Weekly Macro Note: Early Inflation Warning Signals, Technicals Overview, The Physical Energy Reality, Portfolio Strategy Update, & More

In this Macro Note - we discuss the latest updates in the Middle East, discuss early warning inflation signals, provide a very brief technicals overview, and highlight the physical energy reality.

Don Johnson (@DonMiami3), Chief Economist

Good Sunday evening MacroEdge Readers & Community,

This evening, we’re going to explore some outlined topics from the past few days - and lay out the foundation for another packed week. It’s going to be an exciting week, as our ‘On the Ground’ report series kicks off this week, and we’ll be talking about the agricultural sector at large, while focusing specifically on wheat, corn, and fertilizer, which remain in very dynamic places.

While we continue to digest the paper v physical reality in oil futures, it appears that we’re moving toward an environment of scarcity in the coming days as it comes to critical materials and more coming out of the Strait of Hormuz… I posted a few of these items on my X earlier (@DonMiami3), and on Tuesday, we’ll take a look at the major physical supply chain impacts, as well as look at the timeline when we can expect things for these items to worsen. May, as one example, is when we likely start to see more significant pressures for energy supplies, and it’s likely that if this situation continues for another week or so, we’re going to see another globally coordinated SPR release, given what refiners are saying. Yes, having this situation going on, while markets have ‘crashed up’ is a totally bizarre dilemma, but we shouldn’t be mistaken that markets are ‘all-knowing’ in their forward-looking nature, this is actually not the case over the course of many shocks throughout history… especially one where we have so many different economic components at risk at the same time.

This evening, we’re going to briefly cover the futures open, and I would largely ignore these nowadays given the headline bombardment that will resume as soon as markets open ET. The most important thing to monitor this evening is to see if the gaps can actually hold (on the downside move in equities) and on the upside move in oil prices. If that were the case, oil can start to seek out higher price levels again, and we’ll see spot WTI move back to the $100+ level as a starting point. The volatility right now has been somewhat awful for energy equities in the past few weeks, but few can grasp what a tailwind this pricing environment is for both E&P and service companies in the sector. While I do not expect a meaningful increase in drilling activity until at least Q3, we can continue to seek out leading indicators that point to that - and in advance of such activity, we added the necessary exposure on this scarcity play. Global actors may be able to convince people through the futures curve of one narrative, but the reality is in the physical markets - and the situation is not going to resolve itself for (at minimum) months.

For the time being, we’re back to a place where the conflict is looking like it could escalate - and that is going to have economic ripple effects for months to come, some of which we talk about below and will cover more on Tuesday evening.

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Futures Open / Week Ahead

Futures have opened in a mostly red way - down across the indices - with international indices also falling in Asia. Spot WTI is about $90/bbl, and a hold of this gap would be a critical next step in higher price action. Technically, oil is at a very key level with this overnight gap up, and we discuss next steps and pathways below. Again, a grain of salt until the day closes tomorrow, but mind the gap.

Week Ahead

• Monday: None Scheduled

• Tuesday: Retail Sales, Inventories

• Wednesday: EIA Petroleum Status Report

• Thursday: Flash PMIs, New Home Sales

• Friday: Durable Goods

No Fed/BoJ meetings until next week.

Tesla is the >$500bn market company reporting this week. With SpaceX on the horizon, watch for the reaction as a test of the market’s appetite for these IPOs amidst this massive speculative blow-off.

Early Inflation Warning Signals

Early inflation warning signals are mounting - and these take time to transmit all the way through the economy… recall 2021? There are many similar red lights flashing right now - and no one seems to care. The Fed is once again asleep at the wheel - pouring fuel on the fire through balance sheet expansion, and we sit here and wonder when they’re going to halt current policy (which looks quite unlikely). Look at copper prices as one of many warning signals:

Let’s take a look at L&G BCOM - All Commodities Index - which continues to explode higher, and we yelled from the rooftops about this from November & December of last year as a new base began to form and the Fed was talking all about disinflation and soft labor...:

(continued below: early inflation warning signals, technicals overview, weekly report overview, froth and friction - Portfolio Strategy note and commentary from Six, and the reality of freight from John)…