Good Monday AM,

The news was certainly bond friendly this am and the 10-yr is showing strength with the yield down to 3.40.

The news released today was helpful, although the news over the weekend from OPEC that they would cut back production pushing oil prices higher, is not what we need as oil prices are very inflationary. Construction spending came in at -01, which is horrible. The nation cannot and will not grow without construction spending.

Even worse today was the ISM manufacturing release. It came in at 46.3. Anything less than 50 is considered contracting and typically has led to recessions. Is this enough to cause a Fed pivot? Probably not yet. We have so many signs of a weak economy and most of the leading indicators I watch suggest a recession will be upon us in the 3rd or 4th quarter. By then I suspect inflation will have calmed considerably and this will cause the Fed to blink and rates to fall.

Not so great news for our aging population…

An economic slowdown, persistent inflation and weaker productivity growth will hurt Social Security’s finances, draining its reserves one year earlier than previously estimated, the government said.

Social Security won’t have enough money to pay all beneficiaries the amount they are entitled to starting in 2034, according to the latest report by the program’s trustees released Friday. Unless Congress takes action to shore up the program, beneficiaries would receive about 80% of their scheduled benefits after that point.

Lower birthrates over the past few decades combined with a wave of retiring baby boomers have challenged the long-term solvency of Social Security, which pays benefits to retirees, their survivors and people with disabilities. 

Big Data week with lots of employment insight and the jobs report this Good Friday.

Keep in mind, equity markets are closed on Friday, but bond markets are open so expect a lot of volatility.
Monday
The Institute for Supply Management releases its manufacturing purchasing managers index for March. Consensus estimate is for a 47.5 reading, about even with the February data. Readings below 50 indicating contraction in the manufacturing sector.

The Census Bureau reports construction spending data for February. Spending is expected to remain flat month over month at a seasonally adjusted annual rate of $1.83 trillion.

Tuesday
The Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey for February. Economists forecast 10.45 million job openings on the last business day of February, nearly 400,000 fewer than in January. Job openings are off their peak of 12 million in March 2022 but remain historically elevated with 1.8 openings for every unemployed person.

Wednesday
ADP releases its national employment report for March. Consensus estimate is for the economy to add 200,000 private-sector jobs, about 42,000 fewer than in February.

The ISM releases its services PMI for March. Consensus call is for a 53.8 reading, slightly lower than in February, but above the expansionary level of 50.

Thursday
The Labor Department reports initial jobless claims for the week ended April 1. Jobless claims averaged 198,250 in March.

Friday
Stock markets are closed in observance of Good Friday. Bond markets are open but close at noon Eastern time.

The Labor Department releases the jobs report for March. Expectations are for nonfarm payrolls to increase by 200,000, 111,000 fewer than in February. The unemployment rate is seen remaining unchanged at 3.6%, near a historic low.

With the news from OPEC today on cutting back production, I am including a good summary from Bloomberg on how it oil interacts with the Fed.  

Monetary policy is a blunt instrument for fighting inflation. It impacts some sectors disproportionately. It works the same, whether the inflation is related to supply shocks or demand shocks. It’s non-linear. One moment the unemployment rate is low and inflation is high and then the next moment one of the biggest banks in the country fails, in part due to losses on its bond portfolio.

Unfortunately, for all the well-understood problems with relying on monetary policy, it’s the main thing we’ve got to work with. Policymakers don’t have a ton of dials to turn. Nimble and targeted counter-cyclical fiscal policy (raising taxes in a boom, cutting them in a slump) would be nice, but the politics of taxes make that tough. We don’t have an independent Fed-like entity that could adjust, say, payroll taxes unliterally.

So monetary policy is what we’re stuck with for now. Well, for the most part.

Last year, the White House introduced a potentially powerful new tool, with its decision to sell down oil from the Strategic Petroleum Reserve, while simultaneously announcing its commitment to buy back that oil at lower prices in the future. The logic was simple and elegant. Spot oil prices were high, yet domestic producers were slow to ramp up production thanks to an uncertain demand future. By providing a purchase commitment (at least in theory) The White House was in a position to lower the price of oil in the short term, while avoiding crushing domestic operators.

Anyway. That was the theory. The Biden administration executed half of what could have been (perhaps could still be?) one of the greatest oil trades of all time, selling oil around the peak last year. Since then the oil price has plunged. But when it came time to completing the other half of the trade (buying low), the DOE has been MIA. Here’s Liam Denning on the failure to complete the trade from March. Here’s Skanda Amarnath and Arnab Datta from Employ America (which helped formulate the original idea) talking about the DOE whiffing on the moment.

They write:

“Unfortunately, the Department of Energy (DOE) has yet to show any indication that it is prepared to give credible effect to the President’s commitment, with Secretary Granholm providing underwhelming excuses about logistical constraints. Oil prices may have exited the refill range on their own, but the DOE does not seem to have a serious strategy for dealing with the scenario in which oil prices fall sharply or durably below $72. Unless clearer guidance and processes are provided, market and industry participants are more likely to treat the President’s commitments with less credibility, thereby undermining its potential stabilizing effect.”

Now, of course, oil prices are jumping again because of a surprise production cut announcement over the weekend from OPEC. We don’t know the medium-term effect of the cuts, but their existence to some extent speaks to the White House’s blown opportunity. 

The Strategic Petroleum Reserve has the potential at least to be a powerful, counter-cyclical stabilizer that reduces the need for the Fed to do everything on the inflation front. But this is a novel use. And for the SPR to work in this way, it has to have some credibility that its gears can turn in both directions. It needs to be able to boost the price of oil in a slump (by being a buyer of last resort) and it needs to be able to lower the price of oil in a boom (by being a net seller). A pattern of this would bolster domestic industry and provide stability at the pump.

The US is the world’s largest producer of oil, but unlike the big OPEC players, there’s no national oil company. We have no real policy tool for just announcing a cut or hike in a domestic output. And now by failing to build out the SPR mechanism, it looks like despite our size in this industry, we’re still outsourcing energy market stabilization to OPEC.

Please remain safe and stay healthy, make today great!!!