Ep.93: Jerome Powell Boosts Stocks & What To Expect From OPEC+

Okay, hello and welcome to episode 93 of the Market Maker podcast, and I feel very privileged because Piers Curran has decided to join me this week. He's made some space in his schedule, and— but sorry, Piers, there was— I don't think we've heard the story yet about the— I'm now sat here doing this podcast with a full-blown celebrity?

Yeah, it did. Well, firstly, you know, you're lucky I've managed to fit you in. I mean, obviously I've got a tight schedule and, um, yeah, just, just count yourself lucky, basically. But yeah, the, uh, yeah, I'm, I'm famous, um, and I've got an official measure for what, what actually fame is. Yep. Um, so, so, so as I was telling you, I was in Birmingham last week, um, and, uh, I was coming back from— but I was at the University of Birmingham. In fact, we run a few kind of modules and stuff there. So I was just up in Birmingham and then coming back on the train at night, and there was problems with the train, and I had to get a connecting train from, um, a lovely place on, on in this country that I'm sure everyone will have been to. Classic holiday destination, Nuneaton. And so I was a connecting train there, got— so I was on the platform in Nuneaton and then got on there and someone else got on. And anyway, I sat down and then, um, yeah, lo and behold, someone else like plunks themselves right in front of me. And I was about to kind of tuck into some food because I hadn't eaten all day. And he plunks himself in front of me, goes, 'You that guy off that podcast?' And I was like, 'Which your response is?' What? 'Don't know what you're talking about.

No, I'm not. Leave me alone.' Yeah.

So being recognized on a train in Nuneaton is now the official measure of fame. So unless, unless that's happened to you, I don't think you're famous.

Yeah, well, I mean, hello and thank you for that person for listening, hopefully listening to this episode.

Yeah, and can he connect with me on LinkedIn? I asked him to. He works at, um, Schroeder's. He said he was going to connect, so got a reminder, connect with me please. You haven't followed through on your promise.

Anyway, obviously, uh, your chat-up lines need a bit of work, uh, here, but, um, An anticlimax in reality, obviously. Another thing that I have seen is Spotify have started doing their year wrapped, and if you're a Spotify user, you'll know what I'm talking about. It basically auto-generates some quite cool graphics around your most listened to tracks, your most listened to podcasts, so on and so forth. And shout out to Elliot Rumble. Yes, who, um, we're— I think we're there above Morgan Stanley and above the FT, Piers.

So, um, that's right, in terms of Elliott's listening hours. Yeah, I mean, quite rightly.

So yeah, I mean, if, um, if we do pop up on your feed, it would be amazing if you could share it on your, on your socials, and, uh, it would do a great deal, I'm sure, to just get the word out and, and can I get more people listening.

And I set a challenge because another shout out to Stephen Barnett, obviously Amplify. He's been on a couple of the podcasts going back, but he dropped his in the Slack chat this morning and he's clocked 1,762 minutes listening to us, which is— well, I don't know what to make of that.

That's a prison sentence. But yeah, I mean, if that pops up in your feed, Um, and you could do like Elliot has done, which is share it. I guess LinkedIn is kind of the, the optimal platform for that sort of stuff. Uh, if you think people would be interested, it'd be much appreciated. But look, let's get straight down to it, um, because I know given the celebs that you are, Piers, I've already got you, I think, for another 15 minutes. So we're going to talk a little bit about a keynote speech from the Fed Chair Jerome Powell which sent equities rocketing yesterday. So I want you to break that down for us. What was said? What are your thoughts? Where do we go from here? And then talk a little bit about oil because of the looming OPEC meeting which is coming in a couple of days' time. And there's been quite a lot of rumors flying around about what could happen, and there's a few different elements I think that need explaining around, uh, what might influence their decisions. So let's start with, with Jay Powell. What happened yesterday?

Yeah, well, what happened was stocks went sharply higher off the back of what Jay Powell was saying. That just kind of meant lots of headlines, fodder for the press. So I think the S&P— let me get this right— was up 3%. I've lost my stat now. I think it was up 3, 3-odd, or 3.1%, I think it was, on the day. The NASDAQ was up 4.4%. Just meant these indices closed out November in a, with a positive month, and, uh, which meant 2 months in a row of, of gains for US stocks, which is actually the first time they've strung together 2 months back to back, um, since last year. So, um, so yeah, very positive run into the close last night, and this comes actually just weirdly bang on the anniversary. So yesterday was the 30th of November, we're Recording this on Thursday the 1st. So yesterday happened to be the anniversary of the Fed pivot, the first one, because back on the 30th of November 2021, Powell delivered a speech that then, with hindsight, became to be the turning point in the Fed's sort of view on inflation and how they were going to tackle it prior to the 30th of November 2021, the Fed were downplaying inflation. They were using that word transitory, as you'll remember, and look, don't worry, no big deal, blah, blah, blah. On the 30th of November 2021, Powell made a speech and he said, look, inflation pressures were high. And he said, it's appropriate in my view to consider wrapping up the tapering of our asset purchases Perhaps a few months sooner, because it's weird to believe that 12 months ago the Fed was still pumping their QE program. It's crazy, isn't it? But that moment was the pivot, right? Inflation is higher than we thought. It's not transitory. We're going to have to stop QE much faster. And that then started this super steep tightening cycle, right? So that was the anniversary of that was yesterday. Anyway, just so happens Powell was speaking yesterday, um, and it's, yeah, quite nice timing because maybe yesterday again is a bit of another pivot, um, although the pivot was kind of preempted with the Fed meeting and the, um, the last Fed meeting and the Fed minutes and maybe the inflation data that we had, um, a few weeks back. But what he said last night to make markets rocket higher He said the time for moderating the pace of rate increases may come as soon as the December meeting. So there's not— there's nothing new there, right? Markets are kind of already thinking they'll drop to a 50 basis point hike in their December meeting, having hiked 75 basis points at the previous 4 meetings. So, but this is like the clearest evidence yet from the man himself that December will be a 0.5% hike. So that's obviously good just to get even more certainty on that. He said some interesting stuff like, my colleagues and I do not want to overtighten. I will simply say that we have more ground to cover. History is cautious, or history cautions strongly against prematurely loosening policy. So he kind of contradicted himself a little bit there. So he's basically saying, look, we're going to slow down, uh, we don't want to overtighten, but, you know, we don't want to prematurely loosen either. So those hoping for our interest rate cuts in 2023, maybe that's a bit ambitious. But obviously that will, that will, you know, play out, um, and it's data dependent, right? So if your view is that inflation is going to come down pretty quickly next year, then even though he said what he said last night, you know, don't expect premature loosening, if your view is inflation will drop sharply, then we could well start to see the Fed, you know, with that data coming through, start to go, well, all right, maybe it is time to start cutting rates. So yeah, a kind of dovish angle to his speech last night that traders got a hold of and ramped up the equity space, you know, across the piece.

The one thing, maybe just to elaborate, he spoke specifically about the labor market. So maybe a bit of color on that. He said in order to bring inflation back down, he warned that the labor market must become substantially softer and there would need to be a sustained period of below-trend growth. So in layman terms, what's, what's he telling us there?

Well, he's saying that because for the last— because it's nonfarm payrolls tomorrow, right? So how many jobs were created in November? If you take the last 3 months, so job creation in August, September, and October, then the average for the 3 is 290,000 jobs created per month, right? Now, you'd expect job crea— like if the labor market was flat and the economy was flat, you'd, you kind of need 100,000 jobs created a month just to absorb the population growth. Okay, so that 100,000 a month is like your neutral level. Okay, so 290,000, well, that's 190,000 above neutral jobs being created. So he's saying that's still actually super strong, and ultimately we're going to need to see the labor market turn and pivot, and we're going to need to see job losses, which then results in that demand destruction, which then leads to price pressures falling. So he's basically saying that, look, you know, the labor market is still super strong, so that's why don't expect any rate cuts anytime soon, is what he's saying. So the— now, the fact he's put that job creation thing, he's just put that right up at the top of the agenda. In terms of incoming data in the future. And actually, I can point towards evidence of that. It just happened 9 minutes ago because you asked me just before we hit record, you know, what's happened with stocks this morning? Because you've been out at a meeting and I was saying, well, they're basically flat compared to last night. So they rallied into the close last night off the back of Powell's comments, and then they're flat, you know, US futures trading flat this morning. So just hanging on to those gains, but nothing more. Until 1:30 PM, they've just spiked and ramped higher again because we've just had the Challenger job cuts numbers and they have massively gone up. So 76,835 jobs cut in November. That's the highest number since January 2021. So job cuts looks like they're beginning. And that's not a surprise because we've heard from all the tech, big tech firms, you know, We're laying off 10,000 here and 10,000 there, and Twitter cutting their workforce in half, Google thinking about job cuts, you know, what was it, 11,000 job cuts at Facebook, um, all the rest of it. So it's not a surprise, um, but the fact Powell's put— he's put job, job numbers front and center now, I think, for the months ahead, for us now to gauge not when will they ends the hiking cycle, because we think that's now in, and it'll end either with the December meeting being the last hike, or maybe one more hike of 25 basis points thereafter. So we're pretty sure where the top of this hiking cycle is. So now it's all about, well, when's the start of the cutting cycle?

So in terms of like the equity move that we're seeing at the moment, most banks on the street been saying, like your JPs, your MSs, and so on, that this was a temporary rally and actually we were going to go back down, retest, print new lows again on the back of valuation multiples still to decompress, or the language that they use.

Yeah.

Have they got that wrong now then? And actually couple this with what might be happening in China, although there's violent protesting, if there is a softening in the COVID protocols It's very hard.

I mean, I think it's a super hard one to call right now. I think it's really— I think we were talking about the bottom a few weeks ago and it looks like the bottom's in and the Fed's now saying, right, we're going to hike at a slower rate and we've had a bounce. And so the question is, was the bottom a few weeks ago, was it the bottom? Of this whole thing, um, or not. And I think it's hard to call. I think the bottom for the year's in, so— and I think we might have a positive December, you know, the Santa rally. Uh, December's typically a very positive month for stocks, and I think, you know, we just need another, you know, soft inflation number out of the US for December, or a really soft nonfarm payrolls number tomorrow just to kind of continue that upward trajectory. What happens in 2023? Is this another temporary bounce on what continues to be an onward-going downward longer-term trend? I mean, I think that's hard to call, and it's entirely based on the inflation beast. And does it come down sharply? It's entirely dependent on the geopolitical factors, of which obviously Russia's one. But then what about China, as you're saying? And I think they're really hard to call and predict. So I don't know, the jury's out on that. And I think we'll assess that in a month or so's time, I think. But for now, I think we're still pointing pretty positively into year-end, I would say.

Okay, well look, we've got a couple of minutes left, so let's pivot over to— pivot over to oil. And let's talk a little bit about OPEC because there's a virtual meeting happening on December 4th. And actually, just by fact of it being virtual, sources have suggested there might be any policy change, which I can kind of get to a certain extent.

Is that— I didn't realize it was virtual then. Why are they— is that normal or why are they doing virtual?

It's not.

Well, COVID, it was. It would—

it wouldn't be normal. And they've only recently decided to do that. And Reuters sources yesterday were suggesting that that lowers the likelihood of any significant policy change.

But why the shift to virtual, do you know?

Well, you know how OPEC works. These decisions have already been made. Yeah, there's no need for meetings. Um, the other thing, of course, was that Saudi Arabia— so this was 2 days ago— Saudi Arabia and other OPEC members are reportedly considering production increases. So everything you've just spoken about in the economic, the macro context, was about slowdown, rising unemployment, everything that would constitute the opposite normally, and from a consumption oil point of view. But the Wall Street Journal was reporting that Saudi specifically, and others were talking about considering a 500,000 barrel per day increase to production. Yeah, so Well, why are they doing that, and what's the connection with Russia within this in the EU?

Yeah, so there's something big is just happening. It's just happened today. Well, is it big? We don't know yet. What's happened is today, the 1st of December, is kind of officially the beginning of Europe's sort of sanctions on seaborne Russian crude oil. Now they made noises about this back in the summer. They said, right, we're going to stop buying Russian seaborne oil, okay, but we're not— we're only going to stop doing that in December to give us a bit of time to shift and adapt and find alternative supplies. Well, now it's December, so the ban starts today. So EU countries are no longer going to be buying Russian seaborne oil. Now there's a lot of oil being piped which is a different matter. But the, the other thing, they've gone one further, because what Europe are doing, their sanction is we will not buy any, and we will not insure any Russian oil tankers that are going to any other country in the world unless the buyer agrees to not buy crude oil above a certain price. Now, we're not sure what that price is It's been ranging between like something as low as maybe even $20, but more likely probably something in the $60 range. So let's say if India want to buy Russian crude oil, they have to pay, they have to adhere to the European price cap if Russia want the European insurers to insure that boat, which is— now European insurers is the biggest insurance market. They account for all the boats, but not all of them. But the point being, where you could say, well, all right, we'll just do it without insurance— well, India wouldn't do it without insurance. But you could say, well, Russia could insure it, or India could insure it. But the problem is Europe control all the ships. So in order for Russia— so we don't know what's going to happen. Will India continue to buy Russian oil? If so, how are Russia going to get it there? And are there any alternative ships that they can use? And the answer is yes, but probably nowhere near enough. To maintain their current supply to India. So we're not quite sure how this is all going to play out. India have said, well, you know, I'm not going to play ball, I'm not— Europe, I'm not adhering to your price cap, thanks. But it's just more a question of logistically how they're going to get it there. So there is a genuine risk that Russian crude oil drops off quite sharply, which is why I think the Saudis are talking, well, look, we'll increase production to offset that. But there's a hell of a lot of unknowns in here. So I think in the next month or two it will really play out. You've got some analysts thinking that oil is going to ramp to $120 here because Russian supply will drop quite sharply and it won't be able to be— the gap won't be able to be filled by Saudi. Um, so yeah, I think we're entering into quite an un— well, not an unusual, an entirely unique period of uncertainty on supply. Um, so it'll be interesting to see what OPEC do over the weekend, or whether it's a month too early, because they haven't really got any data on how this is all going to play out particularly. But Russia will be talking to Saudi on Sunday to say what are their alternative plans for getting oil to India and to China, of course. Um, so we'll see how this plays out just, just on that supply side. The other issue is, if you're thinking about just global supply generally, or US stockpiles of crude oil. Because during all this time, Biden's been tapping their emergency reserves because he needs to win a midterm election and he needs to get the petrol price down. So he's been greedily tapping the, um, US emergency supply to the point where that is now carrying the lowest number of barrels since the year 2000. And actually, if they keep going, they're not far off having the lowest amount of emergency supply since the 1980s. So that's another supply concern. If this Russia supply thing— if it is worst case and it drops off much sharper than expected, not much US emergency supplies, you could get a bit of a ramp higher in crude prices into the new year, which of course then, wow, what does that mean for the inflation? Story. Is that another chapter of high inflation? Or— so yeah, there's a lot in the mix.

One thing I would say is I don't think people should get too anchored by the idea of having to wait a month for OPEC to observe and respond. I think if needs be, that they will just do what's necessary. They won't hang about. This is OPEC. The other thing then is, what, what about, um, China? There's obviously been quite a few developments happening in China this week, namely that of very unusual public protesting against the government's mandate of zero tolerance COVID, and usually because of the fear of reprisal from the government. So yeah, any thoughts on that and whether Xi will move and how so to respond to quell that uprising?

Well, I think they've moved, haven't they? They've kind of— yeah, I think these— it's got a lot of press attention in the West, of course. And there's been quite a lot of demonstrations in China this year which haven't got as much attention. There's a lot of demonstrations around mortgage payments related to the fact that the property market was crashing and that there were a lot of unfinished apartments and Evergrande and the rest of them were perhaps defaulting, and that meant that people were paying mortgages on unfinished apartments. And so there was a big demonstration around that and people striking and lots of stuff going on around that. I think what's different here is those demonstrations earlier in the year were squarely focused on the homebuilders and Evergrande. Now it's not. It's on Xi Jinping himself. And indeed, I think, well, certainly the West were very keen to report the one demonstration was, you know, calling for the removal of Xi Jinping and a regime change. It's hard to say whether that was a general theme across all the demonstrations in all the cities. I doubt it. But I don't know. I still think at the moment, it's probably— it'll blow over. Is my sense. Um, but it's hard— again, it's so hard to predict, isn't it? And it will be COVID-dependent on whether these lockdowns do ramp up or not. Um, so yeah, Xi Jinping's treading a tightrope at the moment.

So if you're, um, gonna go one of two ways in terms of the current COVID situation, because from a case rate perspective that has gone up we know in China. And so whether or not that requires more lockdowns, we'll see. It probably will do to some extent. So is that— does that compound the already negative trend for the Chinese economy in the short term, or is it actually a positive in a sense that the government will be forced their hand to make some type of change? Now, that change could be monetary, could be fiscally, it could be in various different forms, even in the actual COVID policy in itself. So actually, does COVID re-emerging in that way force the hand, or does it just then make the situation that's already bad worse?

Yeah, I mean, maybe that's his out, right? It's, look, we're maintaining stubbornly with this zero-COVID policy, but look, to just calm you lot down, here's a wave of fiscal stimulus. You know, here's a stimmy check. You know, I, I actually wouldn't be surprised if that's the kind of line he takes to keep everyone happy.

And which, which was Apple's, uh, solution to the Foxconn issue, by the way. I think they were throwing $1,300 US at each individual.

So that— but the problem with The problem with that is, isn't that inflationary again though? Because suddenly a massive stimmy check lands on the doormat and, well, what are you going to do? You're going to spend it, right? So you could get another temporary spike in demand and then you got your supply chain issues still. I mean, yeah, don't know. So that's why I say 2023, even though we're almost there, I think it's still super hard to call it because there's so many moving parts. So I'm kind of in a wait and see. I'm relatively positive into year end with then let's wait and see till we get there as to what I think about next year.

Okay, well, we'll end it there. I know you don't like letting George Clooney wait for lunch, so I'll let you go. And yeah, we'll speak again next week. Thanks, Piz.

Yeah, have a good weekend. See ya.