US Stocks Rise amid OPEC+ Surprise & ISM Dip

The underlying composition of the business sentiment survey was mixed-to-weaker, as the production component increased slightly. Still, the new orders and employment components fell further into contractionary territory, but this is the type of data the Fed, whose back is to the wall, needs.

As we peer back in a volatile March to remember, one of the critical things to fall out of the bank crisis is that the Fed has now signaled that there is likely only one more 25bp rate hike remaining in its year-long-plus rate hiking cycle.

The surprise OPEC cut over the weekend has boosted future crude prices, but US 2-year yields are trading lower, reflecting the market’s dovish Fed bias.

And what typically happens when the Fed stops hiking ?? Well, stocks have a strong tendency to move higher.

US equities have generally rallied in the months following the end of past Fed hiking cycles, with the S&P 500 posting an average 3-month return of +8% and rising in 5 of 6 episodes since 1982. Equities performed poorly when the economy entered recession near the end of tightening cycles.

After spiking due to market stress, cross-asset implied volatility had declined again over the past two weeks: both MOVE and VIX are close to their level on March 7th. But underneath the surface, markets have materially repriced hawkish tail risks compared to one month ago.

The implied distribution of US rates into year-end has shifted lower, as rates traders faded most of the hawkish Fed narrative built up in February.

And are acknowledging the growth impact of tighter lending standards, another form of financial conditions tightening reduces the risk of more aggressive rate hikes, especially with inflation normalizing. All the while, investors are putting more probability on a scenario in which the Fed is forced to cut rates, likely due to a recession.

Oil

Given the Oil market sensitivity to US data, and when combined with an equally weaker China business sentiment survey, they provided a bit of an oil price rally capper to OPEC intervention price momentum.

Oil option markets are pricing a higher probability (~30%) of WTI going above 90/bbl in 3 months, much higher than two weeks ago but still not as elevated as at the YTD peak in January as uncertainty remains high given the volatile global demand picture.

Forex 

The US dollar is trading poorly as Fed pricing barely budged, and the Dollar remained weak with G-10 still supported by the favorable risk setup.

In perhaps the most critical change for the Dollar framework, Chair Powell noted that tighter lending standards could substitute for rate hikes. But, while that may be true for the broader economy, the imprint is harmful to the US Dollar as tightening through credit has the opposite effect as raising the risk-free rates.

US dollar bears continue sniffing out dollar weakness.