"Oil Goes For a Ride"

MONETARY

• Pursuant to the conclusion of the March 15-16 FOMC meeting, the Federal Reserve hikes the Target Federal Funds Rate for the first time since 2018 by 25bps from a range of 0-.25bps to a level of .25-50bps^1,2
  • Additionally, the March 15-16 FOMC meeting was accompanied by a revised set of economic forecasts the Federal Reserve routinely prepares known as the Summary of Economic Projections^1,2
    • Within the Summary of Economic Projections, Fed participants adjusted their expectations for GDP growth in 2022 to a level of 2.8% from the prior estimate of 4.0%, due primarily to economic uncertainties pertaining to the Russia-Ukraine war^1,2
      • (Powell) “I think some of that is just an early assessment of the effects of spillovers from the war in Eastern Europe, which will hit our economy through a number of channels. Highly uncertain but, you know, you’re looking at higher oil prices, higher commodity prices. It’ll be — so that — we think that will weigh on GDP to some extent. So that’s part of what moved — moved the assessments down”^1,2
    • Regarding Inflation expectations, Fed participants adjusted their full-year estimates for Inflation in 2022 to a new level of 4.3% from the prior forecast of 2.6%. The increase in Inflation expectations was largely driven by perceived downstream effects on Commodities prices due to the Russian invasion of Ukraine^1,2
      • (Powell) “Additionally, higher energy prices are driving up overall inflation. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine will put additional upward pressure on near-term inflation here at home”^1,2
    • Fed participants largely expect the Labor Market to remain strong into the foreseeable future, with Fed expectations for the Unemployment Rate to not diverge meaningfully from 3.5%1,2
    • On the topic of reducing the Fed’s Balance Sheet, Fed participants are generally in agreement that commencing its Balance Sheet reduction strategy would likely be appropriate at the onset of the next FOMC meeting in early May^1,2
      • (Powell) “And I’d say we’re now in a position to finalize and implement that plan so that we’re actually beginning runoff at a coming meeting. And that could come as soon as our next meeting in May”^1,2

 

FISCAL

• The Biden Administration formally releases its Fiscal Year 2023 proposed Federal Budget outline which includes various spending initiatives and tax hikes^3,4
  • Among the noteworthy sources of raising revenue include^3,4
    • Raising the corporate tax rate from its current level of 21% to 28%^3,4
    • Raising the top individual income tax bracket to a level of 39.6%^3,4
    • Create a new tax dubbed the “Billionaire Minimum Tax” which would impose a minimum tax rate of 20% on households worth more than $100M^3,4
    • Repealing various tax breaks for oil and gas producers and processors^3,4
  • Some of the noteworthy spending items included in the budget proposal include the following:^3,4
    • Raising defense spending by $31B to a new level of $813B^3,4
      • Included in the $813B of defense spending will be a $6.9B carve-out for funding NATO, European Defense, and Ukraine^3,4
    • Provisioning $10.6B for global health security^3,4
    • Including $32B of spending to address domestic crime, which would involve 20.6B of funding for the Justice Department, as well as $3.2B dedicated to state and local law enforcement grants and hiring police officers^3,4

 

GEOPOLITICS

• Additional details of Russia-Ukraine ceasefire negotiations come to light as the two sides continue negotiations in an attempt to work towards an eventual de-escalation of the military conflict⁶
  • Russia is reportedly open to allowing Ukraine to formally join the European Union as long as the country agrees to various security concessions which include the following:⁶
    • Refraining from developing nuclear weapons⁶
    • Abandoning its pursuit of joining NATO⁶
    • Declining to host foreign military bases in the country⁶
  • One of Russia’s major initial demands, having Ukraine recognize that the territories of the Donbas and Crimea will be under Russian control, is reportedly still on the table and may be a source of future compromise between the two sides⁶
  • In exchange for the aforementioned concessions, Ukraine would receive the ability to formally join the European Union, as well as security guarantees from a number of countries including China, United States, Russia, United Kingdom, Canada, Israel, Germany, France, Poland, and Turkey⁶
  • Important to note, negotiations are still ongoing and there remains a long list of unresolved points that will ultimately need addressed before a formal ceasefire can be agreed upon⁶

 

MISCELLANEOUS

• In response to the ongoing elevated oil and gas prices, Biden Administration is considering a large-scale release of oil from the U.S. Strategic Petroleum Reserve⁵
  • The proposed plan would ultimately entail releasing 1m barrels per day from the SPR over the course of several months⁵
  • Additionally, member countries of the International Energy Agency are said to also be considering larger-scale releases from their own respective emergency oil supplies⁵
  • Skepticism remains as to whether or not a large-scale release of oil from the SPR will have a meaningful lasting effect on oil markets, however some analysts suggest that a large-scale SPR release would temporarily depress prices while the U.S. oil and gas industry continues to attempt to re-normalize oil output to pre-pandemic levels⁵

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Federal Reserve. “Transcript of Chair Powell’s Press Conference: March 16, 2022”. March 16, 2022.
2. The Federal Reserve. “Summary of Economic Projections”. March 16, 2022
3. White House. “Budget of the U.S. Government: Fiscal Year 2023”. March 28, 2022.
4. CNBC. “Biden’s 2023 budget would hike taxes on the ultra-rich and corporations”. March 28, 2022.
5. CNBC. “Oil prices slide as Biden considers huge reserves release”. March 31, 2022.
6. Business Insider. “Russia is prepared to drop its demand for Ukraine to be ‘denazified’ from its list of ceasefire conditions: report”. March 29, 2022.