Fed’s Mester: I would pencil in going a bit above 4% in Fed funds

<ul><li>Business contacts tell me not looking for as many workers as before</li><li>But these are only nascent signs, labor market still quite strong</li><li>Need to see several months of monthly changes moving down on inflation</li><li>We will need to raise rates and then hold them there for awhile</li><li>We’ll bring rates back down once inflation gets closer to our 2% goal</li></ul><p>This is a clear roadmap on how to think about the path of interest rates. Right now, there’s a growing likelihood that July and August CPI will be negative because of the declines in oil and gasoline prices.</p>

This article was written by Adam Button at www.forexlive.com.

The data that’s driving the rout in oil prices is barely believable

<p>Oil is at the lowest since the start of the Ukraine war today but that data that’s weighing on crude has many market participants scratching their heads and some accusing the government of outright manipulation.</p><p>In question is US gasoline demand. Official weekly data show that July US gasoline demand was below 2020 levels.</p><p>Intuitively, that doesn’t make sense. Yes, gasoline prices are much higher than 2020 but the world was in the midst of a pandemic and far more people were working from home in the summer of 2020.</p><p>But the data is what it is and yesterday’s numbers were soft once again at 8540k. That was the main reason for the drop in oil yesterday and the decline through $90 today for the first time since the start of the Ukraine war.</p><p>I’ll take a look at some factors for why the data may be right and why it might not be.</p><p>Why it might be true:</p><p>1) Elasticity</p><p>Gasoline is traditionally one of the least-elastic commodities — people need to drive. However there’s a limit and we may have it it in early July as gasoline cracks below out and US prices hit record highs. Around the July 4th weekend there were clear signs of demand destruction. Perhaps we hit a breaking point and drivers are cutting discretionary miles whereever possible.</p><p>2) Efficiency</p><p>There’s no doubt that cars are getting more efficient and people are switching to EVs and hybrids. That’s a secular trend that will weigh on gasoline demand in the long term. But compared to a year ago? The auto cycle is a long one and it will chip away at demand, but at a slow pace.</p><p>3) Flying more</p><p>The idea is that people and families are flying more this summer and driving less. Intuitively it makes sense. People were stuck driving to nearby locations for vaction for two years and now are branching out further. We’ve all see the nightmares at airports and flying is as busy as ever. Is that killing driving demand? Possibly but given that so much of driving is commuting and errands, it’s hardly believable that it could account for a 10% decline in demand.</p><p>4) Running on empty</p><p>According to GasBuddy, US retail gasoline prices have now fallen for 49 straight days. Following the gasoline price shock in late June, we could be seeing a behaviour shift in drivers where they are waiting longer to fill up gas tanks. That has been the right move for the past seven weeks and the drawdown in collective gas tanks could temporarily be masking demand.</p><p>5) Commercial pumps</p><p>The EIA data measures commercial gasoline demand — so from gasoline stations rather than consumers — so similar to the above, we could be seeing gasoline stations running with less inventory. That makes sense because right now the value of inventory is falling daily. Again, this would only be masking demand.</p><p>6) A sign of recession</p><p>All the talk of recession may have people cutting back on driving and spending. We’ve heard from Visa lately that’s not the case but weekly gasoline demand is some of the most up-to-date data out there. But if gasoline demand is falling this rapidly, what does it say about the rest of the economy?</p><p>7) Price is falling</p><p>Both crude and gasoline prices are falling and today oil is at the lowest since February. Could implied gasoline demand data really be fooling the market? There are reports on physical tightness and paper crude could be liquidating but I have a hard time believing that US demand figures are a major reason for oil weakness.</p><p>Why it might not be true:</p><p>1) EIA data is subject to major revisions</p><p>The EIA does its best to get out petroleum data weekly but it’s a tough job and subject to all kinds of assumptions. HFI Reserach notes that the data is subject to big revisions when the month numbers are finally released. So traders may be simply looking at bad data that will be adjusted.</p><p>2) US gasoline storage remains at a five year low</p><p>Given cracks and pressure on to boost gasoline output, refiners have been working hard this summer. Combined with supposed lower demand, inventories should be moving up rapidly. They’ve made some progress but are basically flat in the last month and still at five-year lows. This is another HFI chart and <a href=”https://hfir.substack.com/p/us-gasoline-demand-falls-below-2020″ target=”_blank” rel=”nofollow”>their explanation</a> is well-worth reading.</p><p>3) Refiners aren’t seeing a slowdown</p><p>US refining giant Valero was asked about falling gasoline demand last week and Gary Simmons, Chief Commercial Officer, had this to say:</p><p>”I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.”</p><p>4) Alternate data doesn’t line up</p><p>GasBuddy tracks retail gasoline demand at the pumps in the US and they showed a 2% rise in gasoline demand last week while the EIA showed a 7.6% drop. Morevoer, last week was the strongest demand of the year from <a href=”https://twitter.com/GasBuddyGuy/status/1555183738358734848?t=tkuUMKdt5UoUuME_VT9z6A&s=03″ target=”_blank” rel=”nofollow”>GasBuddy</a>. </p><p>Another one is vehicle miles traveled from the US Federal Highway Administration. It’s only data though May but it shows vehicle miles traveled up year-over-year through May. We’ll get the June data in the middle of this month.</p><p>5) Conspiracy</p><p>In markets, everyone is a conspiracy theorist. The EIA <a href=”https://www.forexlive.com/news/us-eia-says-no-data-coming-today-on-us-inventories-20220627/?s=03″ target=”_blank”>shut down reporting</a> in late-June — supposedly due to a server malfunction — since they have returned, the gasoline demand data has been consistently bad. Maybe there’s an issue with reporting or maybe it’s a conspiracy.</p><p>It’s not just random people on the internet either, Jan Stuart, global energy strategist at Piper Sandler, yesterday <a href=”https://www.bnnbloomberg.ca/the-close/not-seeing-solid-evidence-of-demand-destruction-in-gasoline-market-energy-strategist~2495474″ target=”_blank” rel=”nofollow”>called </a>the data ‘crooked’.</p><p>At the end of the day, traders have to trade what’s in front of them. Right now it’s a crude chart that’s breaking support after a major period of consolidation — that’s not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish — like the SPR releases ending in October — but that’s months away and OPEC is still adding some barrels.</p><p>For now, oil trades with an 80-handle and the momentum is lower.</p>

This article was written by Adam Button at www.forexlive.com.

NZDUSD moves back higher after testing MA support

<p>The <a href=”https://www.forexlive.com/terms/n/nzd-usd/” target=”_blank” id=”b0d87c1a-31b1-412f-bb1e-5b210dd404a5_2″ class=”terms__secondary-term”>NZDUSD</a> has had an up, down and now back up trading session. </p><p>The move back to the upside has seen the pair first retest the 200 hour MA near 0.62728 before resuming the move higher. The move higher has also seen the pair move back above the 100 hour MA at 0.62867.</p><p>What next? </p><p>The risk is the 100/200 hour MAs now. Stay above is more bulish. </p><p>On the topside getting and staying above 0.6303 is needed to keep the upside momentum going. The swing hi from Friday reached 0.63269. The high price from Mondays trade extended to 0.63519.</p><p>/<a href=”https://www.forexlive.com/terms/i/inflation/” target=”_blank” id=”ad51a5a2-1afc-4f42-9e62-ea6faf6f90fa_1″ class=”terms__main-term”>inflation</a></p>

This article was written by Greg Michalowski at www.forexlive.com.

Fed’s Mester: We are not in a recession now but recession rates have increased

<p>Cleveland Fed Pres. Loretta Mester speaking and says:</p><ul><li>We’re are not in recession right now</li><li>Recession risks have gone up though</li><li>There is still path to soft landing</li><li>We have to take supply constraints as a given as they are likely to remain for some time</li><li>I don’t use yield curve as a strong indicator of where the economy is going</li><li>Given size of balance sheet, we should discuss selling some MBS</li><li>policy is working on the demand-side</li><li>but that moderating demand is not yet impact inflation</li><li>needs to see several months of inflation coming down</li><li>Firms still struggling to find workers</li></ul><p>The comments are similar to ones made on Tuesday. Below are some of the things Mester said during a Washington Post interview:</p><ul class=”text-align-start vertical-align-baseline”><li class=”vertical-align-baseline”>she does not believe we are in a recession</li><li>US labor market is very healthy right now</li><li>We have not seen inflation cool at all</li><li>Growth will be below trend this year</li><li>The Fed is committed to bring inflation under control</li><li class=”vertical-align-baseline”>we are starting to see slow down in investment, consumer spending and housing</li><li class=”vertical-align-baseline”>Wants to see inflation to move down on a sustainable basis</li><li>we need to make sure inflation expectations don’t become entrenched</li><li class=”vertical-align-baseline”>haven’t seen anything that suggests inflation even leveling off yet</li><li>I think will see some increase in unemployment as we go through the cycle but we need that to happen to make sure we get back to price stability</li><li class=”vertical-align-baseline”>we have a narrow path to not sparking a large rising layoffs</li></ul><p>The US stocks are trading mixed with the Dow down, the S&P near unchanged and the NASDAQ modestly higher. </p><p>In the US debt market, yields are lower in the short and then modestly higher in the long end:</p><ul><li>2 year 3.055%, -1.4 basis points</li><li>5 year 2.792%, -3.6 basis points</li><li>10 year 2.688%, -1.8 basis points</li><li>30 year 2.978% +3.0 basis points </li></ul><p>/<a href=”https://www.forexlive.com/terms/i/inflation/” target=”_blank” id=”ad51a5a2-1afc-4f42-9e62-ea6faf6f90fa_6″ class=”terms__main-term”>inflation</a></p>

This article was written by Greg Michalowski at www.forexlive.com.