US equities were stronger Thursday, with S&P up 0.5% heading into the close, the first up day after five consecutive declines. Oil is down again, -1.2%. but US 10yr yields up 8bps to 3.49%.

Stocks snapped a five-day winless steak as investors steady for the next run of closely watched inflation data in the build-up to next week’s FOMC rate decision, with PPI later Friday and CPI next Tuesday.

Much of the data over the past week has led investors to question how high the Fed will need to raise rates to combat inflation and whether they can tame it without driving the economy towards a hard landing. Markets responded favourably to US’s initial jobless claims. More specifically, the worrying sign from continuing claims that was up 62k to 1671k, the highest since February, and may have inspired some dovish sugar plum fairy dreams ahead of next week’s FOMC.

While it seems contradictory to respond positively to Main Street’s pain, the market’s reaction function reflects the hope that the labour market is cooling and that a soft landing may still be achievable.


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With global yields having likely peaked out and oil prices considerably lower, it typically makes for a moderately more friendly risk-on environment as the drop in oil price helps bring down market-based measures of inflation expectations and tends to cap nominal yields.

But importantly, Oil prices are a keen metric Chair Powell watches, and the oil price fall is more a function of what Powell’s policy (FOMC) is doing rather than what Putin has up his sleeve.


For FX markets, lower oil prices are risk positive, lessening the demand for safe-haven dollars, benefiting energy importers and supporting the critical G-2 EUR and JPY, which tend to influence moves on broader global currency markets.


The oil market’s systematic bears continue to apply a full-court press. While the steady drop in oil prices reflects fears over the global demand slowdown, it has also corresponded with the introduction of the USD60/barrel energy price cap on Russia’s oil exports. A retaliatory response from Russia might light a small fire under crude prices. Still, with Russia expected to continue diverting flows to China, India, and Turkey, which are not on board the Western Price cap, Russian oil is finding thirsty destinations.

Due to the tug-of-war between a worsening Covid situation in China and increased reopening optimism, we expect prices to tetter totter. Still, it is tricky to envision oil traders carrying a decent long-sized position into the weekend, especially with zero- Covid taking the off-ramp; no one wants to walk in on Monday to flashing red Covid headlines. Why is this important? From a depth of market and liquidity perspective, it limits upside momentum and may even increase downside volatility on any unfriendly for-risk headline.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT