How are energy investors positioned?
US stocks finished yesterday lower, though not as much as I expected. I had mentally been ready for a 1% decline in the S&P 500, but instead, it fell by only 40 basis points. Still, if this plays out as expected over the next month, it will likely make little difference.
If you looked at the S&P Global PMI data, the Fed should not be cutting rates. If you looked at the Philly Fed Prices Paid Index, the same conclusion applies. That Philly Fed index rose to 66.8, the highest since July 2022, when CPI was running at 9% and PPI at 11.2%. This doesn’t mean inflation is heading back to those levels, but it does suggest the rate of change in inflation is accelerating, and quickly.
Powell would be a fool today to suggest rate cuts are coming in September, or even hint at them. Based on Wednesday’s Fed minutes, to me, the odds of a September cut look slim to none. CPI swaps are clearly signalling the Fed should not be cutting rates—the 2-year CPI swap rose yesterday to 2.94%. Cut rates now, and that pricing is likely to move much higher.
In the meantime, rates remain stuck, but at some point, something has to give. The 30-year minus 3-month spread has been frozen around 70 bps since January. If the Fed isn’t cutting and inflation is rising, how can the curve not shift? It seems absurd that it has been stuck for months at this level.
From a technical perspective, the spread is either forming one of the largest cup-and-handle patterns ever or a major ascending triangle. Either way, I think the curve is set to steepen materially—and it won’t be because the 3-month rate is falling, but because the 30-year yield is rising.
Meanwhile, the 10-year JGB is also on the verge of breaking through significant resistance.