Energy Still Up; Inflation Still Contained
A: Light Sweet Crude topped $67/Barrel today despite doubts that Iran will not cut off oil supplies with the West. Add in supply outages in Nigeria where militants have attacked platforms and pipelines and its hard to imagine a huge drop off in energy prices in our near future. On a side note, Personal Income grew at 0.3% (below Wall Street estimates) and US Consumer Spending rose 0.1% (a sharp slowdown from January but slightly above expectations) as inflation still seems to be contained from higher global energy prices.
The economic reports showed inflation as being contained but higher energy prices and continuing geo-political concerns in the Middle East will take center stage as the Fed continues to combat inflation fears down the road. According to the article:
Over the last 12 months, inflation eased to 2.9 percent from 3.1 percent in January. Core inflation, the price measure favored by the Federal Reserve, was steady at 1.8 percent.
On the economic reports side I found it interesting that the Savings Rate was negative for the fourth straight month at -0.5%:
...meaning Americans spent all of their income and more in February either by borrowing or cashing in savings. The saving rate has not been positive since March 2005.
Moving on to oil, we are rapidly approaching that all important $70/Barrel tradable high that usually is a sell sign for short term profit taking. As oil approaches $69.50/Barrel expect a number of sell side orders to automatically kick in and bring a short term correction in these markets. Should oil bull right past $70/Barrel and not correct at all, expect a few extremely volatile weeks as 1 oil magnate recently predicted the possibility of $100/Barrel oil prices. I recall the CNBC guest as saying "...all it takes is 1 thing to go wrong in either Iran, Nigeria, Iraq, or Saudi Arabia to disrupt oil supply enough to spike the tradable crude markets to $100/Barrel". Something to keep in the back of your mind.
Looking at where we are at right now and relating it back to you for real estate strategy, I suspect the Fed is continuing to raise interest rates mainly because of higher energy prices affecting the global economy. As long as energy prices remain this high and geo-political concerns remain this fragile, I do not see the Fed stopping with their rate hikes. The only thing that could cause the fed to pause is the FACT that interest rate hikes take time to funnel down into the system and their true affect on the economy usually is not seen until about 6-10 months down the road. Will the Fed overshoot with rates again? Probably, because this time they have real concerns to address.
NEXT FED MEETING: May 10th
WHAT TO EXPECT: 1/4 Point Rate Hike Brings Fed Funds Rate to 5.0%. I am about 95% sure of this rate hike unless a natural or unnatural disaster occurs by then.
WHAT TO LOOK FOR: Change in statement issued that would tell the tradable markets that only 1 more 1/4 point rate hike is in store for the following meeting. Should no wording change occur, Lehman Brothers could be right with a target Fed Funds rate of 5.5% before a pause.
~ Income, Spending Gains Slow
~ Oil Tops $67 on Doubts Over Iran
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