Although last week’s US employment data showed that the US economy is heading in the right direction, it failed to provide us with the evidence that the US economy is making sufficient progress to justify the Fed’s recent dramatic dot plot shift.
The dot plot, which is designed to show each policymaker’s interest rate forecast for each of the next three years, is now projecting that there will be two interest rate increases in 2023, up from none just three months ago – while two policymakers see six increases!
As a consequence, we are hoping tonight’s release of the minutes from the Fed’s last monetary policy meeting will clarify their thoughts.
As the minutes are released an hour before tonight’s football semi-final kick-off, we will have enough time to look for comments and clues regarding policymakers’ tolerance for an inflation overshoot, given that at the end of last year the Fed changed its inflation target from 2% to one that averages 2%. While this change was designed to allow inflation to overshoot 2%, to enable it to make up for the time it has spent running below 2%, the Fed has given little away on the time periods.
Additionally, these minutes will be especially interesting after yesterday’s (6 July 2021) ISM Services reading. While the reading came in well above 50, which is the line separating expansion and contraction; at 60.1, the reading was lower than May’s 64.0, suggesting that economic activity may be already starting to slow and normalise.
Elsewhere, headlines have been dominated by the very public and bitter OPEC argument between Saudi Arabia and the UAE over oil output increases and quotas.
Although this has increased market speculation that the oil price will move higher and potentially breach $100 a barrel, we believe this is wrong: instead, in our opinion, it merely highlights to us the lack of discipline that OPEC’s disparate members have – and with UAE obviously wanting to exploit the current price by boosting output, there is a good chance that discipline could completely unravel and member countries start pumping at will, resulting in a lower oil price (which incidentally could relieve some of the current inflationary pressures and help boost global economic growth).
And if we are wrong (as there will no doubt be a lot of closed-door meetings in the coming days) and OPEC reach an agreement which maintains the oil price at around $75 per barrel of Brent, then we would expect the US shale oil producers to start increasing production (as we believe they are the new swing producer and price manager).
Investment Management Team