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: The International Energy Agency’s head made headlines Monday warning oil shortages are days or weeks away, but what do oil-reliant companies say? As the title suggests, they are much more sanguine. European energy and airline companies are growing confident of avoiding jet fuel shortages during peak summer travel season thanks to several countries’ maximizing output, boosting energy imports and tapping strategic reserves (which reminds us, MarketMinder doesn’t make individual security recommendations). The article runs through a few examples, highlighting how business owners and government officials acted preemptively or reacted swiftly to the war’s clamping supply and sending fuel prices skyward. The EU’s decision to allow airlines to use US-produced kerosene seems to have helped greatly, with shipments already up. For investors, this helps show how prices are signals, incentivizing more production to meet high demand, or as one airline exec quoted here put it, “‘That kind of market price mobilises forces.’” Gearing a refinery to increase its kerosene yield isn’t easy, but higher margins make it well worth companies’ while, as the anecdotes here show. While this adaption isn’t necessarily news at this point, it also helps explain why forward-looking stocks began bouncing from the near-correction that accompanied war’s outbreak well before peace prospects emerged. They priced in all the worst-case scenario projections from the Strait of Hormuz’s closure, then moved on as reality gradually went better than feared.

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.