Employment growth remains strong as rate hikes continue to contribute to a now rising federal deficit that is supporting growth, contrary to Fed expectations. This leads to more hikes intended to soften growth and inflation that in fact support growth and inflation:
The Saudis are on the warpath after a falling out with President Biden, scrapping their July deal that included bringing down oil prices (which was probably accomplished by the Saudis confidentially discounting their official selling prices). It now looks to me like prices are to rise to the point where demand sufficiently falls off, which could be at least $10/gal gasoline/$300 crude oil, as a guess, and bring on a serious recession.
If so, headline inflation will consequently resume its upward climb and further confound the Fed and the administration that has the rate thing backwards:
While total corporate earnings are being sustained, the allocation is being shifted from non-energy to energy related enterprises, while the higher rates contribute to reduced valuations in general.
And as the non-energy stocks have the higher price to earnings ratios, both the earnings shifts and the higher discount rates bring their prices down more than the energy stocks go up, resulting in an overall drop in equity prices.
No recession indication here- this is a forecast for Friday’s employment report:
My take is at the July meeting with President Biden the Saudis agreed to bring prices down in return for various favors. The only way for this to happen was for them to confidentially discount their official selling prices with their customers, and for this was done without consultation with the rest of OPEC+. For reasons unknown to me that agreement has come to an end. Selling price spreads to benchmarks have been modestly increased and the discounting has ended. Additionally OPEC+ has announced large production cuts as cover for the actual reason prices are have reversed and will now rise continuously until policy changes or demand, which is currently strong sufficiently collapses.
Furthermore, the proposed price caps on Russian oil, if implemented, will most likely and immediately result in higher prices as the world needs Russian oil a whole lot more than Russia needs $US.
“Oil prices surged almost 2% on Wednesday, with WTI futures rising to almost $88 a barrel and Brent crude to above $93 a barrel, on expectations of tighter supply. Ministers from OPEC+ agree to cut production by 2M barrels per day today, double the volume previously flagged. The move came despite pressures from the US, with Washington arguing that economic fundamentals do not support a reduction in production. Still, output cuts could have a smaller effect on global supply because several countries are already pumping well below their quotas. Meanwhile, the EIA report showed US crude stocks unexpectedly fell by 1.356 million barrels last week, the second consecutive drop and the biggest in five weeks.”
No evidence of demand destruction here (refineries are the only buyers of crude oil):
US consumption has shifted towards the purchase of domestic output while exports remain firm, helping GDP, as the cost of energy for businesses remains lower in the US than most other parts of the world:
“Central banks purchase a net 270 tons of gold through the first half of the year. This fell in line with the five-year H1 average of 266 tons.”
This is the driving force behind gold. When central banks buy it, they pay for it by crediting a central bank member bank’s account on their own books. It is spending that adds to currency depreciation and ‘inflation’ in general. I call it off balance sheet deficit spending as it ‘doesn’t count’ as deficit spending as reported by the local government or international agencies like the IMF and World Bank. Note that Turkey was the largest buyer which I calculate to be about $5 billion of gold purchases.
No sign of recession from rate hikes here:
Lower than pre-Covid level, but seems to be going sideways since the rate hikes:
This series has continued to weaken since the rate hikes, even as real estate lending continues to grow and new home construction is at an all time high:
“Mortgage application in the US sank 14.2% in the last week of September, the biggest drop since April 2020, pushing the index to the 218.7, the lowest since 1997. Higher borrowing costs continue to weigh on demand but “there was also an impact from Hurricane Ian’s arrival in Florida last week, which prompted widespread closings and evacuations. Applications in Florida fell 31%, compared to 14% overall, on a non-seasonally adjusted basis“, Joel Kan, an MBA economist said.”
So far so good for Q3 that ended Sep 30- about in line with pre-Covid growth rates:
Much like the US, much of the rest of the world is hiking rates with high debt/GDP and supporting their economies that had slowed from fiscal contraction with massive government interest payments- universal basic income for those who already have money:
Looks like the pro forecasters see accelerating earrings ahead- yet more evidence the rate hikes aren’t working in the intended direction: