• 19 hours Three Energy Casualties In The Coronavirus Crisis
  • 2 days Markets Crumble As Coronavirus Panic Peaks
  • 2 days Cobalt May Be The Key To Clean Hydrogen Fuel
  • 4 days How Taxpayers Are Bankrolling The EV Revolution
  • 5 days The Coronavirus Is Crushing China’s Car Market
  • 6 days Fighting For Survival In The Streaming War
  • 7 days Want A Job? Forget About A Bachelor’s Degree
  • 7 days Another Major Car Maker Is Backing Hydrogen
  • 8 days Are Americans Finally Sold On Soccer?
  • 8 days Is The Tech Bubble About To Burst?
  • 9 days Coronavirus Could Cost Tourism Industry $80 Billion
  • 9 days What Web Traffic Trends Can Tell Us About The World
  • 9 days Miners Face Greater Headwinds
  • 10 days Boris Johnson Proposes Billion Dollar Bridge To Northern Ireland
  • 11 days Goldman Slashes Oil Price Forecast By $10
  • 12 days Tesla Raises $2 Billion In Share Selloff
  • 13 days What The T-Mobile Takeover Of Sprint Really Means For Markets
  • 13 days The U.S. Has Charged Huawei With Racketeering And Conspiracy
  • 13 days How Hydrogen Could Become The Fuel Of The Future
  • 14 days Millennials Can’t Retire, But They’ll Still Have To Help Their Parents
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Ashraf Laidi

Ashraf Laidi

AshrafLaidi.com

Ashraf Laidi is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" - Wiley Trading.

Contact Author

  1. Home
  2. Markets
  3. Other

Fed will Cut 'Transitory' in September

A Russian saying goes "nothing is more permanent than temporary". At the Federal Reserve, "transitory" may mean "permanently", or could also mean "we have no clue". Oil has dropped by 57% since over the last 12 months but the +200 PhDs at the world's biggest central bank continue to describe lower energy prices as "transitory". At the June FOMC, the Fed made some progress and finally dropped its phrase from the FOMC statement that "energy prices have stabilized".

US Crude Oil Weekly Chart

We long asserted that it will be impossible for the Fed to raise rates this year if US crude oil remains below $48.00 -- even if the next non-farm payrolls come in between 200K and 300K. The October-March decline has already triggered a chain reaction of broadening cuts in capital and labour expenditure, which effectively cast a spell on the suppliers of these energy and mining companies. And barely when oil began its spring time recovery, the declines emerged anew.

Yesterday's release of US July import prices contracted (not slowed) by 0.9% m/m and 10.4% y/y, the biggest fall since 2009. We expect oil to inevitably fall below $40, which would be a 60% decline in oil prices, thus, amplifying the impact on the already sub-Fed target inflation readings.


Market-based vs survey-based inflation

Next week's CPI release will be in focus. But the 5-year forward break-even inflation reference (5-year treasury yield minus US inflation-linked bond forward 5 years), has dropped back below 2.0% from last week's 2.4%. More importantly for the Fed, will be the crucial core PCE price index, due later this month, now at 1.3%y/y, below the Fed's 2.0% target.


Jackson Hole will be about inflation

Holding oil and the US dollar constant (if we can realistically do that), the path for a Fed hike this year does make sense. But bringing back reality into the situation, including a disinflationary USD and recessionary oil/mining sector, the question should re-emerge at the Fed's annual Jackson Hole symposium, where unsurprisingly the topic of this year's conference will be "Inflation Dynamics and Monetary Policy".

 

Back to homepage

Leave a comment

Leave a comment