Daily Commentary

MarketMinder’s View: Kevin Warsh officially became Fed Chair last Friday, replacing Jerome Powell. While pundits have spilled far too many pixels ruminating on where he will try to steer interest rates, Warsh also has some ideas for broader Fed reforms. For instance, during last month’s Congressional confirmation hearings, he suggested dialing back all the press conferences and interviews. The article deems this a mixed bag. It acknowledges Fedspeak can stoke confusion instead of adding clarity, especially when policymakers veer from their prior guidance, but it also argues guidance and Fed forecasts are important policy tools. Overall, we think a more streamlined approach would be beneficial in theory, with actual results depending on the details and execution. Longer Fed statements came with a bigger balance sheet and more complicated (and convoluted) policy. The more Fed folks speak, the more opportunities there are for them to sow confusion and open the door to contradicting themselves. This is why former Fed head Alan Greenspan invented the art of Fedspeak in the first place, “mumbling with great incoherence” (as he put it) in order to avoid boxing the Fed into a corner. While this piece calls forward guidance a policy tool that can prevent bigger rate hikes, we see this opposite. By talking down the likelihood of rate hikes in 2021 and early 2022, the Fed ended up catching everyone by surprise with aggressive, steep hikes later in 2022. The U-turn, not the hikes themselves, sowed confusion and thus market volatility. The more the Fed defies its prior guidance, the more it diminishes its credibility. We see a lot of compelling evidence markets care more about credibility than transparency. So while we shall have to wait and see exactly how (and whether) Warsh amends the Fed’s communication protocols, we don’t think having fewer Fed utterances will be a net negative for investors.

MarketMinder’s View: This article touches on politics, so please note that MarketMinder favors no politician nor any political party, assessing matters solely for their potential market and/or economic effects. It appears that, after years of talks, Canadian Prime Minister Mark Carney and Alberta’s Premier Danielle Smith have struck a deal balancing the federal governments demands for carbon mitigation and Alberta’s large oil industry’s need for ways to transport more oil to the market. In an announcement, Carney has agreed to a lower carbon price for emissions from oil producers and heavy industry in Alberta, as well as agreeing to back a new pipeline project that would connect the province’s oil sands regions to the Pacific via British Columbia. While there are hurdles that still need to be cleared (getting indigenous groups’ approval and the province of British Columbia’s), Carney has said he will seek to declare it a project of national interest, which should streamline permitting and cut some red tape. The aim is to begin building the pipeline by next autumn, which would eventually give Canadian oil exporters easier access to Asian markets like Japan. This also ties into two main stories circulating this year: One, it shows Canada is seeking to diversify its trade relationships, as most of its oil still flows to America. Two, it is a way Asia can further reduce reliance on Persian Gulf oil, limiting its exposure to Hormuz blockages in the future. This is, of course, a long way from completion and is well outside the 3 – 30 month period stocks weigh most. But it is interesting and worth monitoring for the longer-term implications.

MarketMinder’s View: So this coverage is a bit jumbled, includes several outright errors (it refers to the first quarter several times in the body, but as the title correctly notes, the forecasts are for the second quarter) and is generally unclear. (Sorry if that seems harsh, but we call a spade a spade ‘round here.) This isn’t a survey of “top forecasters” as ranked by some impartial referee, it is a group of professional forecasters the Federal Reserve Bank of Philadelphia surveys each quarter. Some are anonymous. Some named, including around 50 economists whose outlooks frequently dot headlines. The inflation rate they forecast is the annualized quarterly change in the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) Price Index. So, let us consider the 6% annualized inflation number the headline touts. One, it is headline CPI (the same economists project an average 4.5% annualized PCE price rise in Q2, core CPI and PCE of 3.2% and 3.4%, respectively). The article treats that 6% annualized number as new and earthshattering. But April’s 0.6% m/m CPI annualizes to ~7.4%. So what these economists are forecasting is slower month-over-month CPI in May and June. This is further highlighted by the fact the group’s average inflation rate in Q3 is 3.0% annualized. So it is really just a way of spinning what we already knew (prices were hot in April, largely on oil) in a different manner. Furthermore, we would note: Stocks are well aware of all of this. Again, the economists’ forecasts here are widely covered in headlines. They comprise the consensus stocks pre-price day by day. This really isn’t a shock no matter how you slice and dice it.