Our Long National Retail Gasoline Price Nightmare Is Over!
Maybe someone does have a magic wand when it comes to a top in gasoline prices. Jean Claude Trichet may finally be getting it. The ECB seemed to back off of a promise to raise interest rates and in doing so instantly changed one of the major fundamental drivers that has caused oil and gasoline prices to rise.
Central bank policy both here and abroad has created interest rate and currency imbalances that have caused commodity prices to soar to heights not seen in years and now they crashed down into speculative oblivion. In fact some of the biggest one day moves in oil since the credit crisis began have come on the heels of comments from none other than Jean Claude Trichet himself.
Back In 2008 as the credit crisis was unfolding, a fateful decision by Jean Claude Trichet sent oil absolutely soaring. In the early stages in the credit crisis when Ben Bernanke was begging the ECB to loosen monetary policy, Mr. Trichet resisted. He said that the dollar was the problem of the US and his mandate was to fight inflation. Of course unwittingly Mr. Trichet caused one of the biggest oil price spikes of all time sending oil that day to its upside circuit breaker and actually fed into more commodity price inflation.
Yesterday we saw the reverse. It seems that Mr. Trichet is starting to grasp that if the EU keeps raising rates and continues to widen the yield differential with the United States, then the dollar will get trashed and commodities will soar. If The EU wants to meet its mandate of fighting inflation, it is clear that traditional interest rate increase cycle will backfire. While the Federal Reserve has a more complex mandate that includes full employment and growth and the ECB just an inflation mandate, it should now be clear that it is going to take a more coordinated effort between the two central banks if both are going to achieve their respective mandates.
Yet the sudden success of the perceived hawkishness of ECB is making them nervous even as they seemed to let the air out of the commodity bubble that the ECB helped create. It seems that now the ECB is saying that Mr. Trichet did not want to seem that dovish. European Governing Council member Ewald Nowotny said that the market's interpretation of comments by Mr. Trichet was an "over-interpretation." He went on to say that, "There can be no idea about being dovish."
Yet the birds have already been released and the bulls have been battered. The truth is that anyone that had any doubts that central bank action is a major factor in pricing, commodities market action yesterday and today should teach you a valuable lesson.
So now with a major potential shift in the fundamentals of rate outlook and currency outlook, we can focus on the old fashion supply and demand fundamentals that most old time traders are more familiar with. We also got great news on that front and it was also very bearish. It was reported that despite the turmoil in Yemen, they will export their full amount of oil. There was also a report that not only would OPEC increase oil production, but they might even raise their quota to legitimize current overproduction according to a Reuters report.
In the meantime as the commodities melt down, remember the long-term bull story has not ended. The parabolic bull market has ended, but now the commodity markets will have to rise on demand that will be inspired in part by more reasonable prices that are not pumped up by out of whack central bank policy. For drivers that means retail gasoline prices are coming down soon and this might act to reverse the damage that we saw occur in our non-manufacturing sector and it should start to repair itself.
Drivers over the Memorial Day holiday will get a break because, barring another disaster in the Middle East, we probably have seen the high price for gas for the year. The ECB and their more dovish tone will also reduce the odds that a slowing economy will force the Fed into a QE3. Weaker commodity prices are just the stimulus that the economy needs right now and while there are still supply issues with food and risk in the Middle East, the cushion from a stronger dollar may help.
Now if we could only get the US budget under control and the Chinese to float their currency, we might be well on our way to putting this economic crisis behind us.