Daily Commentary

MarketMinder’s View: This article centers on several publicly traded companies, so please note MarketMinder doesn’t make individual security recommendations. Their mention is coincident to our highlighting a broader theme: Oil and gas producers continue adapting to wartime disruptions in ways that will secure more long-term supply while curbing the Strait of Hormuz’s relevance. For context, many of these companies have dialed back investments in exploration projects in recent years, opting to stay lean after overextending themselves during the shale boom and getting caught out when oil prices plunged, leaving them with high fixed costs and less revenue to cover them. But it seems high oil prices and the desire to reduce a regional chokepoint’s importance have incentivized them to ramp up drilling again while distancing themselves from potential disruptions in the Middle East. Producers are targeting new drilling sites “in Africa, South America and the eastern Mediterranean that could refill their reserves for the next decade.” We see a couple of investor takeaways here. One, as previously noted, this shows how high oil and gas prices help strengthen producers’ balance sheets and incentivize new production. Just as we saw after Russia’s invasion of Ukraine, global producers are ramping up supply to fill the shortfall. Two, while today’s investments may take years to come online, they point to a future where oil supply is more diverse and geopolitically stable, much as Europe’s investments in natural gas import terminals did in 2022. This is something investors ought to keep in mind when these conflicts begin. While headlines focus on worst-case scenarios, there are potentially positive outcomes, too. For more, see today’s cover story, “Easing Hormuz’s Grip for the Long Term.”

MarketMinder’s View: Inflation in the Great White North accelerated to 2.4% y/y in March, slightly cooler than analysts’ estimates but still faster than February’s 1.8%. And as the title notes, much of this acceleration stemmed from higher gas prices tied to the Middle East conflict. “Gasoline prices jumped by 21.2% on the month, according to Statistics Canada’s report on Monday, marking the largest increase on record as the Middle East conflict drove up oil prices globally.” However, natural gas prices’ -18.1% m/m fall helped offset some of the pain here by dampening the rise in overall energy costs. As we noted with February’s reading, Canada’s hefty domestic oil and gas industry helps shield them from global price shocks, which came in handy in March. Prime Minister Mark Carney’s temporary pause on federal fuel excise taxes until September 7 should help ease energy costs, too. Pair this with core inflation’s (which excludes food and energy) 1.9% y/y rise in March, and it appears Canada, like the US, isn’t suffering from higher oil and gas prices’ bleeding into other categories. Outside of this, while we don’t think central bank moves are possible to predict, it is interesting that sentiment expects a rate hike this year even as the Bank of Canada “has signaled it plans to look through the short-term impact of the oil shock.” This strikes us as more evidence investors are fighting the last war, in this case central bankers’ rapid U-turn toward aggressive rate hikes in 2022.

MarketMinder’s View: Here is a bit of economic positivity flying under the radar: Several of America’s largest banks reported impressive year-over-year commercial loan growth in Q1, ranging between 8.8% y/y and 17.8% (which reminds us, MarketMinder doesn’t make individual security recommendations, and we feature this for the discussion of loan growth’s macroeconomic implications). Now, none of this should be revelatory, considering the Fed reports weekly loan growth and already has full Q1 and March data in the books. At the economic level, everything here is widely known. But the discussion is still interesting. The article does the usual handwringing about consumer lending, warning its slower growth—and lower-income households’ deleveraging—suggests consumer spending may slow, citing this as an economic risk. But that doesn’t really wash, as we have written numerous times, considering most spending goes to essential goods and services, making it pretty stable in expansions and recessions alike. Consumers aren’t the economic swing factor. Businesses are, which is why solid business lending is a big positive. It implies businesses are getting funding for investment, inventory builds, expansion and other new projects, which tend to support GDP and corporate earnings ahead. America’s economic engine has plenty of fuel, defying fears that the war in Iran would induce a slump.