The ongoing search for the right playbook has the market riding the rate hike roundabout with stops at 75 and 100 bps, but with no historical context to compare the current situation; at times, investors feel uncertain about how to position risk with Fed guidance not helping matters; fortunately, we get a break from the madness thanks to the FOMC blackout period.
The FED’s dilemma is balancing Inflation vs Growth as stubbornly high inflation could lead to the FED overshooting and market pricing in a much higher risk of recession.
The long-waited June CPI was published on Wednesday at 9.1% and opened the possibility of a 100bps hike in July. And the surprising 100bps dose of inflation-fighting medicine in Canada helped the hawkish thought process.
At the same time, front-loading so many hikes have brought the curve’s peak closer with an upward slope up to December, and February is already pricing a cut.
But given the downward responsiveness of commodity prices to global front loading rate hikes. It’s conceivable an inflation re-assessment pause or at least a deceleration in the size of rate hikes may come much quicker than market pricing, especially if oil prices move closer to the $ 90 level.
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The market cared less about the inflation-laced bounce in retail sales, given higher gasoline prices pushed the value-based index higher but liked the looking lens view from the University of Michigan survey.
The July surveys of consumers’ 5-year inflation outlook fell to 2.8% (prelim) from 3.1% (final) in June, likely because of the 5% decline in gasoline prices this month.
A month ago, the prelim jumped from 3% to 3.3% and was revised back to 3.1%. That is a significant change in sentiment.
The Fed was jolted from 50 to 75 by that 3.3% last month. Surely this must mean that it’s “only” 75 this time.
And it could be the final jumbo rate hike given the expected fall in headline CPI amid lower oil prices and base effects that could put inflation concerns in the corner. Remembering peaks in inflation has often been an essential precursor for subsequent market rallies.
Oil prices short covered into the weekend with no output announcement from Biden -MbS meeting so far. And as the market dialled back US rate hike bets, the USD eased a touch helping oil bounce.
It is an odd market with traders continuing to take profits on long positions while those that had already taken risks off are now buying upside calls. There seems to be a desire to flatten up but still want to be involved in the tails as many view Dec22 Brent at around $90 as very peculiar given the supply shortfall expected for next year.
Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT