"Drilling or Chilling?"

MONETARY

• In response to higher than expected inflationary measures in May, the Federal Reserve opted to raise its Target Fed Funds Rate by 75bps from a level of 75-100bps to a new level of 150-175bps¹
  • Prior to May’s CPI reading, market participants were largely expecting a 50bps rate hike at the June FOMC meeting, however with inflationary measure surprising to the upside expectations adjusted to 75bps¹
  • The June FOMC meeting was also accompanied by an updated set of the Federal Reserve’s Summary of Economic Projections³
    • The median projected GDP growth rate for 2022 was revised downward from the prior level of 2.8% to a level of 1.7%, which primarily reflected the committee’s expectation for international trade related headwinds, as well as a slowdown in housing market activity due to higher mortgage rates. 2023’s expected GDP growth rate was revised slightly downward to 1.7% from a prior expectation of 2.2%³
      • Important to note, the committee referenced that accelerating consumer spending is currently being masked by international trade related effects, therefore the downward revision in GDP expectations may understate the true underlying strength of the economy as a whole³
    • Regarding employment, the Fed’s expected rate for unemployment for 2022 was held relatively constant, coming in at a projected rate of 3.7%. Current unemployment levels stand at a rate of 3.6%. The Federal Reserve currently foresees the U.S. economy operating at employment levels consistent with maximum employment for the foreseeable future³
    • On inflation, the Federal Reserve revised its inflation expectations upward to a level of 5.2% from the prior estimate of 4.3% for 2022. However, participants correspondingly adjusted their 2023 inflation expectations downward slightly to a level of 2.6% from the prior level of 2.7%³
      • The upward revision in 2022’s inflation projections largely reflects expectations of further inflationary effects in Food and Energy costs attributed to global disruptions from the Russia-Ukraine conflict, as well as from effects of COVID-related lockdowns in China³
    • Expectations for the Fed Funds Target range currently stand at a median expectation of 3.4% at the end of 2022, and come in at a level of 3.8% in 2023³
• The Federal Reserve completes its annual Stress Test of major banking institutions and finds that all major banks would be sufficiently capitalized to withstand major hypothetical recessionary scenarios⁴
  • Federal Reserve Stress Test do not constitute a forecast or expectation by the Federal Reserve that severe recessionary conditions will occur; rather, the Stress Test is intended to represent hypothetical scenarios to help ensure that major banking institutions remain well-capitalized during adverse economic events to prevent a repeat of the 2008 Global Financial Crisis⁴
  • Having demonstrated the ability to withstand various severe hypothetical recessionary conditions, major banks were permitted to increase dividend payments and/or share buybacks⁴

 

FISCAL

• In an effort to lower the cost of gasoline, President Biden formally calls on Congress to implement a 3-month Federal Gas Tax Holiday⁵
  • Additionally, President Biden has called on states to implement similar measures in an attempt to lower gasoline prices⁵
  • The current Federal Gas Tax is 18 cents per gallon for regular fuel, and 24 cents a gallon for diesel fuel. Under the proposed Federal Gas Tax Holiday, those taxes would be suspended for 3 months⁵
  • The Federal Gas Tax Holiday has faced a high degree of skepticism from both Democrat and Republican lawmakers and is likely seen as not being able to successfully pass through Congress⁵
    • At present time, any Gas Tax suspension will likely have to come at the state-level rather than at the federal-level⁵

 

GEOPOLITICS

• S. Commerce Department adds five Chinese companies to an export blacklist for allegedly aiding Russia’s military⁶
  • Reports suggest that the five blacklisted Chinese companies supplied Russian entities of concern prior to the initial invasion of Ukraine and continue to contract to supply such entities⁶
  • The five blacklisted companies include Connec Electronic Ltd., King Pai Technology Co., Sinno Electronics Co., Winninc Electronic and World Jetta (H.K.) Logistics Ltd.⁶
  • This is the first instance of the U.S. taking action against any Chinese companies for allegedly assisting the Russian war effort⁶
• Member states of OPEC+ announce that the group will stick to its planned increases in oil output, as questions continue to rise about the amount of spare production capacity members states currently have^7,8
  • In reference to OPEC+ estimated spare capacity, (Shell CEO – Ben van Beurden) “We are seeing an ever tighter oil and gas market appearing — and we are feeling that right now. I think it is probably fair to say there is a little bit of a fear factor in the oil price at the moment but by and large, it is also true that there is limited spare capacity”^7,8
  • (Shell CEO – Ben van Beurden) “And, of course, I cannot know how much spare capacity OPEC would have but it is not as much as what a lot of people hope or think is my estimation.”^7,8
  • Domestically, U.S. oil output has yet to rebound to pre-pandemic levels⁸
    • Roughly 20% of global oil production is currently under some form of sanctions. This includes countries such as Iran, Venezuela, and now Russia⁸

 

[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. Federal Reserve. “Federal Reserve issues FOMC statement”. June 15, 2022.
2. The Wall Street Journal. “Transcript: Fed Chief Powell’s Postmeeting Press Conference”. June 15, 2022.
3. Federal Reserve. “Summary of Economic Projections”. June 15, 2022.
4. Federal Reserve. “2022 Federal Reserve Stress Test Results”. June 23, 2022
5. The White House. “FACT SHEET: President Biden Calls for a Three-Month Federal Gas Tax Holiday”. June 22, 2022
6. The Wall Street Journal. “U.S. Blacklists Five Chinese Firms for Allegedly Helping Russia’s Military”. June 29, 2022.
7. Reuters. “OPEC+ sticks to oil output policy, avoids debate on September plans”. June 30, 2022.
8. CNBC. “OPEC+ sticks with planned oil production hike as supply concerns weigh on energy market”. June 30, 2022