Fed and Markets in Data Dependent Mode

FOMC Minutes

In my view, there’s not much to look at here – think about the context of the last meeting and the fact that they went up 75 basis points – of course these minutes will come across as hawkish. The message here is already known: growth risks are on the downside given the aggressive up cycle; the Fed fears that inflation is taking root and will use its available tools to deal with it.

Markets

Despite the hawkish minutes from the FOMC, the good news is that stocks have risen because commodity and oil prices are collapsing; both are the critical target that Fed policy is designed to tame; inflation expectations are therefore under control.

Still, the market is looking through the lens of slower economic data to find an excuse for the Fed to pause. But stronger macroeconomic data in the United States overnight is not that excuse, and Fed prices have not budged.

For now, rate pricing is keeping the hiking path steady and surprisingly, in my opinion, given the recent decline in commodities.

However, we should take these small wins as the drop in oil prices likely sent the VIX to the lowest level in a month; so fear goes out of the market, which is good for stocks

Yet the Fed and the market are now in data dependent mode. CPI and inflation expectations are important, but I think their impacts on the market could be limited given the recent drop in gasoline prices and slowing freight data. What matters from here is growth data like NFP on Friday and retail sales next week. Additionally, today’s weekly EIA report will give us more color on gas mileage.

So, stocks are bouncing higher with a global market backdrop not as bleak as Tuesday; For the markets, the biggest challenge right now is getting out of this negative feedback loop with recession risk and stubbornly hawkish Fed prices cratering the trail.

Oil prices

Oil prices extended their recession-driven slide after the American Petroleum Institute reported a crude oil rise of 3.825 million barrels this week. By comparison, analysts predicted a drawdown of 1.1 million barrels.

Oil is decimated with little new information on production or consumption. Yet, with commodity traders becoming highly risk averse due to growing demand and ever-hawkish Fed policy concerns, recession risk is like an anvil around the market’s neck.

While the lockdown in China offers eye candy and sparks fears about what will happen when winter hits the other hemisphere, it hasn’t quenched their thirst for cheap Russian crude. And triggers a price reaction from Saudi Arabia and others, offering certain grades of crude at a deep discount as cheaper Russian oil flows are drawing intense competition. Cleary OPEC is worried about losing market share.

Because this is a commodity-wide breakdown with many large offices forced to close the risk, as reflected in the latest open interest report, the extent to which the drop in oil prices could reflect technical factors related to the margin call on the broader commodity sell-off may determine the duration of the rout. And of course, the resulting lack of liquidity from the major players is also not helping the market due to the lack of a stable mantra of buy lower; instead, traders wave the white flag rally signal.