Image Source: MARKETSAfter recovering from the Asia market holiday-thinned lows, the S&P 500 closed relatively unchanged. What initially looked like an ugly day for stocks looked far better by the close of US trading. Still, investors are looking ahead to the release of October’s Consumer Price Index (CPI) reading, scheduled for Tuesday, as the next significant market catalyst.While the US economic data is expected to be more or less well-behaved, investors are fully aware that fluctuations in inflation, especially top-side beats, are an ongoing risk to markets. So even the soft landing crew was reluctant to push the envelope on US stocks ahead of a possibly market-moving event.At the same time, investors continue evaluating the implications of Moody’s Investors Service downgrading the outlook on the US credit rating from stable to negative over the weekend. This development precedes a potential government shutdown.Indeed, investor reactions to Moody’s downgrade are palatable, but there is also a sense of edginess ahead of big macro data this week, particularly US CPI and retail sales that may potentially result in some impact on the Federal Reserve reaction function. It may go a long way to explain why traders are sitting on their hands, as investors and policymakers will closely scrutinize both reports.Although the likelihood of a renewed discussion on higher terminal rates is a high hurdle to clear, it is too early to completely dismiss the possibility of a hike in December (or January). The current market rate probabilities are so low there is room to rise, and how stocks react to subtly shifting rates is always a bit of a mystery. Still, even if the data comes in hotter than consensus and doesn’t move the needle for December, it could upcall for a January rate hike. While not our base case, keeping all options open is necessary, given that no one knows what is happening in the rates markets. So, the possibility of choppy price action looms until there is definitive clarity on the Fed’s next move.As you might’ve heard, major banks have considerable disagreement regarding the likely trajectory of the Fed funds rate in 2024.UBS made waves early this week by projecting aggressive rate cuts, which the bank’s economists believe will be necessary to combat rising unemployment and a sharp deceleration in growth.On the other end of the spectrum is Goldman, whose strategists and economists expect just one lonely rate cut next year and not until Q4.With no significant economic data releases or major market-moving developments emerging over the weekend, it resulted in a somewhat directionless Monday. Yields on 10-year Treasuries experienced a slight upward drift. At the same time, front-month Brent oil contracts rose by approximately 1.5%; typically, one would be inclined to assign some risk appetite beneath the surface on the move, but higher oil prices are all about OPEC pushback on bearish market sentiment.OIL MARKETSOil prices had been grinding higher yesterday as traders anticipated that the Organization of the Petroleum Exporting Countries (OPEC) would revise its global demand outlook for the fourth quarter of 2023, and they didn’t disappoint the bulls. The IEA monthly report is released today and may provide a more balanced outlook.Even though OPEC propped up China’s demand, the Saudis can’t be too happy as China has become a massive buyer of Russia’s crude oil, cutting back on what it once sourced from Iran or Saudi Arabia.But in early November, the United States implemented comprehensive new measures against Moscow in response to the war in Ukraine. These measures targeted Russia’s future energy capabilities.According to sources familiar with the matter, the US Treasury Department issued notices to ship management companies yesterday, seeking ship logs for about 100 vessels suspected of violating Western sanctions on Russian oil. Hence, that added to the oil market bounce, raising supply concerns.As we mentioned in our weekly oil outlook, the ongoing decrease in net managed money positioning suggested a potential upside to current spot prices, significantly if markets can gain some upside momentum this week.FOREX MARKETSThe foreign exchange market has opened the week with relative calm. Investors are reflecting on Moody’s decision on Friday to change its Aaa rating on the US sovereign to negative, citing concerns about political polarization and governance erosion.However, the primary driver influencing the dollar remains the Federal Reserve policy reaction function. So, US CPI first, but pressure on the dollar could build as traders assess the risk of a US government shutdown later in the week.The current stop-gap spending bills are set to expire at midnight on Friday, and if Congress fails to secure future funding plans, the government may need to initiate worker layoffs. Such a scenario could have negative implications for US activity data and negatively impact the dollar.While we typically refrain from trading the straight-up dollar beyond a 4 to 6-week horizon, opting for dollar-neutral trades for longer-term perspectives, we anticipate the global economy to regain better balance over the coming year, exerting downward pressure on the dollar over time. However, considering the potential for robust US growth and higher yields, the dollar could present a formidable challenger. Indeed, the dollar could remain “stronger for longer,” especially if other economies like the Eurozone and China continue to struggleMore By This Author:
