Lost in the heat of the moment

Last week's crucial US economic releases were singing the same song—higher for longer. Sizzling core readings in the CPI and PPI crushed hopes for a tidy melt in inflation. A ferocious recovery in January retail sales sequestered thoughts of a meaningful economic cooldown. Dreams of an imminent end to Fed rate hikes were lost in the haze of hawkish Fedspeak after Presidents Mester and Bullard implied that a 50bp hike could be on the table for the March Fed meeting. But compounding matters, the lonesome dove on the board, Leal Brainard, is set to leave for a top economic post at the White House.

Still lost in the heat of the moment was that traders seldom, if ever, put much weight on these comments because both are known to be hawks and non-voters. Moreover, it does not seem that either Mester or Bullard have updated their view on the terminal rate, but they think we should get there as fast as possible. And that is not a change of view.

Despite the Dollar rising last week, recent news suggests that the global economy is still on solid footing, which should eventually prove corrosive for the safe-haven Dollar. Hence a big part of the dollar "correction" is equally attributable to a market that has moved far too fast.

Ultimately the improving global economic backdrop should see the Dollar weaker during 2023. Still, bear traps will line the path given the still-difficult road for Fed policymakers trying to slow the economy just enough to bring inflation back to target, where US economic data and Fedspeak will be the source of bullish USD shocks until the next month's major US inflation prints.

Oil prices

After the initial oil price leak at the beginning of the year, bullish sentiment coalesced around a resurgent China and a rebounding European economy. Encompassing these signals was a Fed pause leading to a weaker dollar, opening the door for more robust Chinese fundamentals to take hold.

While Europe remains a feel-good story, traders are now questioning the Chinese recovery, mainly due to property deleveraging, leaving less cash for Q2 consumption slingshot recovery.

And the latest string of robust US macro data points more towards an accelerating US economy, which, unfortunately, comes with a sting in the tail due to a higher or longer Fed narrative and a much stronger US dollar environment than expected, negative for oil markets.

Range-bound markets, quite frankly, are dull and cause traders to become circumspect. And while the bullish China thesis remains primarily intact; however, higher-than-expected US and Russian production and the loss of gas-to-oil switching have left markets awash with current inventory, seeing traders turn wary. If the bullish thesis holds, it will take longer for oil markets to trade + $90, leaving oil bulls more exposed to the unavoidable macro cliffs.

But the Fed is the wild card. If they become hellbent on slowing the US economy through higher and higher interest rates resulting in a strong USD, the oil price rally could be pushed out to a 2024 story.