A Gathering Of Hawks And The Pressure Of Ideology

In exactly two weeks, the Federal Reserve Bank of the United States will most likely enact its first interest rate hike since Theodore Roosevelt was president… oops, no… it’s not been quite as long as that, but it is years and years.

Speaking from prepared remarks at the Economic Club of Washington, Janet Yellen seemed quite tilted toward a rate hike.

"I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market," Yellen said. Such gains, combined with market inflation anticipation, "serve to bolster my confidence in the return of inflation to 2%.” Yellen mentioned the fading of the effects of low energy and import as stimulators of higher prices.

Not to second-guess Ms. Yellen, but most reports say that crude prices should remain low for, perhaps the next 15 years. And, if rates are hiked even modestly, that will strengthen the U.S. dollar and lower the cost of imports, not raise them. Lower import costs will force American businesses to become more competitive in their price strategies.

All this talk, still premature, and not the actual results of the meeting, served to weigh on equities in the U.S. The Dow is down 0.75%, the S&P 500 is off close to 1.00% and NASDAQ has been tripped up by half of one percent.

European equities were mixed as were Asian stocks, Shanghai being the only solid winner across world bourses because of a rumor about a lowering of mortgage taxes in China.

Gold is off precipitously, falling a bit on the weaker dollar, but mostly on poor physical demand and generally lackluster interest on the trading floors. The entire precious metals complex is depressed, seemingly each component metal taking a turn leading down the whole group, day after day. Palladium could soon be flirting with $500 per ounce.

Crude oil also suffered a bit from dollar strength/euro weakness. West Texas Intermediate fell below the magical $40 per barrel mark briefly today but recovered and is now trading just above that important psychological level. It is down about 4.25%.

Brent North Sea also fell dramatically, again 4.25%, and is closing the WTI-North Sea spread, which is now around only $2.25 per barrel.

As crude oscillates lower and lower it makes us think that we are entering a period in production and marketing of oil that is going to see the U.S. become more powerful than Saudi Arabia. While the countries involved would never do it formally, a de facto “North American Cartel” is emerging.

For the present, we sit and watch prices in energy stagnate, we watch the dollar strengthen and we speculate that the Fed is going to raise rates simply because it’s been too long and a bone must be thrown to the ideologues among rate hawks.

Wishing you as always, good trading,

Gary Wagner