China and Powell dominate headlines but keep an eye on OPEC+

MARKETS

US equities were a bit weaker Tuesday, with S&P down 0.3% heading into the close ahead of remarks by Chair Powell due Wednesday US time.

China equities rebounded, with Hang Seng up 5.2% and CSI300 up 3.1%. —US10yr yields up 7bps to 3.75%.

With cash parked on the sidelines, locals flooded back to the market, taking advantage of another invitation to a reopening party after China reported “significant progress” in vaccination rates for elderly citizens.

Vaccination rates, particularly among the elderly, will continue to be a keen signpost for accelerating the reopening narrative.

US stocks pared most of their losses as Macro investors, the incremental seller in 2022, showed little appetite to press big shorts ahead of Jerome Powell’s speech. With the ongoing easing inflation versus growth debate, and possibly due to the time of year, traders appeared less incentivized to play the recession cards into year end.

Investors will closely tune to Chair Powell’s speech at the Brookings Institute as it will provide the most unambiguous indication of how the Fed thinks about the recent Financial Condition Index easing.

And given its proximity to the Fed Blackout period, traders could indeed move markets if the expected step down in rate hike hikes gets framed by a tight and highly hawkish wrapper.

We think this would imply the cycle extension risk is underpriced and hopes for easing shortly after the peak would then be overpriced. An outcome that would be negative for risk and favourable for the US dollar.

The risk is not in rate hike quantum, as the November FOMC has already confirmed a slower hiking pace due to uncertainty around lag effects and incoming data. But it sits in the higher for longer terminal pricing camp, especially as the market moves from inflation to growth frustration.

Getting inflation down from 10 to 5 % is easy; driving it down the Fed target is tricky, and that is where the recession tail risk lies.

US conference board consumer confidence is roughly in line, falling 2pts in November, driven mainly by expectations. In the details: there is little change in the labour market differential (“jobs plentiful” versus “hard to get”) over the month. Note this ratio is historically an excellent guide to US unemployment and has been pointing to a rising unemployment rate since mid-year.

OIL

Oil is still riding the updraft from speculation OPEC will try to wrong foot traders again, getting the most significant bounce per barrel by announcing a surprise production cut. And with the focus shifting to a step down on China’s Covid -Zero policies, I do not think anyone wants to be too  short.

Oil prices could also remain supported by a surprisingly hefty draw in US commercial crude inventories even in the face of the DoE releasing 1.4 million barrels from the SPR in the week ending November 25, leaving the US government oil security blanket with just 389.1 barrels.

We continue to see the upside risks for oil prices into the New Year as the persistently low inventory buffers suggest crude stocks are unlikely to recover as the embargo sets in. Still with the global recessionary signal flashing red across multiple market gauges, it’s difficult to get too bulled up given the heavy fund sales of late who are now convinced the G-7 price cap will roar more like a cub than a lion.

With OPEC likely to stick to the current production quota by drip-feeding supply more slowly than the recovery in demand, even with China making small incremental reopening steps, it could set up a better situation for Oil bulls in 2023.

Suppose OPEC does cut supply in response to China’s negative Covid loop. In that case, it could spark an outsized rally, much to the chagrin of Western allies who are on record accusing Saudi Arabia of cohorts with Russia.