What recession?

Markets

US stocks are trading higher as investors applauded signs on Thursday that arguably two enormous risks hanging over markets could be diminishing.  

Although there has been no official pen to paper, there is enough white smoke emanating from Capital Hill for investors to cheer after policymakers in Washington said that a bill to raise the US debt ceiling may be put on the table next week, raising the possibility of a deal to avoid a potentially catastrophic default by the federal government.

The better-than-expected Philly Fed index, a decline in weekly jobless claims, strong consumer-affirming results from Wall Mart, and an as-expected decline in Existing Home Sales -- in aggregate provide further evidence, perhaps, that the US is still on the path to a soft landing but certainly skirting those omnipresent recession calls during its post-pandemic economic meanderings.

Indeed Macro releases and strong results from Buy-rated Wall Mart continue to defy recession concerns, at least in the near term. On the latter, 1Q23 EPS results came in above expectations, driven by ticket and traffic, and the company increased FY23 EPS guidance.

Forex

This week's robust US economic data has pushed back recession fears, but with good comes the bad news for those betting against the dollar. 

Fed official remarks over the last few days have highlighted the ongoing debate between committee members on how much more the Fed may need to do. Despite differing views between the pause and the need to do more camps, the overarching theme across the speakers was that data dependence and the need for optionality remain paramount. 

Hence, US economic data is the key driver of FX, as we saw overnight with stronger-than-expected US data has forced the market to raise its forward US rate expectations once again with 2yrs UST yields up 10bps to 4.25% amid hawkish Fed speak, hence the dollar is starting to look like The King again.

I suspect the pre-G-7 Yuan sell-off is tempering as Asia as traders will now be on guard for PBoC intervention. After all, promoting internationalizing the Yuan is hard when it's in free fall. 

Oil

On the macro level, Oil markets are now torn between robust economic data from the US, soft data, and deflationary impulses from China. 

A US soft landing scenario should be good news for oil, especially as global oil demand increased by 3 MB/D MoM in March to the highest level ever registered by Jodi-reporting countries and is still on the ups given the significant decline in US gasoline inventories amid surging demand in the US.

The problem is that supply, not demand, is hurting the bullish thesis with the ubiquitous dark fleets moving Russian and Iraqi oil to destinations worldwide and keeping inventories topped. 

Oil and FX

The relationship between commodities and other macroeconomic variables always receives significant attention when the US dollar weakens or strengthens. In general, using simple Granger causality tests based on data over the past two decades, we find that, for oil, the causality mostly runs from the commodity to the currency markets, not the other way around. So, in other words, the level of the US dollar has minimal impact on global oil demand.

Still, a strong US dollar typically signals that the US economy is strong while other economies are less so. And with the Yuan taking a free fall tumble this week, the writing is on the wall as it would suggest China's deflationary impulses are worsening in the eyes of investors. And that isn't good for oil markets.

Put simply; oil is lower because the commodity is priced in US dollars, whereas macroeconomic demand indicators are the primary driver of speculative demand for oil. The demand elasticities are extremely small, and the commodity price volatility is usually five times that of the currency, completely overwhelming any currency effect on demand.