FOMC MINUTES 

In my opinion, there is not a lot to look into here – think about the context of the last meeting and the fact they hiked 75 bp – of course, these minutes will come off hawkish. The messaging here is already known: risks of growth are tilted to the downside given the aggressive hiking cycle; the Fed is concerned about inflation becoming entrenched and will use its tools available to deal with that.

MARKETS

Despite hawkish-tinged FOMC minutes, the good news is that stocks rose because runaway commodity and oil prices are sinking; both are the critical target FED policy is engineered to tame; hence inflation expectations s coming under control.

Still, the market is looking through the lens of slower economic data for any excuse for the Fed to pause. But more robust macro data in the US overnight is not that excuse, and Fed pricing did not budge.

For now, the rates pricing keeps the hiking path steady and surprisingly so, in my view, given the recent downdraft in commodities.

However, we should take these small wins as the fall in oil prices has likely sent the VIX to the lowest level in a month; hence fear is coming out of the market, which is postive for stocks

Still, the Fed and the market are now in a data-dependent mode. CPI and inflation expectations matter, but I think their impacts on the market could be limited given the recent pullback in gasoline prices and the slowdown in freight data. What matters from here is growth data like NFP on Friday and retail sales next week. Also, today’s weekly EIA report will give us more colour on gasoline consumption.

So, stocks are bouncing higher with the global market backdrop not quite as gloomy as Tuesday; for markets, the most significant challenge right now is to break out of this negative feedback loop with recession risk and stubbornly hawkish Fed prices cratering the runway.

OIL PRICES 

Oil prices extended their recession-driven washout after The American Petroleum Institute reported a build for crude oil of 3.825 million barrels this week. In comparison, analysts predicted a draw of 1.1 million barrels.

Oil is getting decimated with little new information about production or consumption. Still, with commodity traders turning very risk-averse due to growing demand and still hawkish Fed policy concerns, the recessionary headline risk is like an anvil around the market’s neck.

While lockdown in China provides sour eye candy and triggers fears of what happens when winter hits the other hemisphere, it has not dented their thirst for cheap Russian crude. And is triggering a price response from Saudi Arabia and others, offering some grades of crude at a steep discount as more cheap Russian oil flows spark intense competition. Cleary OPEC is getting antsy about losing market share.

Because this is a commodity-wide breakdown with many big desks forced to close out risk, as reflected in the latest open interest report, the extent to which the decline in oil prices could reflect technical margin-call-related factors on the broader commodity sell-off may determine how long the rout lasts. And of course, the ensuing lack of liquidity from major players is not helping the market either due to the lack of a steady buy-on-dip mantra; instead, traders are waving the white flag sell-on rally signal.

Stephen Innes

Managing Partner
SPI ASSET MANAGEMENT