Bad news. More of it.
Consumer inflation expectations in the key University of Michigan survey moved back up in early October, according to preliminary results released on Friday.
One-year expectations rose to 5.1% from 4.7% in September, while five-year expectations were back out to 2.9% after receding to the lowest since April of 2021 last month (figure below). Gains were reported across age, income and education, the survey said.
Make no mistake, this is notable. The Fed is sensitive to these readings. Just ask the first of what are now likely to be five consecutive 75bps rate hikes. Recall that it was a very hot read on preliminary five-year expectations in the Michigan survey which, together with a very frightening CPI report, tipped the scales in favor of June’s shot across the bow.
The fact that we’re still, four months later, struggling with the staggering one-two punch of hot CPI reports followed immediately by elevated readings on the Michigan inflation gauges, speaks to how little progress is being made.
As you can imagine, the honeymoon effect from the summer decline in gas prices is wearing off.
“Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers,” survey director Joanne Hsu said Friday, adding that “after three months of expecting minimal increases in gas prices in the year ahead, both short and longer run expectations rebounded in October.”
The OPEC+ cuts won’t help. Tensions between Washington and Riyadh are spiraling. Just this week, as US lawmakers debated the NOPEC legislation, The Saudi Foreign Ministry irritably refuted allegations that the Kingdom is engaged in a witting effort to assist Russia in the Ukraine conflict.
“The Government of the Kingdom of Saudi Arabia affirms that any attempts to distort the facts about the Kingdom’s position regarding the crisis in Ukraine are unfortunate,” a statement read, adding that,
The Kingdom stresses that while it strives to preserve the strength of its relations with all friendly countries, it affirms its rejection of any dictates, actions, or efforts to distort its noble objectives to protect the global economy from oil market volatility.
Resolving economic challenges requires the establishment of a non-politicized constructive dialogue, and to wisely and rationally consider what serves the interests of all countries.
The Kingdom affirms that it view its relationship with the United States of America as a strategic one that serves the common interests of both countries. The Kingdom also stresses the importance of building on the solid pillars upon which the Saudi-US relationship had stood over the past eight decades. These pillars include mutual respect, enhancing common interests, actively contributing to preserve regional and international peace and security, countering terrorism and extremism and achieving prosperity for the peoples of the region.
Although the fate of the NOPEC bill remains uncertain, it’s fair to say America’s increasingly fraught relationship with the Saudis is on the brink of deteriorating irreparably. The statement excerpted above suggests the Kingdom harbors what I’ll politely call an optimistic view of its security and financial prospects in the event relations sour further.
The Saudis have no real leverage with the US. Forgive me, and with all due respect to Mohamed bin Salman’s efforts to diversify the Kingdom’s revenue, without the oil, there isn’t anything there. Even with the oil it’s a frontier market. Pennsylvania has a larger economy. There’s certainly a sense in which the Biden administration’s response to the OPEC+ cuts indicates palpable concern about US energy security, and therefore suggests the Kingdom does, in fact, have leverage, but that only goes so far.
America may well destroy itself from within, and to the extent gas prices are used by US politicians to stoke internal division, I suppose OPEC might achieve some limited gains by fueling (no pun intended) political discord. But that’s trivial compared to what might unfold in Saudi Arabia if the US ceases to guarantee the Kingdom’s security or decides to go after the riyal peg. That latter option doesn’t get much press if it gets any at all, but I’d note that Donald Trump reportedly pondered deliberately undermining the Hong Kong peg before being dissuaded.
Although consumer sentiment in the US actually improved early this month according to the University of Michigan’s gauge thanks to a notable rise in the current conditions index, the expectations gauge fell, and any additional upward pressure on gas prices will surely be unwelcome among households struggling with double-digit inflation for groceries and electricity.
The Fed is aware of the fact that headline inflation matters more to consumers than core inflation, and the Saudis are surely aware that headline inflation is sensitive to oil prices. Notwithstanding the (superficially plausible) contention that Riyadh isn’t actively seeking to bolster Putin in the war, you could argue that closely coordinated actions aimed specifically at supporting crude prices taken in conjunction with Alexander Novak, who was sanctioned by Janet Yellen late last month, counts as the adoption of a hostile policy bent. And there’s no reason whatsoever for the US to countenance any sort of hostility from the Saudis. They’re still a US client state in many very important ways.
“With NOPEC now potentially gaining traction, there is a real risk that this diplomatic dispute could intensify,” RBC’s Helima Croft said. “We would not be surprised to see suggestions in the coming days that Gulf countries could liquidate their US financial holdings if NOPEC becomes law.”
Good luck with that. They’d be actively undermining the very assets that ensure their financial stability, while simultaneously irritating the government that guarantees their security.
Earth to Klaatu, please send Gort…
+1
I can’t believe I’m saying this but it’s beginning to look like our current POTUS is seeking to increase isolation for the US just like his predecessor. These days it seems that managers of all stripes seem to think effective management requires a willingness to be a ba…rd, as well as being short-sighted and a bit dim. Not the hallmark of a “Christain” nation.
Perhaps, but it seems to me we are just watching globalism unravel. The actors are painted into corners of self interest
What does the US relationship with Saudi have to do with isolationism? The US has to guarantee a country’s security and periodically send troops into combat, or we’re “isolated” from that country?
We can not get to nuclear (SMRs) fast enough. Fracking will be necessary to bridge the gap.
Almost all of Saudi’s military aircraft (fixed wing and helicopters), ordnance, missile defense, and ordnance are US-made (the rest are mostly UK) and are maintained and supported by US (and UK) contractors and spares. A modern jet fighter requires something like 10-20 maintenance hours per flight hour. The US also provides critical operational support to Saudi, including aerial refueling, targeting, and intelligence. From what I’ve read, the Saudi Air Force cannot operate, for long, without ongoing US (and UK) support.
The bulk of Saudi’s armor and artillery is also from the US, but I don’t know how dependent that is on ongoing US support.
Saudi can’t switch to Russia as its main weapons supplier, because Russia can’t build its most sophisticated weapons and needs to replace its own losses. Anyway, assessment of Russia weapons have probably dimmed a bit. Conceivably Saudi could switch to China, who would probably like to develop a defense export business. This would be quite a gamble by Saudi, as Chinese weapons are unproven. It also wouldn’t solve their problem, as China cannot provide the same security guarantees that the US does (not going to send 100,000 PLA to fight Desert Storm Xi), and whether China would even stand by Saudi in a fight with, say, Iran is uncertain.
The question would be whether this is a risk that MBS (or his father) want to take, to boost oil by $10/bbl for a while?
The Saudis are not our friends. The U.S.-Saudi relationship has always been a marriage of convenience. And @jyl is correct: the U.S. has the leverage here. If Prince Bonesaw wants to take a turn in Putin’s sandbox, good luck to him. Q: What do you call an air force that can’t maintain an offensive or defensive capability? A: a seriously wasting asset.
I’ve been reading about energy lately and it seems fracking is a terribly expensive way to produce oil. There’s a lot of debt in fracking that may never be repaid. Plus we are past the peak of oil produced this way. https://economicsfromthetopdown.com/2020/11/16/peak-oil-never-went-away/
Also, asking seriously, could it be that Saudi Arabia is slowing production in order to not run out of oil too soon, and dare not say so?
It takes oil to produce solar panels, wind turbines and nuclear power plants. From what I’ve read we are using up fossil fuel energy before we have a replacement.
That’s part of it, I’m sure, but Saudi is being unusually aggressive here. In the past, $70-80 was a perfectly acceptable price for Saudi as $100 risked due to demand destruction. Trying to force price to $100 is “not your grandfather’s Saudi”, as it were. I know, inflation, but oil is sold in USD.
The US first tried to get additional barrels of oil from Venezuela, an ally of Putin, to mitigate those lost Russian barrels.
US govt. also courted the US oil industry to not sit on non-producing acres available for drilling and to start drilling or face possible fines. Not sure but I think that did not go well either.
The US govt. then moves to release 1 million barrels per day from SPR up to about 180 million barrels which should be ending late this year or early next year. But this only represents about 5% of US consumption, probably not enough to really impact US inflation.
So, I do not see how the US is really in a position of strength here.
The SPR will need to be replenished and in a tight oil market.
The US producers are not interested in increasing supply, in producing extra barrels at much higher costs and getting paid lower $ per barrel in a tight oil market. (Sound familiar?)
The US cannot take the risk of not providing adequate security or support to the Saudis to protect their installations (and the US petro dollar).
The US could sanction Saudi oil, seize their reserves, actively subvert the riyal peg, cancel all security guarantees and the monarchy would collapse.
They’re a client state. At the end of the day, they’ll either do what the US says, or they’ll lose the strategic partnership. The idea that the US somehow has more to lose from that than the Saudis is a joke. They can try to sell their oil to the Chinese in yuan, but then they’re in CNY in size. How do you imagine that’s going to work? The yuan isn’t a freely traded currency. I’ve been over this dozens of times. There’s no alternative for them economically, and militarily, who’s going to arm them? The Chinese? Against Iran? No. Definitely not.