Inflation Walk-Back & China

Macro Perspectives: Wed 5 May 2021

We are more than halfway through Q1 earnings season, and S&P 500 earnings compared to Q1 of last year are running at a 45% growth clip. For the economy overall, first quarter growth came in at a sizzling 6.4%, with the second quarter projected north of 13% GDP growth.

With this story unfolding, we are finally seeing cracks in the Fed's inflation denial campaign.

The President of the Dallas Fed said that it would make sense to start discussing how they would go about tapering QE. Which was followed by Yellen (former Fed Chair and now Treasury Secretary) speaking at a school, saying that "interest rates will have to rise somewhat to make sure that our economy doesn't overheat."

That combo punch is good enough to hit the stock market, and it did.

But don't worry, the walk-back will follow. Already, Yellen has appeared on the schedule to be alongside the White House Press Secretary for the Friday press conference. Why will this admission by policymakers, to the obvious inflationary forces that are being seen and felt all around us, be walked back?

Because the administration still has another $4 trillion of spending programs to get through Congress, and Congress has been using the excuse, to support more profligate spending, by saying that the experts at the Fed don't see inflation risks.

Then, just as I concluded the day's journal, Yellen walked it back, saying that she doesn't think there will be an inflationary problem.

Let's talk about oil…

A couple of weeks ago, Biden hosted the virtual Climate Summit with over 30 world leaders in attendance. We looked at the chart of crude oil, after Biden's said this: "I see workers capping hundreds and thousands of oil and gas wells" around the country.

As we discussed, despite the intent of the message, to promote/telegraph the move to "clean energy," this was more likely to be a catalyst for higher oil prices, as they can remove supply, but demand isn't going away anytime soon.

$XLE, whose chart was highlighted in the post, is up 9.4%.

Crude oil is up 7% on that catalyst of the Climate Summit, and now, a new catalyst has entered: The prospect of war.

Just when you thought it couldn't get more chaotic, with the frenzy policy directives in DC, the China threat has become a point of focus.

The Sydney Morning Herald in Australia ran a headline yesterday quoting a general saying "War with China is likely." The U.S. media has officially done a flip-flop on China, with a NY Times headline "Is there a war coming between China and the U.S.? 60 Minutes interviewed the Secretary of State on Sunday night, where he talked tough on China.

This is all just over the course of a few days.

Add to this, the G7 foreign ministers are meeting in the UK, where China relations have been the big focus.

So, with the specter of a China confrontation being introduced, expect the move in commodities to kick into another gear, especially oil prices.