12 Oct WILL THIS WEEK BE OF GREAT SIGNIFICANCE?
In thin Columbus Day trading, the S & P 500 erased earlier gains and closed at session lows amid an intensifying debate on whether inflationary pressures will be transitory. Both the Dow and the NASDAQ fell about 0.70%. The bond market was closed for the holiday.
Oil closed up 1.50% at $80.50-barrel, the highest price since October 2014. The narrative is beginning to increase as to why crude is staging this incredible but unexpected advance and its possible ramifications.
It is generally accepted the incessant rise is the result of legislative fiat that has made fossil fuel exploration prohibitively expensive, legislated fiat including banks to estimate the climate costs of energy loans outstanding and reserve for such costs.
Moreover, the political zeal to shutter traditional energy providers has created shortages, an environment exacerbated by inability to store energy produced by alternative sources. The technology has not yet been developed. If the sun is not shining or the wind is not blowing, alternative sources are of no use. It is the proverbial of placing the cart before horse.
Many are finding it oxymoronic the Administration is not only demanding OPEC to increase production while excoriating American producers, it has also championed the natural gas pipeline from Russia to Germany to “ensure stable supplies” while canceling vital domestic pipelines.
As noted last week, Green pledges are popular; green policies drive public revolt as prices rise because of lack of supplies. Is the Administration attempting to mitigate political and economic damage by asking our adversaries to help the West to overcome its self-induced wounds? Absolutely but if I were an American adversary would I only offer nominal support and offer lip support?
Speaking of legislative fiat, according to the financial blog FISUM, the SEC is considering regulations to ensure all “RIAs and other asset managers” to have a position in ESG compliant companies. Wow! Forced investing decisions via regulatory fiat. I have no idea whether or not this has a chance of being legislated, it is frightening that such is even being considered. Some might suggest this is akin to Soviet ordered capitalism.
As noted yesterday, this could be a pivotal week. There are many key data releases including the CPI, PPI and retail sales, a slew of Treasury auctions and a number of Fed speakers. It is also the commencement of third quarter earnings season.
The question of just how transitory inflation will prove to be will not be answered this week, but perhaps the very question itself will come under questioning. Another issue is just how high and persistent inflation needs to be before it really matters for financial markets. We may not be there yet, but the historical record suggests that we are not that far away with only history answering the question as to when the transition point was crossed.
Regarding earnings, it is widely accepted 3Q earnings will largely meet expectations as have been the case in the last fifty quarters for the exception of two, 2Q11 and 1Q20 according to B of A. The issue at hand is forward guidance as inflation and supply chain issues is far from being resolved. It is generally agreed upon companies that are able to pass increased costs onto the end user will outperform.
As noted several weeks ago, for the first time in a generation, all respondents to a Fed manufacturing survey indicated all were able to pass on increased costs, where the environment has radically changed to “availability is the primary determinate of purchasing decision” from “price is the primary determinate of a purchasing decision.”
Today the JOLTS Job Openings is released. Will it continue the record streak of job openings? As noted many times there are 1.25 jobs for every unemployed person. A major issue at hand is lack of skills and perhaps the lack of desire to work, maybe the result of government policy.
Last night the foreign markets were down. London was down 0.38%, Paris down 0.48% and Frankfurt down 0.32%. China was down 1.25%, Japan down 0.94% and Hang Seng down 1.43%.
The Dow should open little changed as all are assessing inflationary pressures from rising energy prices and signs of widening regulatory scrutiny by China. The 10-year is off 1/32 to yield 1.61%. Oil up another 0.50% to over $81/barrel.