MARKETSWhile operating in a macro news vacuum, stocks traded lower as investors were left dodging higher US yields after a rough long bond sale and a rare rally pushback from Chair Powell.In an unusual pushback, not only suggesting he means business but obviously not pleased with the recent easing in financial conditions, Federal Reserve Chair Jerome Powell is leaving the door open for additional interest rate hikes to combat inflation, as stated in prepared remarks on Thursday. Powell remarked, “We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes.” He added, “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”Powell makes it abundantly clear that the Fed is carefully balancing the risk that inflation could reignite against the risk that the central bank could cause unnecessary economic damage. Hence, the Fed appears to be still erring on the side of doing too much versus too little. And this can potentially sink all boats as rate cut probability vaporizes along the curve.And as we ponder the apparent end of the Fed’s tightening cycle, it’s worth reminding ourselves that core inflation is nowhere near the target. Everyone knows that, but the lingering overshoot gets no pity from the Fed. When we say the Fed’s job isn’t done, we mean that literally. Inflation isn’t at 2%.With stocks given license to rally earlier in the week as yields dipped to 4.50% yet failed to lift off, with a modest pullback in rates today and a still inflation-wary head of the Fed, it’s unlikely to serve as a rallying cry for the market.A tail at Thursday’s 30-year auction was all but a foregone conclusion.The 30-year bond yields are down significantly from last month, and 30-year auction stop-throughs are rare.Wednesday’s 10-year sale reception was subpar, but bonds handled it well while maintaining long-end momentum.Fast forward 24 hours and Thursday’s supply event was much worse than mediocre.This week’s refunding supply is the only fundamental input for bonds after the best weekly rally since SVB. Sadly, it was an unfortunate result for bond and stock market investors.Recall that a poor 30-year sale on October 12 derailed the long-end’s last attempt to find its footing. Thursday felt like déjà vu all over again.If nothing else, Thursday’s poor auction is a calling card to the notion that it will take more than a polite nod from the Treasury to the term premium repricing and incrementally softer macro data to pacify the shifting buyer base for US debt.Stocks and bond yields maintain a relatively narrow range this week, with volatility, as measured by the VIX, decreasing significantly over the last two weeks from a local peak of 22 to the current level of 14. But with fewer important fundamental catalysts and trading volumes slow ahead of the holidays, one should expect volatility to experience a seasonal decline; hence, the drop is unlikely to be a systematic stock market driver.Last week’s ebullience may have left markets searching for a clear catalyst for further upward movement.
OIL MARKETSFor those hoping for a less hawkish Fed to jumpstart the oil market, you might have to put that playbook back on the shelf until next year.However, this is just one aspect of the larger narrative, as many bearish factors currently influence the oil markets.The emerging debt crisis in China casts a long shadow, darkening the overall economic landscape, which is undoubtedly the biggest demand-side elephant in the room.While on the supply side, U.S. crude oil production has reached a record high of 13.2 million barrels per day (bpd), offsetting a significant portion of OPEC+ production cuts. In addition, weekly data from Vortexa indicates that the volume of crude oil in global floating storage has risen significantly, signalling a potential decrease in demand. These all constitute crucial bearish data points, potentially accounting for the sizeable visible inventory builds.More By This Author:
It’s Not Over Till It’s Over
