Asia open: Turnaround Tuesday?

Markets

US stocks are trading off the New York session highs but starting the week more positively than expected ahead of a busy macro and micro data docket.

As we move into "Turnaround Tuesday," investors are debating whether January's inflation reflation was just another temporary bump in the road as the economy adjusts to a post-pandemic world. Indeed one look at Brent Oil prices struggling to hold on to the $82 handle doesn't precisely reignite worrisome inflationary fires.

The following two weeks loom critical for market participants. Events are predominantly US-centric: a reaffirmation of a preferred Fed hiking pace of 25bps, some mean-reversion in the February employment data & CPI prints, and avoidance of exacerbating tensions in the US-China relationship would give investors confidence to move back out along the risk curve while at the same time correcting the US dollar lower and green lighting global risk sentiment again.

While absolute comfort levels are hard to find after the core PCE price index increased at the fastest sequential pace since June 2022 in last Friday's report, suppose incoming data show some mean reversion; then, the policy path will get more anchored to a 5.25-5.50 terminal rate; in that case, the market could start pricing in peak Fed again.

Given the extent and speed of the Fed repricing, the market has already priced a fair amount of good growth/ higher inflation news. It will need upcoming solid data releases to confirm higher terminal bias before yields can establish another material leg higher.

We have been down this path before. We experienced similar '1-month' spikes last June and August, followed by subsequent inflation cooling. The post-pandemic era continues to deliver unusual macroeconomic patterns.

Oil prices

Oil prices are lower again, seemingly ignoring a possible bump in China sentiment gauges and what will likely be pro-growth NPC as markets remain oversupplied due to resilient Russian production. Perhaps investors want to peek at the China PMI  and US inventory data before buying in again.

Even though we never really believed oil and commodity markets were that overly owned, there was virtually no one with a bearish stance either, as most continue to hold the view that pent-up demand in Q2 amid more normalized Chinese consumer operating conditions will hold sway.

With an appreciation for how painful this has been for the bulls, I suspect the medium-term path is still higher as the structural thesis echoed by numerous commodity analysts remains intact. But that doesn't mean another fall below Brent's $80 bbl in Q1 is out of the question.

In the meantime, a possible hawkish repricing of the FED curve, global inventory gluts and absentee organic growth in China is providing the near-term overhangs.