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Crude oil's slide continued on Monday morning, as oil futures broke below $39 per barrel. And with oil producers unwilling to publicly make moves to reduce the supply of oil, traders don't appear to see crude rising back above $50 per barrel any time soon.
On Monday, the first futures contract that shows oil above $50 expires in the second half of 2017. Crude oil for December 2017 delivery (which is more liquid than other far-in-the-future contracts) is trading at just $50.50 per barrel.
Futures contracts don't reflect pure expectations of where that commodity will trade; they also reflect things like the costs of storing that commodity, the extra price that users will pay to have access to the commodity for convenience reasons, and prevailing interest rates.
Yet the crude oil futures curve clearly reflects expectations that the commodity's plunge below $50 is not a short-term phenomenon.
"The futures curve is telling you that the market is totally oversupplied, and will remain so for a long time," commented Andy Hecht, a commodities trader and the author of How to Make Money with Commodities.
The latest bad news for crude came on Friday, when the Organization of Petroleum Exporting Countries decided to take a "wait and watch" approach to production levels, rather than taking action as oil prices continue to plummet. That spelled bad news for oil bulls who may have been hoping the oil cartel might signal a policy shift.
"In a nutshell, it tells me that it will take a long time to work through the surplus and traders feel prices won't rise significantly for a while," agreed Anthony Grisanti, a New York-based trader with GRZ Energy.
The European Central Bank shocked the world and caused a global sell-off when it announced a smaller-than-expected stimulus package this week. The message from ECB President Mario Draghi sent the euro surging more than 3 percent against the dollar, seeing its best one-day gain in more than five years, a feat that left veteran trader and commodities king Dennis Gartman stunned.
"This is something more than a bounce," Gartman told CNBC's "Futures Now" on Thursday. "I've been trading for 40 years, and anytime you see a four euro move, you have to stand back in absolute awe and in the majesty of that move. It is stunning."
Gartman noted that magnitude of the move was caused by Draghi's hawkish tone. "The ECB caught everyone off guard" by not enhancing the amount of its monthly purchase, he said.
For those wondering what it will take for the market to reach new highs, BlackRock's Russ Koesterich channeled a 1990's Clinton campaign mantra by saying "It's the economy, stupid."
Using the theme of James Carville's famous 1992 campaign quote, Koesterich told CNBC's "Futures Now" on Tuesday that the S&P 500 will continue to trade in this sideways and choppy pattern that we've seen this year until there's "significant evidence of growth" in both the economy and earnings picture.
"The key thing for the U.S. market is that we are already at the top of its valuation range. The S&P 500 is already trading at 19 times forward earnings and there's only so much further that multiple expansion can take us," BlackRock's global chief investment strategist said.
The Federal Reserve now looks set to raise rates in December, partially based on expectation that inflation is set to finally rise to its 2 percent target. There's only one potential problem.
There's actually a way that markets can see where investors think inflation will go. And they do not exactly see eye to eye with America's central bank.
Over the next five years, annual inflation is expected to run at less than 1.3 percent. Even over the next ten, investors are looking for no more than 1.6 percent per year.
The Fed is well aware of this thinking among investors. In fact, the minutes to the Fed's October meeting record that "a couple of members expressed concern about the continued decline in market-based measures of inflation compensation."
To be sure, the comparison here is not apples-to-apples.
The popular market-based measures of inflation referenced above are simply found by comparing the yield on a Treasury bond and a Treasury Inflation-Protected Security (or TIPS) of the same maturity.
Since a TIPS bond pays an investor an amount that varies with the Consumer Price Index (CPI), and a Treasury bond is not adjusted for inflation, the Treasury yield minus the TIPS yield should theoretically produce the market's expectations of inflation. That number is known as a "breakeven rate" (since it is the inflation amount that will make the TIPS investor and the Treasury investor break even with each other).
While the breakeven rate reflects expectations about the more popular CPI inflation rate, the Fed targets the alternative personal consumption expenditures (PCE) metric.
Still, it is the trend in the breakeven rate that the Fed has its eye on, rather than the absolute percentage. And while the PCE and CPI readings may differ from month to month, the measures are almost perfectly correlated over time.
One of the biggest stated concerns for stocks over the past year has been the tightening of monetary policy by the Federal Reserve. But for the famously bullish Tom Lee, those who expect a Fed hike to hit stocks are getting something wrong.
When asked about the potential consequences of a Fed rate hike in December, Lee said: "I think markets are really going to embrace this, and it's going to be quite constructive."
Lee, the former JPMorgan strategist now with boutique research firm Fundstrat Global Advisors, said "equity markets are anxious to really get some clarity from the Fed, and of course we interpret that to mean the Fed to start moving," particularly after so many months of speculation about when the first hike would come.
A December move wouldn't exactly be a shock to the market; to the contrary, "we know fixed income markets and credit have priced in some type of move," Lee said Thursday on CNBC's "Futures Now."
Investors are clearly obsessed with the question of when the Federal Reserve will first raise rates. Yet it's the pace of future increases that could ultimately be more important for risk assets.
Fed presidents James Bullard and Jeffrey Lacker made headlines this week when they told reporters that the any rate hikes after the first one will not necessarily be gradual, and will not be on a predetermined path.
To be fair, they are among the most hawkish members of the Federal Open Markets Committee. Lacker's was the the lone dissent to the Fed's decision not to raise rates in September, and Bullard has said that he would have dissented had he had a vote, which he will in 2016.
Still, the idea that subsequent rate target increases will be gradual no matter when the Fed hikes has become a key part of market speculation. Fed chair Janet Yellen frequently directs attention away from hike number one to the slow hikes beyond it.
Meanwhile, Bullard's and Lacker's comments served to remind investors that if the Fed's actions are truly data-dependent, such vows can really only serve as a forecast.
If inflation finally picks up, as the Fed's hawks expect it will, the central bank would obviously be hard-pressed to increase rates rapidly in order to fulfill its mandate to maintain stable prices — particularly since the "maximum employment" side of its mandate appears to be well-met with job creation on the rise.
But that doesn't prevent the doves from suggesting a promise-heavy policy path.
"It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Chicago Fed president Charlie Evans said in a Thursday speech.
He explained that if the committee failed to provide such guidance, it would be an "important policy error" because it might induce people to believe the Fed "is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives."
Whether or not such a belief would be justified is a separate question entirely.
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