August CPI data disappoints … crypto has been pushing higher, but it’s not a green-light yet … why Eric Fry believes it’s not time to bet against the oil trade
As I write Tuesday morning, it’s a bloodbath for stocks, and we have a hotter-than-expected Consumer Price Index (CPI) print to thank.Before the market opened, we received the August CPI numbers. Economists were expecting the year-over-year figure to come in at 8.1% and the month-over-month number to fall 0.1%.Instead, year-over-year came in at 8.3%, and month-over-month rose 0.1%.Here’s CNBC with the specifics of the CPI report:
Inflation rose more than expected in August as rising shelter and food costs offset a drop in gas prices, the Bureau of Labor Statistics reported Tuesday…Energy prices fell 5% for the month, led by a 10.6% slide in the gasoline index. However, those declines were offset by increases elsewhere.The food index increased 0.8% in August and shelter costs, which make up about one-third of the weighting in the CPI, jumped 0.7% and are up 6.2% from a year ago.Medical care services also showed a big increase, rising 0.8% on the month and up 5.6% from August 2021. New vehicle prices also rose, increasing 0.8% though used vehicles fell 0.1%.
In response to this surprise report, stocks are down big and the 10-year Treasury yield is up big.As I write, all three major stock indexes are in the red, with the Nasdaq off the most at -4.1%. Meanwhile, the 10-year yield has shot up to 3.43%, which isn’t far below June’s highwater mark of 3.48%, which was the highest level in 11 years.
Given today’s CPI print and the surging treasury yield, some traders are suddenly asking “will the Fed raise rates by 100 basis points next week?”
At this time yesterday, while the majority of traders were expecting a 75 basis-point hike from the Fed next week, a minority were thinking it would only be 50 basis-points – especially if today’s CPI data came in soft.We saw this by looking at the CME Group’s FedWatch Tool. This reflects the probabilities that Wall Street traders are giving to different fed funds rates at various points in the future.Yesterday, these traders had odds on a 75-basis-point hike next week at 90% and odds on a 50-basis-point hike at 10%, as you can see below.
How quickly things change.In the wake of today’s CPI data, 16% of traders are now expecting a full 100 basis-point rate from the Fed next week. Yesterday, these odds were at 0%.And the odds off that 50 basis-point hike?0%. It’s not even on the board anymore.
As noted a moment ago, the market is not reacting well to all of this.But stocks aren’t the only asset under pressure…
As bitcoin sells off today, what can crypto investors expect in the coming months?
As I write, bitcoin is down nearly 5% as traders are bailing on risk assets. But if we look at the bigger picture, the grandaddy crypto has actually been enjoying bullish momentum since last Monday.Not only has bitcoin’s price broken back above the key level of $20,000, yesterday, it topped $22,000. But as today’s selling pressure mounts, it has retreated back to $20,927 as I write.Ignoring today’s CPI-related volatility, how close are we to the new bull market that crypto investors have been waiting on?For that answer, let’s turn to our crypto experts, Luke Lango and Charlie Shrem of Crypto Investor Network.From their Saturday update:
The cryptocurrency markets staged an impressive comeback bid this past week, but we caution against growing too bullish on the short-term price action. Our technical and fundamental indicators continue to point toward more consolidation for cryptos in the months ahead.On the bullish side of the coin, those same indicators continue to suggest cryptos will break out to the upside in late 2022 before entering a new boom cycle in 2023. However, that breakout likely remains a few months away, and therefore, we still have time to remain patient and wait for better buying opportunities.In short, stay on the sidelines, but get ready to pounce – the time to buy for the next boom cycle is likely just months away.
Luke and Charlie point to some positive drivers to support this conclusion.Specifically, last week’s bullish action came on the back of disinflationary signals from the global economy. In short, commodity prices – namely, oil prices – collapsed last week, while the European Central Bank and Bank of Canada both hiked rates by 75 basis points.What we’re seeing is economic demand dropping, which is pushing commodity prices lower. Add to that rate hikes (with more to come) and demand destruction will continue – which will result in easing inflation numbers.This is bullish for crypto.However, let’s return to Luke and Charlie for why this isn’t a green light to buy today:
[Bitcoin’s recent bounce] isn’t technically indicative of a breakout. We didn’t take out previous highs and, instead, are just languishing in the middle of a recent sideways consolidation channel.To that end, the BTC breakout this past week looks most like a continuation of a three-month consolidation pattern.
Adding to Luke and Charlie’s caution is the lack of firepower in the recent rally.Specifically, cryptos have developed a close correlation with high-flying growth stocks. The summer rally was huge for growth stocks – many of them soared 50%, 60%, 70%-plus.Those gains weren’t replicated in the crypto sector. Luke and Charlie point out how bitcoin only retraced 13% of its bear market losses in the summer rally. Hardly inspiring.If bitcoin was to mirror the S&P 500’s near-60% retracement, we would’ve seen a bitcoin price of $45,000 or more.So, for now, Luke and Charlie are preaching caution. But looking further out, get ready for a boom thanks to lower inflation, a softer Fed, a resilient economy, and a history of risk assets rallying after midterm elections.Put it all together, and here’s Luke and Charlie’s gameplan:
Don’t get fooled by this rally. Let it happen. Let it fizzle out and find support again below $20K. And ultimately, let the descending triangle pattern on BTC converge. Then, once we breakout to the upside of BTC’s descending price trendline, that’s when we buy.We believe that moment is just months away. To that end, we’re continuing to preach patience, but we are now also saying: “Get ready.”The next crypto boom cycle is almost here.
Finally, are you banking on a continued collapse in oil prices? You’re likely to be disappointed, says our macro expert, Eric Fry
As a “macro” investing expert, Eric was bullish on today’s oil trade from the very beginning, leading his subscribers to triple-digit gains in recent months.But as you’re likely aware, crude prices have sold off steeply since June. So, is this trade done? Will a global economic slowdown mean $60 oil is right around the corner?Let’s jump to Eric’s latest issue of Investment Report:
Now that the crude oil price has erased all of its “Ukraine gain,” we investors are left to wonder, “Was that it? Did the oil bull market just end?”I doubt it.The recent pullback looks like a classic correction in an ongoing bull market – a pause that refreshes.
In coming to this conclusion, Eric notes how global crude supplies are not as elastic as they once were. Rising demand will not conjure up new supplies as automatically and easily as they did in the past. In fact, most OPEC members are struggling to maintain production today, much less increase it.And don’t forget – last week, we learned OPEC is planning on cutting production.Meanwhile, U.S. oil production is well-below its peak level. Plus, crude inventories, expressed as “days of supply,” have fallen to their lowest levels in 20 years.Back to Eric:
These trends are unequivocally bullish for oil prices. Yet, very few investors seem to believe them. Investor skepticism toward oil and oil stocks has reached extreme levels.For example, the S&P 500 Energy Sector is now trading at a record-low discount of 72% below the valuation of the S&P 500 Information Technology Sector, based on estimated price-to-EBITDA ratios.
Better still, we’re seeing a contrarian bullish signal playing out with the Commitments of Traders (COT) reports
These reports reflect how professional money managers are positioning themselves in an asset. Eric points out that they’ve reduced their bullish bets on crude to the lowest levels in nearly a decade.Here’s Eric with why this is actually bullish:
Ironically, that’s a positive sign for oil prices. Whenever this particular group of investors is leaning hard to one side of a particular trade, it usually pays to take the other side of that trade.As a group, these investors are not exactly the “dumb money,” but they are certainly not the “smart money.” I call them the “flock money” because they tend to act like sheep, especially at the extremes of a particular market.They flock toward the identical trade at the identical time. When that happens, the trade becomes “crowded,” and there are very few investors left to buy into the trade and push its price higher. That’s when a reversal usually takes place.
Still skeptical?Eric provides a fascinating detail that supports his takeaway. It turns out that it was on June 16 that money managers placed their largest bullish bet on crude in three years.What’s the significance?June 16 marked the precise moment when crude prices topped out.We don’t have enough space in today’s Digest to cover all of Eric’s research on oil. If you’re an Investment Report subscriber, make sure to get all those details in your latest monthly issue.But here’s Eric’s bottom-line to take us out today:
[The bullish factors Eric has highlighted] do not guarantee a return to $100 oil, but they point in that direction, which is one of the reasons I added a new energy play to the Fry’s Investment Report portfolio last week…As I have stated several times previously, the crude market has probably entered a “new normal” in which triple-digit prices become more common than double-digit ones……The next phase of the crude oil bull market might begin soon.
Have a good evening,
Jeff Remsburg
