Soft landing incoming?

Powell and the oil market

Fed Chair J Powell sat down with the Wall Street Journal’s Nick Timiraos. You can see the whole thing here. Powell said nothing new. He held to the script that the Fed is working on tightening conditions. He also acknowledged that the bank was moving much faster than previous rate hike cycles. Nick asked about the rate hike schedule and what would it take for the central bank to slow down the current pace of hikes. Powell responded very clearly.

“What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down and if we don’t see that then we’ll have to consider moving more aggressively. If we do see that, then we can consider moving to a slower pace.”

Powell went on to talk up the strength of the economy noting the recent retail sales figures and the tight labor market. He still stressed that supply chain issues and lockdowns will continue to provide a floor for the current inflation surge. This time around, though, he made it clear that it doesn’t matter where the inflation is coming from, the Fed’s job is to get it under control.

Nick then asked about the “soft” landing versus “soft-ish” landing. Trying to get Jerome to elaborate on a topic that he broached. Chair Powell was very firm that inflation needs to get down and that “pain may be involved”. This signals to me that Powell is prepared for much more “pain” in the stock market and that traders need to be prepared for more turbulence.

I thought it was interesting that they even touched on teh topic of a “soft” landing. This has been bandied about by the mainstream press, though I doubt they know what it even means. The fact of the matter is that Powell is stuck on seeing inflation coming down and that a recession is coming. This is not the soft landing that I want to see. Just like the term “transitory”, I see the term “soft landing” leaving the vernacular before long.

Lastly, there are rumors that the lockdowns in Shanghai will be ending soon. Traders caused the yuan to surge on the rumors. The headline was that no new reported Covid inflations have now reached into the third consecutive day. This is an important milestone and it could be the beginning of the end of Shanghai’s lockdown. Shanghai has a population of roughly 28.5 million. The pent-up demand will be overwhelming. I expect that there will be a surge higher in oil and shortages developing throughout Shanghai and the surrounding areas. Once these people get a chance, I expect them to load up on food items to replenish their pantries.

On top of China opening back up, OPEC has warned that no increase in supply is coming. I stressed the idea that there is very limited excess supply for OPEC to pump a few months back. I believe that they are at or near full production mode. With the US curtailing their supply and Russia’s supply sanctioned, oil is getting very tight. I’m looking at USO calls here. I’m also thinking about borrowing an idea from David over at LiveBetterNow. He has had a most excellent theory on the 3x ETFs. Watching his thesis play out, it makes me want to get in on the action. So in addition to USO calls, I’m looking at puts on DRIP.