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Talk about reversals and a run to safety. Ten-year bond yields spiked to over 2% on Thursday following the release of the monthly Consumer Price Index. It hit a 40-year high and caught Wall Street bulls by surprise because the number was supposed to dip in January. Even more shocking, was the “core” rate which removes food and energy in the basket. Both numbers came in at 0.6% or 7.5% annualized for the base number and 6% for the core (both 40-year highs.) Unfortunately, on the heels of the release, a number of Federal Reserve Presidents commented the US Central bank is probably behind the curve and will need to act aggressively if they don’t want to see a repeat of the 1970’s style stagflation. It is a delicate balancing act. Raise too quickly and you quell any chance of an economic recovery; delay and inflation could really get out of the bag. What started out as a supply squeeze, may turn into a wage push inflation spiral.

Here is the problem in my view. Not withstanding China’s practise of shutting down factories to reduce smog ahead of the Olympics, covid may rear its ugly head in their manufacturing belt. Without an effective vaccine, the Chinese government may be forced to shutter plants longer than the West is betting on. We read one report that suggests manufacturing won’t get back to normal until well into 2023. Never mind the ongoing chip shortages that is curtailing everything from autos to play stations.

Remember, those products need to be shipped to North America and transported by rail and trucks to retailers and consumers. In North America, we speculate there is a growing labor shortage that could get worse if we get an acceleration in “boomers” retiring earlier than 65.

In other news,  the IEA estimated OPEC+ production missed their quota by 900,000 barrels per day in January. IF you are wondering why oil and gasoline prices are going up, look no further. And remember, companies like Enbridge and TC Energy (formerly Trans Canada Pipe) have been stymied at every turn to get additional pipeline infrastructure in place that could have met the supply needs with Western Canadian product. But if Middle East exports continue to shrink, countries like China and India will have no choice but to bid up the price of the commodity.

That is providing a huge windfall for Canadian and US energy producers. No surprise Exxon Mobil announced plans to increase its overseas production and Baker Hughes saw its rig counts rise to their highest levels since 2018. In my opinion this is the tip of the iceberg and the only thing to upset the apple cart would be removal of Iranian sanctions in return for slowing their nuclear “energy” program. Bottom line, expect more oil companies to report higher earnings, dividend increases and stock buy backs.

Now back to the other elephant in the room. The expected Russian incursion into Ukraine. The US Government believes it could happen at any time and its effects on capital markets were immediate. Gold hit $1867 oz and 10-year bond yields dropped from 2.05% to 1.91% in a heartbeat. Crypto currencies btw fell rapidly which tells me it is not exactly a safe haven currency or asset class. Mind you that might have something more to do with the recent decline in Consumer Sentiment which hit a 10-year low last month.

Turning to next week, aside from US Producer Prices on Tuesday (its expected to rise 0.5%,) the street will also be focused on retail sales and housing data…that and a bucket load of corporate earnings including Nvidia Corp, Applied Materials, Cisco, Airbnb and Walmart. Hopefully, earnings will be strong enough for Wall Street to erase the 1.8% drop in the S&P.

In Canada, Stats Can will report January inflation on Wednesday (0.6% expected), plus housing starts and manufacturing sales plus a smattering of earnings including Restaurant Brands (Tim Horton’s Burger king) Air Canada and Canadian Tire.

Finally, when not fixing a hallway closet, playing soccer, I will be supporting our Canadian athletes and watch them as they try to win more medals…With my PVR I should also be able to catch the Superbowl and all the great ads this year.

Happy trading and Stay Safe.

Cheers Steve.

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