Fed takes a punt on inflation

Abraham George Macro View

There is one thing the Fed will never admit but that is also the thing that concerns them the most. In their CPI calculations, food and energy prices are not included. But when oil prices go up significantly their antenna’s go up. Since Election Day, oil prices have moved up from $37 to $53. It is up 43% and it may continue to go higher. Exxon is up 45%, Chevron is up 30 % and EOG resources is up 57%.

All since Election Day. Why is that? Isn’t that the industry that we thought will be most hit under a Biden presidency. Biden has already signed orders to reverse many plans Trump had implemented. With Biden’s focus on clean energy, the biggest investors in the world are withholding investments in new exploration projects. Therefore the existing producers will get more business and get to sell their production at higher prices. Until we are all driving Tesla cars or similar alternate energy cars, oil prices will continue to remain very volatile and may even shock you on the upside.

What does this all tell about inflation? That is one thing that the market is underestimating but the Fed has already promised us that they will extend their rope further and tolerate a higher inflation. It is not easy as you think to tame inflation if the Fed falls behind the curve. At least that’s what history has taught us. But I am sure the 1000-odd PhD’s at the Fed collectively knows a thing or two better than you and me.

Equities

The Dow and the S&P 500 are in a potential time window for a high. The price of S&P 500 at 3830 is also at a very significant support level. A significant break down today or this week could increase the chances that the high at 3861 on Jan 21 is significant.

Bonds

The meandering patterns in bond prices are not worth pursuing. The thing to note is if prices rise to 170 or 171 they are meant for selling or a break below 168 is worth following.

Euro

The recent pullback from its recent low of 1.2054 has retraced almost 50 pct of its recent highs. There may be more strength left in this pullback. However a close above 1.2230 to 1.2245 is not a good sign for further weakness in Euro.

Gold

We are not sure if the recent rise to 1875 has completed the corrective retracement. If not a potential rise to 1890 to 1900 cannot be ruled out. In any case the path of least resistance should be to the downside.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.