Pro Perspectives 3/23/21

March 23, 2021

The broad risk environment is "off" today.  It was led by a 6% decline in oil prices.  Stocks followed oil lower after Jay Powell and Janet Yellen both said asset prices are “high” or "elevated." 

Are they talking down asset prices?  It sounds like it, for the moment. 

Both the interest rate market and the oil market have been putting pressure on Fed policies, implying if not feeding into inflation and inflation expectations.

Today's moves in markets have given the Fed some room to breath.   The 10-year yield is off 13 basis points from the highs of last week.  And oil prices have broken the uptrend from the election-eve lows (as you can see in the chart below). 

Lower oil prices will soften the inflation picture.  But it will be short-lived.  As the global talks on climate action heat up this week, the planned destruction of the fossil fuels industry only builds a moat around the existing producers.  They will get more and more business (as the global economy will still demand a lot of oil), and sell production at higher and higher prices (as supply is constrained).  That makes the oil and gas stocks a buy on the dip.