What $100 oil could mean for inflation … home prices reverse and shoot higher unexpectedly … Q1 earnings estimates are coming down, but down enough? … a big event with Luke Lango
OPEC+ just jolted inflation with a defibrillator.As we noted in yesterday’s Digest, on Sunday evening, OPEC+ announced oil production cuts of more than 1 million barrels a day. This was a reversal from its previous position of keeping oil production levels steady.Here’s more from Bloomberg:
It’s a significant reduction for a market where — despite the recent price fluctuations — supply was looking tight for the latter part of the year.Oil futures soared as much as 8% in New York on Monday while gasoline also gained, adding to inflationary pressures that may force central banks around the world to keep interest rates higher for longer.
But this production cut isn’t the only tailwind behind higher energy prices, and potentially, inflation. For more, let’s jump to Louis Navellier’s Accelerated Profits Weekly Update from this morning:
…These recently announced production cuts aren’t alone in placing upward pressure on crude oil prices.The American Petroleum Institute reported that crude oil inventories declined by 6.1 million barrels in the latest week. That marked the biggest weekly drop since November.The Energy Information Administration also reported an even bigger decline of 7.5 million barrels of crude oil, as well as a 2.9 million drop in gasoline inventories.The bottom line: Slashed production coupled with falling inventories will drive crude oil prices higher, especially as demand increases in the upcoming weeks and months.We are now in the midst of a seasonal spring surge, and $100 per barrel (or more) is even more likely now.
To what extent will this resurgence of higher oil prices impact inflation… which impacts the Fed… which impacts hopes of a shift to dovish policy?
Energy costs make up nearly 10% of the Consumer Price Index
Given this weighting, energy costs impact the headline number the Fed watches every month. And in the wake of Sunday’s news, analysts are hiking up their price estimates for oil.Louis just pointed toward $100 oil, and he’s not the only one.From Bloomberg:
[This latest OPEC+ news], combined with the extension of the Russian production cuts, led [Goldman Sachs] to raise its Brent oil forecast to $95 a barrel for December this year from $90 earlier, and to $100 for December 2024 from $95.
And here’s The Guardian with the spill-over into inflation:
The surprise move by Opec+ could scarcely have come at a worse time for the US, the UK and the EU – all of which are battling to reduce upward pressure on the cost of living…Higher oil prices make production and transport more expensive, and reduce the spending power of consumers.Central banks have been expecting inflation to fall sharply this year on the grounds that there will be no repeat of last year’s increase in energy costs triggered by Russia’s invasion of Ukraine. The Opec+ move threatens to make the fall in inflation a more protracted affair.
But what about slowing global growth? Is there a case to be made that the production cuts will merely stabilize what otherwise would have been falling energy prices?Here’s CNBC featuring Paul Sankey, who is ranked number one by “Institutional Investor” for energy independent research in 2023. He’s also calling for $100 oil:
Sankey doesn’t believe the economic slowdown will impact his bullish outlook. He pointed to the start of driving season, U.S. refineries coming back online and natural seasonal demand as other factors that could boost prices…“Global oil production capacity really has a problem. I mean we really only have growth in Guyana outside of OPEC+ and almost nothing else to speak of…”
While higher energy prices will complicate the Fed’s policy roadmap looking forward, it’s not the only unwelcomed recent development.
Yesterday, we learned that cooling housing prices reversed in February, notching their strongest one-month gain since May of last year
The Fed wants housing prices to come down. Shelter costs make up the largest percentage of the Consumer Price Index – about 33%.In the wake of the pandemic housing mania, which sent home prices vertical, the Fed has been trying to prick this bubble.Soaring mortgage rates, based on the Fed’s historic rate hikes, have been chipping away at nosebleed shelter costs. But even today, home prices are only 2.6% below their peak last June. For context, the median U.S. home price surged 46% since the pandemic.We can thank cooler mortgage rates for this February bounce.Here’s CNBC with more:
Unexpectedly strong home sales at the start of this year reversed a sharp, several-month decline in home prices. Mortgage rates are behind the swing…By June [the 30-year fixed rate mortgage] had gone from around 4% to just over 6%. Sales slowed down, and prices followed. By fall, the rate shot over 7%, and home prices began cooling more quickly.In December and January, however, mortgage rates began pulling back, and homebuyers were quick to take advantage. Closed sales of existing homes in February, which represented contracts signed in December and January, shot a remarkable 14.5% higher, according to the National Association of Realtors.
This heavy demand of would-be buyers on the sidelines, ready to swoop in, will act as a buoy on prices – not what the Fed wants.The next Consumer Price Index report comes out a week from tomorrow. We’ll be watching for the latest on shelter costs, as well as comments from the various Fed presidents in the days to follow.
Finally, next week kicks off an important Q1 earnings season
Are we in for a rough earnings season? Or can U.S. businesses avert a painful hit to earnings?Broad consensus is for a hit to earnings. Here’s more from FactSet, which is the go-to earnings data analytics group used by the pros:
For Q1 2023, the estimated earnings decline for the S&P 500 is -6.6%. If -6.6% is the actual decline for the quarter, it will mark the largest earnings decline reported by the index since Q2 2020 (-31.8%) …Given the continuing concerns in the market about bank liquidity and a possible broader economic recession, did analysts lower EPS estimates more than normal for S&P 500 companies for the first quarter?The answer is yes.
FactSet goes on to point out that analysts lowered EPS estimates for the quarter by 6.3% (to $50.75 from $54.13) from December 31 to March 30. For context, during the past five years, the average decline in the bottom-up EPS estimate during a quarter has been just 2.8%. So, these cuts are significant.The question is “are they significant enough?”Mike Wilson, Morgan Stanley’s chief investment officer doesn’t believe so:
Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes…This is typically how bear markets end—i.e., P/E multiples fall precipitously and unexpectedly, catching many investors off guard.The recent underperformance of small caps and low-quality stocks suggests it could be imminent.
Of course, Wilson has been a market bear for some time now. And not all analysts hold this conviction, perhaps most notably, our own Luke Lango, who is very bullish about today’s market environment.But this leaves investors in a tough position – is this truly a transition market from bear to bull? Or is this just a respite within a broader bear market that has one most major decline left in it?Well, what if you could make money either way?
On that note, a reminder to join Luke tomorrow afternoon at 4 PM EST for an important live event that details a “breakout trigger”
The market is not one big monolith that rises and falls in unison.The same factors that hurt one company might be tailwinds for another – think of the rise of the internet crushing brick and mortar retail while being a massive tailwind for leading online retailers.Pick a variable and it’s the same – from oil prices, to interest rates, to the value of the U.S. dollar, while some stocks take it on the chin as these variables change, other stocks benefit.This supports a saying we have around the InvestorPlace offices – there’s always a bull market somewhere.Tomorrow’s event with Luke is about how to find these micro bull markets and take advantage by evaluating the one thing that truly matters – the price chart itself.As my colleague Luis Hernandez recently wrote:
Luke doesn’t care about the sector, the latest news, or even the name of the stock.When Luke sees this pattern in a stock chart – what he calls the “breakout trigger” – he knows it’s time to act.Tomorrow at 4 PM EST, Luke will show you everything else you need to know. What the pattern means… how to spot it for yourself… and how you could leverage it for fast profits.
We’ll dive further into Luke’s breakout trigger in tomorrow’s Digest, but to go ahead and reserve your seat at the event, click here.Bottom line: No one can say for sure whether a new bull market has begun or the bear has one last attack in it, but Luke’s system will show you how to sidestep that uncertainty by finding the localized bull markets that are “always happening somewhere.”Have a good evening,Jeff Remsburg
