Despite The Inflation Bolt From The Blue, Bargain Hunters Return

Markets

The prevailing discourse surrounding market overreactions was a prominent theme overnight among traders, particularly in light of the recent events where Tuesday’s data release represents merely one data point and, notably, not even the central bank’s preferred inflation metric.

Indeed, the magnitude of the market’s response might lead one to believe that U.S. inflation had surged again last month. However, contrary to these perceptions, January’s headline annual Consumer Price Index (CPI) decreased to 3.1% from the previous 3.4%.

So, given the overreaction narrative, U.S. yields have fallen a touch lead by the front end, which offered equity dip buyers some breathing room. Still, one has to remember market dynamics can change rapidly, and nothing is immutable in this forever-changing economic landscape. Investors now focus on retail sales and industrial production numbers expected later this week, which could potentially lead to a modest and more positive reversal in market sentiment.

Although “no landing” discussions were prominent yesterday, the problem for skeptics is simple. Notwithstanding inflation, which is still too high versus arbitrarily defined targets, the U.S. macro picture continues evolving consistently with a soft landing.

The rebound in the U.S. stock market offers some respite following the jolt from the blue delivered by yesterday’s inflation figures. Sure, Mega Cap companies appear relatively insulated from the current interest rate environment, benefiting from robust cash holdings and the ability to service low-coupon, long-term fixed debt. So, an 8 or even 12-week delay in the Fed cuts will unlikely negatively impact balance sheets and earnings. Depending on the current cash balance, it might even boost some corporate profit.

Despite this, market volatility is expected to persist as long as U.S. 10-year yields remain elevated. That matters for the equity market because bonds compete with shares for investors’ affection. High stock valuations and rising yields can bring equity risk premiums into touch, which may ultimately continue to dampen investor sentiment, especially with markets attempting to crest new summits.

Finally, whenever we experience a volatile event, it forever conjures fears of a crowded trade, and these days, it’s the Magnificant 7 and the constant comparison to the dot-com bubble.

The dot-com bubble was characterized by a fervent belief in the internet’s transformative power, often at the expense of traditional metrics like profitability. Many companies prioritized growth over profitability during that time, leading to significant market speculation and eventual market correction.

In contrast, the Magnificent 7 companies are hugely profitable and hold substantial market dominance in their respective segments. Instead of breaking the monopoly, the U.S. government sees the Mag 7 as necessary to compete with China; hence, it’s in their interest to protect these companies via tax incentives.

Oil Markets

Oil futures experienced a downturn on Wednesday, influenced by the latest inventory statistics released by the Energy Information Administration (EIA). Oil prices reversed course due to a larger-than-anticipated increase in commercial stockpiles, while products registered accelerated losses due to a decline in demand.

According to the EIA’s report, there was a notable 12.018 million barrels (bbl) surge in U.S. commercial crude inventory for the week ending February 9th. This figure surpassed the 8.52 million bbl increase reported by the American Petroleum Institute late Tuesday. The observed build marks the third consecutive weekly rise in crude stocks, pushing the total inventory to an eight-week high of 439.45 million bbl, up by 18.772 million bbl or 4.5% since January 19th. Despite the increase, the disparity with the five-year average narrowed to an 8.143 million bbl deficit.

The stock build-up was primarily driven by reduced crude inputs at U.S. refineries, which recorded a fourth consecutive weekly decline through February 9th. Last week saw a decrease of 298,000 barrels per day (bpd) in refinery crude inputs, amounting to a cumulative drop of 2.111 million bpd or 12.7% since the second week of January. With refinery crude inputs averaging 4.542 million bpd, they hit a more than 13-month low, signalling subdued activity in the refining sector.