GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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US TREASURY YIELDS, FED MANEUVERS, AND FISCAL GAMES© Leo Haviland June 5, 2023

“Now if there’s a smile on my face
It’s only there trying to fool the public”. “The Tears of a Clown”, a song by Smokey Robinson
and the Miracles

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CONCLUSION AND OVERVIEW

The United States Treasury 10 year note yield probably will continue to travel sideways for the near term.

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In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces remain substantial. In particular, inflationary and recessionary (deflationary) forces battle for supremacy.

Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, significant inflation persists in America. Both headline and core (excluding food and energy) inflation float well above targets aimed at by these guardians. Price indices for United States personal consumption expenditures services for the past several months have remained high. Yet in comparison with actual consumer price inflation, inflationary expectations for longer run time spans have remained moderate. Unemployment in the US remains low, assisting consumer confidence and thus household spending, thereby tending to keep interest rate yields relatively high. Given the Russian/Ukraine conflict and OPEC+ willingness to support prices, how probable is it that petroleum and other commodity prices will ascend again?


America’s recent resolution of the heated battle over raising the debt ceiling avoided default. However, despite celebratory talk by many about how that new legislation displayed fiscal responsibility, the new law accomplished very little in substance toward reducing the towering public debt challenges confronting America. The massive and increasing public (and overall) debt in the United States (and many other leading countries) signal the eventual arrival of even higher interest rates.


Higher interest rates have diminished worldwide GDP growth prospects and boosted recessionary fears. History indicates that a negatively sloped US Treasury yield curve (short term rates higher than long term ones), such as has existed in America for over six months, portends a recession. Though history need not repeat itself, either entirely or even partly, significant disinflations induced by monetary policy tightening connect with recessions. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession or a substantial fall in the S+P 500 and will strive to avoid those eventualities. The shocking banking collapses a few months ago in America and Europe seem largely forgotten. However, they warn of dangerous fragilities facing banking systems and diverse marketplace arenas, especially if US rates resume their ascent or price feebleness in commercial real estate assets becomes even more worrisome. The United States dollar, the leading international reserve currency, has depreciated from its major high milepost reached in autumn 2022 but arguably remains “very strong”. This robustness helps to make US Treasuries (and other dollar-denominated assets) relatively appealing to some overseas players. Prices of emerging marketplace stocks and interest rate instruments remain vulnerable to rising UST yields and
dollar strength. Also, even in an inflationary environment, fearful “flights to quality” (buying UST) sometimes emerge.

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US Treasury Yields, Fed Maneuvers, and Fiscal Games (6-5-23)

PETROLEUM: ROLLING AND TUMBLING © Leo Haviland June 10, 2019

“Well, I rolled and I tumbled, cried the whole night long
Well, I woke up this mornin’, didn’t know right from wrong”. Muddy Waters, “Rollin’ and Tumblin’”

OVERVIEW AND CONCLUSION

Of course the petroleum universe “as a whole” has, as do its various individual crude oil streams and assorted refined products, “its own” past, present, and potential future supply/demand/inventory situation. However, the petroleum circus, including so-called specific oil-related variables affecting it, is not a domain entirely separate from other economic and political phenomena. For example, marketplace history reveals that price levels and trends for the petroleum complex intertwine in diverse ways with benchmark global stock, interest rate, and currency arenas, and with other commodity fields such as base and precious metals. These relationships, including convergence/divergence (and lead/lag) ones between the oil marketplace in general and these other financial playgrounds, can and do change, sometimes significantly.

Marketplace history need not repeat itself, either entirely or even partly. Visionaries differ in their perspectives on and conclusions regarding petroleum and other marketplaces, frequently substantially.

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OPEC is an important actor within the oil theater, as are its current producer allies such as Russia. The United States, given its ravenous demand for petroleum plus its booming crude oil output in recent years, also is an important petroleum player. But these entertainers are not independent of other stages and performers.

In the timing and direction of its major price moves, the global petroleum complex does not necessarily or always travel alongside the S+P 500 and other benchmark stock indices. A survey of the critical price turning points since early 2016 for the oil and equity realms nevertheless displays the close connection between petroleum and stock trends.

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For related marketplace analysis, see essays such as: “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17).

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Petroleum- Rollling and Tumbling (6-10-19)

AMERICAN ECONOMIC GROWTH: CYCLES, YIELD SPREADS, AND STOCKS © Leo Haviland March 4, 2019

In “Back in the U.S.A.”, Chuck Berry sings: “Yes, I’m so glad I’m livin’ in the U.S.A. Anything you want, we got right here in the U.S.A.”

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OVERVIEW AND CONCLUSION

Marketplace and other cultural analysts create meaningful relationships between variables and groups of phenomena. As subjective perspectives differ, these faithful inquirers identify, define, select, assess, and organize evidence (data; facts; factors) in a variety of fashions. This results in diverse propositions, arguments, and conclusions, and thus an array of competing stories.

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In its discussion of America’s 4Q18 GDP growth, the NYTimes (3/1/19, pB1) stated that “most economists do not expect a recession this year.”

America’s current economic expansion is very long by historical standards. Of course history need not repeat itself. Conditions, including associations and patterns between variables, can and do change over time. Marketplace convergence and divergence trends (and lead/lag relationships) are not inevitable; they can shift, sometimes dramatically. However, devoted study of the ongoing economic expansion should not divorce itself from previous economic growth and decline episodes and patterns.

Interest rate yield relationships offer insight into economic history and prospects. Particularly given the remarkable length of America’s recent glorious real GDP expansion, marketplace clairvoyants should review the long run historical relationship between yields for lower-grade United States corporate bonds and the ten year US Treasury note in the context of American economic growth and recession cycles. The recent widening yield spread trend for this credit relationship warns that a US recession (or at least significantly lower growth than generally forecast), whether in calendar 2019 or not long thereafter, is more likely than most wizards anticipate. Moreover, current trends in the US Treasury yield curve, when placed in historic perspective, also underline the looming potential for an American economic downturn (or considerably slower growth than most soothsayers predict).

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American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)

AS THE FINANCIAL WORLD TURNS: COMMODITY AND OTHER MARKETPLACE DOMAINS © Leo Haviland April 2, 2018

Chuck Berry sings in “’Round and ’Round”:
“Well, the joint started rockin’
Goin’ round and round,
Yeah, reelin’ and a rockin’,
What a crazy sound,
Well, they never stopped rockin’,
’Till the moon went down”.

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OVERVIEW AND CONCLUSION

Many marketplace high priests enthusiastically proclaim proverbs on price relationships. For some heralds, these adages are only guidelines; however, for others, they represent high (or very high) probabilities. Such aphorisms include the links between the United States dollar and commodities “in general”, or between the US dollar and the S+P 500 or other stock indices. For example, one widely popular chant: “weak dollar equals strong commodities”, “strong dollar equals weak commodities”. For some, the word “equals” in this formula implies “is connected to”, or “associated with”.

Observers differ, often substantially, in their choice between as well as the assessment of the supposedly relevant variables (data, evidence) and analytical time horizons. Perspectives on past, current, and future convergence and divergence (lead/lag) relationships between financial marketplaces (and factors influencing them) likewise can vary significantly.

In practice, viewpoints regarding the role of the dollar in determining commodity price levels, trends, and turning points nevertheless differ, and often a great deal. After all, other financial marketplace realms (such as interest rates and stocks), diverse economic and political theaters, and a wide range of other phenomena interrelate with both the dollar (and other currencies) and assorted members of the commodities world. So a variety of competing stories and predictions about the dollar, commodities (whether in general or in regard to individual sectors such as petroleum or base metals), and other marketplaces exist and change.

Moreover, historical review indicates that trends for commodities “in general” can intertwine in various fashions with currencies (such as the United States dollar), as well as with interest rate benchmarks (picture the US 10 year government note), and stock playgrounds (the S+P 500 and related indices of advanced nations; emerging marketplace signposts). Moreover, marketplace history, whether for a given arena or the relationship between two or more fields, is not marketplace destiny.

For further related marketplace analysis of stock, interest rate, currency, and commodity fields, see other essays such as: “Global Stock Marketplaces: Winter of Discontent” (3/5/18); “There Will Be Blood: Financial Battlefields” (2/9/18); “Busload of Faith: Financial Marketplaces” (1/15/18); “Marketplace Vehicles: Going Mobile” (12/13/17); “History on Stage: Marketplace Scenes” (8/9/17).

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In any case, let’s now focus on the historical relationship between the broad real trade-weighted US dollar (“TWD”) and commodities in general over the past several years. The table below underlines that players should be on the watch for a fairly close coincidence in timing of major or other important turning points in those two wide realms. However, in the current context, they also should monitor TWD moves in relation to the critical height around 96.0. The broad real trade-weighted US dollar (“TWD”) recently fell decisively beneath crucial support around 96.2 to 96.6. The broad real TWD high during the global financial disaster was March 2009’s 96.6.

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What does an investigation of the petroleum, base metals, and agricultural commodity groups since their first quarter 2016 major lows unveil? Many marketplace turns have occurred around the same time. All these commodity battlefields made important highs in first quarter 2018; so did the S+P 500 and other important advanced nation and emerging marketplace stock indices.

Yet not all commodity sectors (or members within a group) necessarily dance (make turns) together. In principle and practice, potential divergence can develop and persist within the commodity universe.

However, whereas petroleum arguably very recently threatened to exceed its 1Q18 barriers, base metals and agriculture apparently did not. Determined and sustained crude oil output restraint by OPEC and its non-OPEC allies such as Russia has helped to draw down OECD petroleum industry inventories. Fears of supply interruption (Middle East tension, including the Iran nuclear issue; Libya; Nigeria; Venezuela) exist. Numerous prophets assert the world economy will remain robust. The further weakening of the dollar since around mid-year 2017 has inspired some petroleum bulls.

The net noncommercial long position of petroleum players (see the CFTC Commitments of Traders) expanded massively since mid-2017, and this net noncommercial buying probably played an important role in rallying oil prices. It remains very large and is vulnerable to liquidation.

Prices for the oil group probably will not break above their first quarter 2018 highs by much if at all. Neither will broad commodity indices such as the broad S&P Goldman Sachs Commodity Index or the Bloomberg Commodity Index. The 1Q18 peaks in the S+P 500 and MXEF stock indices are two year diagonal bull time moves from their 1Q16 major troughs. The GSCI and BCI’s first quarter 2018 highs likewise are two year diagonal ascents from their major bottoms of 1Q16.

Yet suppose the petroleum complex does attain new highs relative to those of 1Q18. As petroleum is an important part of many widely-watched commodity signposts (especially the broad S&P Goldman Sachs Commodity Index), that may boost such broad indices to levels above first quarter resistance.

It is important whether or not the base metals crew (copper, aluminum, zinc, and others) also achieves new highs, for both base metals and oil link closely to international economic growth trends (and arguably more “immediately” than agriculture does).

Many major highs (lows) for commodities “in general” have roughly coincided with major peaks (bottoms) in the S+P 500. But not all have. The 2007-2009 global economic disaster era displayed an exception. The major high in the S+P 500 (10/11/07 at 1576) preceded the GSCI’s pinnacle (7/3/08 at 894). However, the S+P 500’s final top, 5/19/08’s 1440, bordered the July 2018 commodities summit.

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Regardless of whether or not key commodity indices achieve highs above their first quarter 2018 plateau, the first quarter 2018 resistance for the S+P 500 and other advanced and emerging marketplace equity benchmarks probably will remain in place. As “There Will Be Blood: Financial Battlefields” (2/9/18) stated: “The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top.”

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As the Financial World Turns- Commodity and Other Marketplace Domains (4-2-18)