How Will Inflation Impact Gold & Oil?

 Let me double down and go through some numbers. I agree that too much is better than too little and we should aim for some overheating. The question is how much. Much too much is both possible and harmful. I think this package is too much.— Olivier Blanchard (@ojblanchard1) February 6, 2021 

 The Biden plan is a vital step forward, but we must make sure that it is enacted in a way that neither threatens future inflation and financial stability nor our ability to build back better through public investment.https://t.co/h1ebAM82Xr— Lawrence H. Summers (@LHSummers) February 5, 2021 

 The next time Olivier Blanchard is right about macroeconomic theory or projections will be the first time. https://t.co/0eA42emi1T— Ben Hunt (@EpsilonTheory) February 7, 2021 

"In terms of judgment, in forecasting his record has been atrocious"

- Joseph Stiglitz

“Why would we listen to the economist who admits he went too small last time if he’s warning us to go small again? I swear this town is nuts. It’s like people can only remember thirty names and so they just keep going back to the same people.” - Sen Brian Schatz

Nonetheless, the risks are looking more and more skewed to a longer period of above-target inflation, particularly given additional fiscal stimulus is in the offing

We see a clear risk that Powell and the Fed starts sounding a bit like Summers and Blanchard as soon as inflation is actually running above target, which could lead to an internal Fed debate on the appropriate balance sheet policy already before summer.

It is after all much easier to talk about average inflation targeting, as long as you are not tested on actual inflation that runs hotter than the target

…it helps to look back at the inflation dynamics that the United States has had for some decades and notice that there has been, you know, significant disinflationary pressure for some time for a couple of decades.

Inflation has averaged less than two percent for a quarter of a century and the inflation dynamics from the flat Phillips curve and low persistence of inflation changes over time.

It evolves constantly over time but doesn’t change rapidly. It’s very unlikely anything we see now would result in troubling inflation.

Of course if we did get sustained inflation level that was uncomfortable, we have tools for that.

It’s far harder to deal with too low inflation.

The Fed is not afraid of inflation getting out of control. 

The Fed is more afraid of making the mistakes of the last recovery and withdrawing support for the economy too early.

The Fed will not hike rates until inflation exceeds 2% on a sustained basis. This is not the forecast of inflation, this is actual inflation.

The Fed expects us to take these promises seriously and stop worrying about rate hikes until something interesting happens on the inflation story. 

And stop worrying about tapering until we see some data confirming the growing optimism for this year’s outlook.

“We are not going to lift off until we get inflation at 2% for a year. 

We are trying to tie our hands.

We are saying we are not going to hike until we get to 2%,”

In a world where almost a year later we’re still almost 9 million jobs (at least) short of maximum employment, people out of the labor force, it’s very much appropriate that monetary policy be highly accommodative to support maximum employment and averaging two percent over time.

Traders are generally backing up such a view in light of the steepening of the US Treasury curve and rising market-based measures of inflation expectations.

Given that Chair Powell has said the FOMC will provide plenty of heads-up, market participants will be looking for guidance fairly soon.

 Let's say end-22 (23 more jobs reports) = 435k/mo NFPs(!!!)

The problem is that it’s over 20 million jobs so these numbers would need to be doubled. Unemployment is going to destroy any economic recover. @Halsrethink— Live Monitor (@amlivemon) February 8, 2021 

In a world where almost a year later we’re still almost 9 million jobs (at least) short of maximum employment, people out of the labor force, it’s very much appropriate that monetary policy be highly accommodative to support maximum employment...

 We could see a consumer credit cycle led by housing but without wage inflation I think we still see muted inflation pressures. Japan has an unemployment rate near 2% and still hasn’t seen any. Technology, imports and remote workers will all help to work against DM wage growth.— The Long View 🍥 (@HayekAndKeynes) February 7, 2021 

Recent increases in crude prices and the rapid drawing down of visible stockpiles will undoubtedly lead to calls for a more rapid raising of production targets than was envisaged in December.

That may well reignite tensions between the co-leaders of the group, Saudi Arabia and Russia, with the potential for more brinkmanship that could undermine the price recovery.

The amendment agreed to in December allows for monthly changes in the collective target of up to 500,000 barrels a day until a total of 2 million barrels has been added back.

The first such increase came into effect last month.

Given that Russia and Kazakhstan received their shares of the next increase spread over February and March, any output increases for April should, by rights, exclude them. I can’t see that going down well in Moscow.

Moscow may well want to claw back market share relinquished through the supply cuts more quickly than is comfortable for Saudi Arabia and others.

The rest of OPEC+ may have little alternative but to accede to its demands. They remember only too well what happened last time they failed to keep Russia on board — a production free-for-all that saw prices tumble below $20 a barrel. Nobody wants that.

...while the market outlook continues to improve, there remain demand risks in the near term. Until vaccination rates pick up around the world, it is difficult to be overly bullish on oil demand, with it still held back by lockdowns in certain regions and restrictive international travel.

Meanwhile speculators continue to increase their net long in ICE Brent. Over the last reporting week, speculators increased their net long by 7,900 lots to leave them with a net long of 346,053 lots as of last Tuesday, with the bulk of the buying over the reporting week being fresh longs rather than short covering.

Clearly given the move in the market since last Tuesday, it is very likely that the current net long is somewhat larger.

Obviously if there was to be another demand wobble, the risk is that you do see a sizeable amount of these longs liquidating.

If we stick with positioning data, but focus on WTI, it does seem that higher prices are attracting more producer hedging, with the gross producer/merchant/user short increasing by 69,808 lots over the last week, and leaving this gross short at the highest level since June.

Further strength in the market would likely only attract further producer hedging, which should start to provide some resistance to the market.