Centerfin Collective Weekly

Weekly Update April 5, 2024

Oil spikes on potential escalation in the Middle East, US government debt interest out of control, Strong read on jobs raises risk to rate cuts

Oil spikes on potential escalation in Middle East

Brent crude oil, which serves as a base price for most oil traded around the world, spiked to over $91 this week. While oil has been creeping higher for some time, the latest surge came on the back of Israel bombing an Iranian embassy building in Turkey and killing seven of their elite Quds Force. This attack was seen as an escalation in the war in Gaza and reverberated throughout markets, with oil higher and stock markets selling off. In response, Biden’s administration canceled purchases of oil for the Strategic Petroleum Reserve (SPR). If oil prices stay elevated, it will serve as additional fuel for inflation at a time when it has been coming down, and the Fed has indicated they will cut interest rates.

  • Despite all of our efforts, the world still runs largely on hydrocarbons (oil)
  • While consumers initially feel higher oild prices when they fill up their cars with gas, it has further implications for the price of goods if it stays elevated
  • Higher oil prices eventually feed through to the price of most goods because those goods are usually delivered via trucks and ships that use oil
  • In an election year, Biden is under pressure to keep inflation down, hence he canceled any further purchases of oil for the SPR
  • If the price of oil stays elevated, this will become evident in inflation figures and could complicate the Fed’s plan to lower interest rates later this year

US government debt interest out of control

Bank of America (BOA) put out a chart this week showing that US debt service would reach $1.6 trillion at the end of this year if rates stay at current levels. If the Fed were able to lower interest rates, it would still be $1.2 trillion. To put this into perspective, Biden’s budget for 2024 is $6.8 trillion, so this would be over 20% of this year's budget. Interest on our debt is going to surpass our largest expense, defense, which is slated to be just under $900bn this year.

  • The US has been running the largest fiscal deficit ever during peacetime
  • At some point, this becomes an unsustainable situation
  • As our debt to GDP ratio (currently at over 120%) continues to climb, this is negative for the value of the US dollar
  • A relative drop in the value of our currency is potentially inflationary
  • The problem is, regardless of who gets elected in November, this is unlikely to change
  • The only way to address this issue is by raising taxes and/or cutting spending
  • Neither of these scenarios are in the cards for either Biden or Trump

Strong read on jobs raises risk to rate cuts

The non-farm payroll number significantly exceeded expectations of 214k, coming in at 303k. Before COVID, payrolls came in above 300k only 15% of the time, so this is a very strong number. Wage inflation is still over 4% but showed signs of decelerating. Labor force participation is also up to 62.7%. Skeptics pointed to part-time jobs being a huge part of the number, while full-time jobs actually declined.

  • Regardless of whether hiring was part-time or full-time, today’s announcement showed the economy is still strong
  • This will complicate the Fed’s job, as it becomes harder to justify cutting rates into a hot economy
  • While futures markets for Fed cuts didn't move much, the long end of the bond market (10-30yr treasuries) spiked on the news
  • Higher long-term yields are a headwind for stocks, last year as the 10-yr spiked to almost 5%, stocks sold off about 10%
  • The 10-yr spiked to over 4.4% on this news before backing off

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