ARTICLES

Oil and US Inflation

The US core personal consumption expenditure (PCE) price index is the Federal Reserve Bank’s (The Fed) preferred gauge to measure inflation in that country because it excludes both food and energy prices. The PCE has remained at more-or-less the same level for the past 5 months from November 2022 to February 2023. In November 2022 it was 4,8%, 4,6% in December, 4,7% in January 2023, 4,6% in February and 4,7% in March.

In our opinion, investors have been focused on the consumer price index (CPI) and have not been giving the core PCE the attention which it deserves. This explains the unusual and protracted bullishness in the S&P500 index in recent weeks. The CPI, of course, has been heavily impacted by the price of oil.

With that in mind, consider the chart of the dollar price of North Sea Brent oil since December 2021:

Here you can see that the oil price has been falling steadily since President Biden visited Saudi Arabia in June last year. But in the last few days it has spiked up – breaking above its long-term downward trendline. Could this be the start of a new upward trend?

The decline in the price of oil has had an immediate and substantial impact on the consumer price index (CPI). It is the primary factor in bringing the CPI down from 9,1% in June 2022 to 5,2% in March 2023 - but the underlying core inflation (the PCE) has remained stubbornly high. For the past 4 months, investors have been discounting the falling CPI and have not paid much attention to the fact that core inflation has not come down significantly.

Core inflation still reflects a US economy that is running hot. It has generated more than 340 000 new jobs a month on average this year. The rate of job creation is declining, but it remains very high. The unemployment rate also shows a very tight labour market At 3,5%, it is at or close to what economists consider to be full employment. And there are about 1,7 jobs on offer in America for every job seeker.

The jump in the oil price over the past month since OPEC announced its intention to restrict supply may well indicate that the season of lower oil prices is at or close to its end. A rising oil price will certainly push US inflation higher.

The picture which emerges from these facts is that the Fed will probably have to remain hawkish for the rest of this year. It would be well to consider the old Wall Street aphorism “...the Fed keeps on tightening until something breaks”. The collapse of Silicon Valley Bank (SVB) is not big enough to be “something breaking”. Interest rates will have to go higher and stay at higher levels for some time to reach the Fed’s stated goal of bringing inflation down to 2%. There has been much talk about a “pivot” point, where the Fed changes direction and begins to reduce interest rates, but that surely cannot happen this year or even early next year.

The S&P500 is once again testing its long-established resistance level at 4170. We will be surprised if it penetrates this level significantly. In fact, we are expecting it to fall back now as investors increasingly digest the reality that the US economy has to go into recession before the Fed can pivot. Furthermore, it is well to remember that, historically, Wall Street has usually continued downwards for some time after the point when interest rates began to fall.

Since the stock markets of the world, including the JSE, follow Wall Street it is important to watch developments there.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Smart Local Investors

The last two months have been wild on the markets – mainly because of Trump’s ill-advised, on-again, off-again tariff policies. The issue now is:

Will this morph into a full-blown bear trend? Or is this correction almost over?

From his election victory on the 6^th of November 2024,

Jerome Powell

The Federal Reserve Bank (“the Fed”) is completely outside the control of the President and Executive Branch of the US government. The chairman of the Fed is appointed for a renewable 4-year term by the President. The President cannot remove the Chair without cause. The current chairman, Jerome Powell was appointed by Trump during his first term as President and reappointed by

Uncertainty Soars

Investors are by their very nature risk takers, but they are always trying to reduce the risk which they have to take to a minimum. Donald Trump, with his threat of an international trade war and his on-again, off-again tariffs has significantly increased the level of risk in markets across the world. This can be seen in the extraordinary volatility in the S&P500

Liberation Day

Trump has done the unthinkable. He has deliberately engineered the collapse of the US and world stock markets in the nonsensical belief that somehow an international trade war will make Americans richer. Nothing could be further from the truth. His actions have taken the S&P down from its all-time record high of 6144.15 on 19^th February 2025 to Friday’s

The Creation of Money

The money supply of a country is a symbol of the goods and services of that country. Obviously, if the size of the money supply is increased more rapidly than the real growth of its economy, then you have more money chasing the same goods and services, resulting in rising prices. Since, over the long term, the only organisation that can create money is the government,

V-Bottom is likely

The 10% collapse of Wall Street, which is a direct result of Trump’s random policy of on-again, off-again tariffs, is very similar to what happened to Wall Street in February/March 2020 when investors tried desperately to accurately discount the impact of the COVID-19 pandemic.

Normally, corrections in the market

The Trump Correction

It is relatively unusual for the activities of American presidents or what they say to have an impact on the New York Stock Exchange, especially during their first 100 days in office. Trump, however, is the exception. His confused, on-again, off-again rulings on tariffs have rattled the market. Markets hate uncertainty and even Trump himself doesn’t appear to know exactly

Dividends

Investors know that the return on a share is made up of a capital gain plus the dividend. Private investors are mostly attracted to the prospect of making a capital gain on the shares which they buy and do not often consider the dividends. What they perhaps do not realise is that a capital gain is actually just the dividend in a different form.

Quarterlies

One of the major differences between the US equity markets and the JSE is that listed companies in America are required to report every 3 months, not every 6 months as they are on the JSE. The quarterly reports of the S&P500 companies are closely followed by investment analysts and predictions are made for their profits.

Gold's Record Run

On Friday last week, gold reached a new all-time record high of $2871.42 per ounce. Its gain in rands has been even more impressive rising from less than R1000 per ounce in August 1992 to last Friday’s close of R52864.85.

In our Confidential Report of March