War Note: The 'Standby' Continues, Flag or Drag, CPI Preview, Gold Discussion

In the latest War Note we discuss the standby in the conflict, recent tanker attacks, 'flag or drag' with the major US indices, preview the mostly noisy CPI report tomorrow (grain of salt), and more.

Don Johnson (@DonMiami3), Chief Economist

Good Tuesday evening MacroEdge Readers & Community,

This evening we’ll be going over the start of the week, some of the latest war developments, preview what’s ahead for the remainder of the week, and more. This week has been largely uneventful - and we’re turning our attention to the ‘next best thing’ being a CPI report. There’s not a whole lot else this week other than a few earnings events in the sub $500bn market cap category, and we continue to monitor energy prices closely. Today, markets traded slightly flat to sideways - oil moved higher about a point, and diesel is nearing its highest daily close for the cycle - advancing overnight to its highest reading since April 7th. Many are surprised by how wide the spreads are versus refined products vs front month spot on WTI/Brent - but there are many contributing factors to that. Tomorrow evening, we’ll have the first of many energy strategy notes in the months and years ahead - these will arrive every Wednesday evening - and discuss on the public equity market side of things opportunities that the Oil and Gas Research team sees. It will also feature updates and discussions on movements to the Oil and Gas Portfolio Strategy - which will soon be trackable through a third party resource for those subscribed. Subscribe to Oil and Gas Research below:

Oil and Gas Research will be foundational to many reports for the rest of the year, as I suspect it is going to play an important role in how market dynamics evolve between now and midterms - and from there on out through early into Q1. This year just seems to be accelerating in pace, and with school starting once again - soon we’ll blink, and midterms will be a weekend away, and then we’re looking at the holidays. The most important things to watch out for over the next few months will be bonds and oil/energy prices - spot & not. We’re also seeing the yen give up gains from the massive intervention round, and the Administration is seeking to run inflation white hot going into election day now to get assets pumping. The KOSPI is up over 4% overnight (Korean local time), and below we’ll look at the technicals of the major US indices in ‘flag or drag’.

A cool CPI tomorrow could send yields tumbling down temporarily and kick assets into overdrive once again -

Every report since Erika has been booted from the BLS has come in-line, so do I really expect a surprise tomorrow? Not really, because that would be ammunition for a 25bp move in September - which they want to avoid strongly. Either way, the AI trade will start to vibrate violently if rates are increased - just as we saw in 2000…

This evening we’ll take a look at the next reports in our research sequence, talk about the continuing standby in the war - and the dynamics of oil and diesel prices (with the potential for WTI to enter a new cyclical bull come November), and also explore the technicals of the major US indices in ‘Flag or Drag’, and continue on with a CPI Preview.

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Reports in the Sequence

• (Wednesday) Oil and Gas Research Note -> Strategy Note

• (Thursday) Midweek Macro Note

• (Friday) Part 3 of 5 - Midyear AI Bubble and Data Center Construction Update

• (Saturday) Redeye Macro Note - Ozone, Oil and Gas Research Macro Briefing - O&G

• (Sunday) Weekly

The Standby Continues

The *war* is now in a standby state - with Hormuz traffic effectively closed (about ~5mm barrels) transiting through on a daily basis on a 7-day rolling basis, so about 8 million/bbl lower than pre-war. While China demand has remained suppressed, that has begun recovering, and China cannot keep their foot off of the demand pedal forever. We’re also starting to see US exports drop sharply, which explains the large build today in the API report; the EIA report tomorrow will likely show something similar, and that will begin adjusting next week. The market will continue to digest data as it comes in - and patience is warranted through October and this midterms period as we figure out what’s going to happen with both Hormuz and Bab, and the conflict itself.

WTI - in a compression formation - I would call this highly pre-cyclical for something like an 08 move - so be patient.

For gasoline - the large flag is a bit different - but same sentiment as above:

Diesel is the tightest market - just shy of cycle highs - which should see $6/gal return for diesel in many states:

(Continued below with Ozone - The Standby Continues, Flag or Drag, CPI Preview for July, Gold’s Rebound and It’s Warning - John Galt)