F-oiled Again

Aoifinn Devitt – Chief Investment Officer

Just when it seemed like inflation was firmly receding based on last week’s PCE price index data, oil looked poised to deliver a supply side shock – at least over the weekend.  However, in today’s compressed news cycles and real-time investor responses, this shock soon dissipated, and we went back to regular programming.  The decision by OPEC nations to cut oil output was met with an initial rebound in energy prices, with the oil price and the energy sector soaring by 8% and over 4.5%, respectively, on Monday. But soon, more of a forensic analysis of what was really going on took hold.  The thinking went – if the supply cut is a defensive move, this might suggest that a slackening in demand and the recession that has now been long-forecasted is in fact on the horizon.  There also seemed to be real doubt that this would re-start a wave of cost-push inflation as was seen over one year ago with the outbreak of the war in Ukraine, and instead, it looked like this was more an attempt to right the balance after a choppy year for supply and demand. It was a reminder that the Opec+ cartel might not wield the control it once had, underscored by the growing set of alternative energy sources now dotting the energy landscape.

With a weaker jobs report showing a drop in US job openings (below 10 million for the first time in close to 2 years) and ongoing reports of layoffs and inventories building, the somewhat more mundane worries around insufficient growth and a pending slowdown took precedence this week.

Source: Morningstar as of 4/4/2023

Data this week has centered on a downward revision to US GDP growth (2.7% to 2.6% seasonally adjusted annual rate for the fourth quarter) and a slide in non-financial corporate profits by around 4% annualized. This has added to the momentum expectation that the Fed will be slowing its path to tighten and even move towards a pause. Like the chain reaction we are accustomed to seeing in reverse, an indication of a slower Fed led to a weaker dollar, and the fact that there was no meaningful contagion from the demise of SVB and Signature Bank overseas seemed to shore up confidence in non-US markets.

As markets digest what was a volatile quarter for stocks, the post-mortem on the few victims of the banking sector turmoil continued.  Some fingers pointed at excessive regulation which had encouraged the banks to build large portfolios of government securities, and others highlighted the lack of nuance in a system which sought to apply universal stress tests across institutions that differed considerably in their lending profile and client base.

It is perhaps too early to properly ascertain the effect of our Spring storms in the banking sector – but it would be unwise to assume that the weather has turned a corner.  Even as March madness draws to an end, we have to be alert to April showers.

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