Powell hits the gas, as oil rallies

Jerome Powell wants to see the US interest rates rise faster. At a speech titled ‘Restoring Price Stability’ yesterday, Powell told the National Association for Business Economics that there could be a 50-bp hike in May, and at subsequent sessions, if the Federal Reserve (Fed) officials conclude that it’s more appropriate to move faster.  

And it will probably be more appropriate for the Fed to move faster, as inflation will certainly continue spiking toward fresh multi-decade highs given that the latest numbers don’t even factor in the war-led surge in oil and commodity prices, and the Covid-led restriction measures that add an additional pressure on the global supply chain crisis.  

Powell is now playing with an open hand, as he doesn’t necessarily rock the boat with surprise hawkish moves which would get investors to dampen their assets faster than necessary. And a panicked market is not the ideal environment to hike rates. 

Activity on fed funds futures hint that the probability of a 50-bbp hike stands near 65%, hinting that there is more to be priced in for the Fed hawks.  

Still, the US 2-year yield could hardly rise faster, and the spread between the 2 and the 10 year is about to turn negative. A yield curve inversion is interpreted as a sign of a coming recession, although UBS warns that a recession started on average 21 months after a curve inversion – ranging between 9 and 34 months, and that the S&P500 stocks returned an average of 8% in the 12 months following the inversion of a 2-10 year yield.  

Market reaction to Powell’s hawkish speech was contained. The stocks in New York sold off as a kneejerk reaction, but almost erased all losses with a late session rebound, as investors thought that higher rates would be less toxic for companies than higher inflation in longer run. Yet gains remain vulnerable to macroeconomic and geopolitical pressures, and the risk of rapid selloffs remains on the table as uncertainties loom, energy prices continue rising and boosting the inflation expectations and the Fed hawks. 

Oil rallies, again

Energy and commodity stocks remain ideal for hedging, one of the biggest gainers in the US session yesterday was Marathon oil, which rallied 8.5% as US crude gained more than 7% and is up by another 2.5% to $115pb at the time of writing. The next natural target for the bulls stands at the latest resistance of $130pb, if cleared will revive the speculation of a further advance toward the $150pb mark.  

The major drivers of the latest rally are an attack on Saudi facilities on Sunday and the EU’s consideration of an embargo on Russian oil. The biggest risk of sanctioning the Russian oil is to lose the Russian gas along with it, and the Russian gas stands for about 40% of the European gas imports. But as Qatar agreed to work on supplying Germany with LNG, the idea that the EU could walk away from the Russian oil became more realistic.  

European gas futures tanked 8% yesterday, as gas supply via Ukraine remains good for now, and the American LNG stocks are jubilating with the European efforts to scrap whatever comes from Russia. Chesapeake gained more than 3% yesterday, as Antero resources jumped 3.5%, EQT near 5% and Range Resources more than 1%.  

On the index level, the FTSE was the only winner yesterday in Europe as energy companies pushed the index higher with BP and Shell gaining more than 4% each. FTSE futures outperformed the US and European peers in the overnight trading session on the back of firmer oil and commodity prices and cheaper sterling.