceeding months increases the odds the FOMC will increase interest rates sooner than many expect.
Perhaps the biggest surprise of 2014 is the collapse of oil prices. In June crude was around $110/barrel. At one juncture yesterday, prices were around $65/barrel following a 2 day 10% plunge, the result of the OPEC meeting where production was not cut.
The unexpected strength of third quarter GDP growth, which was revised up to 3.9% annualized rate from 3.5%, is further evidence the economy is on the verge of finally reaching escape momentum. Consensus had expected a nominal downward revision to 3.3%. The past six months the economy has grown at its fastest pace in a decade.