October 2022

The third quarter was supposed to end on a positive note since the Fed’s September 21st key interest rate hike was supposed to be the last big 75 basis point increase. Unfortunately, the Fed is also shrinking its balance sheet by $95 billion per month and driving Treasury yields higher, so the Fed has to continue to raise key interest rates to “catch up” with market rates. In fact, all the gains from the rally in Treasury bonds since
mid-June have been wiped out, as the 10-year Treasury bond yield has soared close to the 4% level.

The other factor that caused this surge in Treasury yields was that the core rate of inflation resumed rising in August, even when energy prices were falling. However, energy prices are no long falling, since the Biden Administration’s artificial manipulation of the crude oil market is anticipated to end soon. The release of 1 million barrels per day from the Strategic Petroleum Reserve (SPR) is expected to end sometime after the midterm elections. We expect that after the midterm elections, the Biden Administration will have to start refilling the SPR as it is now at its lowest level in approximately four decades!

The other reason that crude oil prices are rising again, despite weak seasonal demand, is that OPEC+ recently announced up to a 2 million barrel per day production cut. However, the real production cut may be more like 900,000 barrels per day after factoring in Russia’s production declines …