MARKETS

Investors are hyper-focused on inflation, economic growth, and future Fed policy. Most assume the worst and think a financial tsunami will hit the US and global markets thanks to the quorum of US-based bank CEOs that have given the gloomy growth narrative their imprimatur. Anything less than that outcome is going to surprise a lot of folks.

The market turned from strong out of the gates to fader’s fancy, with growth stocks leading the fade as the velocity of the move in US yields was just too much for stocks to handle.

The US 10y yields broke through 3.03% to start ‘CPI week’ 3.03 being the highest level since May 11, the prior CPI release.

But more problematic for risk is the FOMC members will likely be unhappy to see a 5y5y break now back to 2.49%. Put another way; the market is pricing in higher inflation expectations ahead of this week’s US CPI; hence, the implication is the Fed will need to shift into a more aggressive rate hike mode.

The bond markets have a lot on their plate this week as traders will digest their first round of supply after the start of the Fed’s unwinding of its balance sheet with USD44 bn new 3y on Tuesday, 10y reopening for USD33 bn on Wednesday, and 30y reopening for USD19 bn on Thursday.

OIL 

While prices are supported by the higher-than-expected Aramco OSPs for July and the ongoing easing of Covid restrictions in China, however, the updraft was offset by rare positive news on the supply side as Libya’s largest oil field restarted over the weekend: the 300kb/d El Sharara field is producing at 180kb/d after being shut.

There is also some anecdotal scuttlebutt making the rounds that the US will sanction Iran barrels back to market despite the widow to return the JCPOA shrinking.

Finally, OPEC can only deliver lower oil prices by relaxing the quotas imposed on individual OPEC+ participants. Only then can the group achieve an actual increase in production. The UAE and possibly Iraq and Kuwait have enough spare capacity to offset production issues elsewhere within OPEC+, at least temporarily. Still, while the new increased monthly targets continue to be driven by proportional contributions from all participants (including Russia), it is unrealistic to expect an increase close to the headline figure.


Stephen Innes

Managing Partner

SPI  ASSET MANAGEMENT