Global Macro and Crude Oil Analysis – The Market Feels Even More Capitulatory Today

Global Macro

Inflation might have fallen from the previous high, but the slow pace of the drop will only add to concerns that statistics and peak CPI aside, the Fed still has a problem with more persistent inflation.

US inflation almost certainly peaked in March, but some relief in the data for April will not mean the inflation threat is over. The focus on data is, if anything, typically more intense on the way down.

Still, April’s core CPI rose by 0.57% month-over-month, well above consensus and the fastest since January; the market will be concerned that there will be no let-up in the Fed’s hawkish tone, and it will want to keep pressing on with 50bp hikes. It will also keep talk of a 75bp hike alive in the market even if the Fed continues to push back that noise to avoid a dramatic market shock.

Today, the markets feel even more capitulatory as three big problems are staring financial markets in the face. One, investors will have to price a more prolonged Fed hiking cycle. Two, the possibility the Fed gets too hawkish and eventually kills growth triggering a recession. And three, traders still have QT to navigate.

For the better part of a decade, the stock pickers have lived off QE, and now, without it, people are not quite sure where equities will settle – which means for the short term, traders will keep doing the opposite of QE trades until proven otherwise.

In the meantime, there is always the relief rally crew, but even if volatility settles in, equities might not see a sharp rebound. “TINA” is no longer the case.

Oil Fundamental Analysis

Oil rallied as the European Union quarrelled over a Russian crude ban while fuel inventories predictably plunged ahead of the US summer driving season.

However, the favourable bend lower in China’s covid curve appears to have turned the tide for oil markets this week, well, at least until oil traders have another recessionary mood swing.

A US recession is almost inevitable as the Fed attempts to cut inflation. Interest rates are a very blunt instrument, and QT’s tightening of financial conditions is an absolute recipe for economic disaster.

Against that heady backdrop, until we see some significant policy support coming through in China or policymakers adopt an alternative strategy to Covid (which seems very unlikely), oil prices could remain capped near term.

For a look at all of today’s economic events, check out our economic calendar.