Stocks had a mixed close yesterday with any hopes of a relief rally being held back by rising bond yields. Durable Goods Orders ticked up last month in a sign the economy is… not weak.
Crude language. When the Fed talks about inflation, it is usually referring to so-called core inflation which doesn’t include food and energy. I recently wrote a long piece on this, so I won’t get too deep into it. The reality is that, despite what economists think, consumers still have to pay for food to fuel their bodies and gasoline to fuel their cars, so they DO matter. That was my premise… and it still is.
Let’s look further into that. The Fed raises interest to make our lives so painful that we simply stop buying things and allow prices to moderate. Basic economics: lower demand means lower prices… ceteris parabus. “WHOA Mark,” you are thinking, “did you just add some Latin to that last statement!” I sure did, my loyal readers. Economists like to use that fancy Latin term to say, “all other things kept constant.” So, if demand goes down and supply doesn’t change (ceteris parabus), prices go down. But what if supply goes down? If supply goes down, prices go up… ceteris parabus. Now let’s go back to energy. I know that some of you drive electric cars, but bear with me on this because most of the world still drives combustion engine cars at the moment. You must fill up your car with fuel in order to get to work… it’s not an option. So, if the price of gas goes up, you have very little choice other than to simply curse at the gas pump and complain to your pets, who, it turns out, are great listeners. Unfortunately, in this case, we are price takers, because fuel is, for the most part, highly elastic. More on that new term in another piece, but for now, just understand that consumers have very little influence on the price of gas. You with me? Good, let’s get further into it.
So, who or what does influence the price of gas? Crude oil futures this morning are around $93 per barrel. For reference, they were around $75 a year ago. Why are crude oil prices higher today than they were a year ago? Because OPEC+ cut supply, intentionally, to bring up the price per barrel. Remember, supply down, prices higher, from above? Some basic science… you need crude oil to make gasoline. Now, some more basic science. Crude oil is used to make all sorts of things that we use daily, for example, plastic, asphalt for roads, lubricants, heating oil, and even fertilizer. So, when the price of crude oil goes up it can, and it does impact inflation at some point.
Hopefully, you are arriving at my point. How can the Fed influence the price of crude oil? That is a trick question. It cannot, not directly at least. I suppose that higher interest rates could cause so much pain in your budget that you will simply start walking everywhere and the reduced demand for fuel would force prices lower. That is not likely to happen, but even if it did, OPEC+ could simply cut supply to raise prices. So, you see, energy prices are very much a part of the prices of many things that we purchase on a daily basis, and those costs are on the rise once again, and the Fed, despite its best efforts, has very little control over those costs. Finally, in case you haven’t noticed, crude oil has been rallying. Indeed, it is likely that global demand has something to do with it, but it is mostly driven by supply, as you now know. If we look at futures, we see the market in a state of backwardation, which indicates near term bullishness on crude. But it also means that traders expect prices to moderate somewhat by the end of the year. That would be great if traders are correct. Pay attention to crude oil futures today… everyone else will be… except maybe the Fed.
WHAT’S HAPPENING BEFORE THE BELL
CarMax Inc (KMX) shares are lower by -10.59% in the premarket after the company announced that it missed EPS projections by -2.34%. In the past 30 days, 25% of analysts have revised their price targets: 3 up, 1 down, and 12 unchanged. Potential average analyst target upside: +10.0%.
Micron Technology Inc (MU) shares are lower by -4.56% on high volume in the premarket after it announced that it beat on EPS and Revenue estimates by +9.43% and +2.05%. Despite the strong beat, the company’s Q3 guidance included a broader EPS loss than analysts were expecting. Dividend yield: 0.67%. Potential average analyst target upside: +16.3%.
YESTERDAY’S MARKETS
NEXT UP