Apologies amid a significant psychological triumph

Markets

A challenge in addressing macroeconomic topics today lies in grappling with the inclination to offer apologies amid positive developments. The market has notched a significant psychological triumph, attaining clarity that the formidable tightening cycle has concluded. Additionally, there is a consensus emerging that at least three and probably more Fed  "insurance cuts" are on the horizon unless there is an unexpected resurgence of inflation.

However, a growing wave of skeptical articles suggests that the Fed's actions could potentially undermine the 'everything rally.' Traders, interpreting previous signals as indicative of future rate cuts, might have taken too significant a leap of faith.

While the market dynamics exhibit classic signs of a rate overshoot, traders simply attempt to anticipate the Federal Reserve's next moves. Uncertainty lingers regarding whether the Fed possesses unique economic data insights or if the expectation shift stems from the argument that already elevated real interest rates will rise further as inflation subsides. As Fed Governor Chris Waller suggested, this de facto tightening of the policy stance could pave the way for interest rate cuts.

That's the 50 basis point gap between current market pricing and the Fed ( Assuming you adhere to IMM future pricing as Gospel )

Realistically, discussions about the timing and pace of Fed rate cuts in 2024, beyond the initially anticipated three "insurance cuts," will largely depend on inflation data, assuming other factors remain stable.

It's worth noting that Powell has seemingly loosened the reins on the short end, predictably unleashing animal spirits. Dampening these spirits could prove challenging, as the consensus is growing that the Federal Reserve (as well as the ECB and BoE) is poised for a relatively significant downward shift in its next series of policy moves.

Oil markets

It appears that a cohort of traders are taking hedging precautions against the tail risk associated with the Strait of Hormuz, which is providing the bid today. The Houthis' focus on vessels with ties to Israeli ownership or those engaged in shipping cargo to Israel through the Red Sea has raised concerns.

While the likelihood of such an event seems low, given the presence of two U.S. carrier battle groups in the region, a cautionary approach is prudent in some traders view

However, muted Chinese demand amid a jump in Asia-bound cargoes is giving cause for a prompt rethink on the bullish reflationary impulse from Fed rate cuts in 2024

However, with the time of year suggesting the onset of range trading, oil prices may remain relatively stable unless geopolitical tensions in the Middle East escalate.