Global Macro and Crude Oil Analysis - Today, the Market Feels Even More Capitulatory

Global Macro

Inflation may have declined from its prior record, but the sluggish rate of decline will further increase fears that, despite statistics and the CPI peak, the Fed still has a problem with persistent inflation.

Inflation in the United States almost definitely peaked in March, but a little decline in April statistics does not suggest the inflation menace has passed. If anything, the concentration on data is generally intensified on the way down.

Still, the core CPI climbed by 0.57 percent month-over-month in April, considerably above expectations and the highest pace since January; the market will be concerned that the Fed's hawkish tone will not soften, and it will want to continue with 50bp rate hikes. It will also keep rumors of a 75bp rate hike alive in the market, despite the Fed's efforts to stifle this chatter in order to avoid a severe market shock.

Today, the markets are even more despondent, as they are confronted by three significant difficulties. First, investors will need to account for a longer Fed raising cycle. Two, the danger that the Fed may become excessively hawkish, so stifling growth and creating a recession. And third, traders still must navigate QT.

For the greater part of a decade, stock pickers have relied on quantitative easing (QE), and now, without it, nobody knows where equities will settle; therefore, traders will continue to conduct the reverse of QE trades until proven differently.

In the interim, there is always the relief rally crew, but even if volatility rolls in, stocks may not experience a significant bounce. "TINA" no longer applies.

Fundamental Analysis of Oil

Oil prices rose as the European Union argued over a crude oil embargo against Russia, while fuel supplies fell predictably ahead of the US summer driving season.

However, the favorable downward bend in China's covid curve looks to have reversed the trend for oil markets this week, at least until oil traders experience another mood swing toward a bearish outlook.

As the Fed works to reduce inflation, a US recession is practically certain. Rates of interest are an extremely blunt instrument, and QT's tightening of financial conditions is a prescription for economic calamity.

Until we see substantial policy support from China or authorities embrace an alternative strategy to Covid (which seems highly improbable), oil prices could stay constrained in the near future.