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MARKETS

Stocks in the US were a bit higher, but for the most part, traders are sitting tight ahead of this week's core US consumer price update and the much-anticipated Federal Reserve meeting.

Meanwhile, Nvidia (NVDA), the darling of the AI world, pulled off a 10-for-1 stock split on Friday. But despite the hype, investors were as divided as a pie at a family reunion, with shares barely budging, rising just 0.8%. The thinking behind the split is that the lower price would make the stock more accessible to the masses, but it seems the masses are still figuring out what to do with it.

With the fiery debate over the hot Establishment Survey and the cool Household Survey now simmering down, it's time to shift our gaze to the high-stakes world of inflation reports and the Federal Reserve's latest decision on interest rates. Investors dream of a scenario that avoids the extremes—one that lands us gently in the economic Goldilocks zone, where everything is just right.

The ideal scenario? Inflation cools down just enough to ease the pressure on prices, potentially giving the Federal Reserve the green light to cut its main interest rate from its highest level in over two decades. Think of it as the financial equivalent of finding that perfect porridge—not too hot, not too cold, but just right.

The economic data has been as clear as mud and just as tricky to decipher. Friday's stronger-than-expected jobs report followed closely on the heels of disappointing numbers from US manufacturing and other economic sectors. Even within the realm of US consumer spending—the beating heart of the economy—there's a sharp divide. Lower-income households struggle to keep pace with persistent inflation, while higher-income households are cruising along much more comfortably. It's like watching a three-legged race where one team is limp, and the other is sprinting ahead.

Indeed,  while America's elite in the corporate echelons and household domains might find themselves shielded from the blows of restrictive policy settings—arguably even benefiting from high rates—the same cannot be said for the "have-nots." For most middle and lower-class Americans, Fed policy feels like a straitjacket that's far too tight.

Unfortunately for most on Main Street, The Federal Reserve finds itself in an unenviable role in the economic theatre—caught between a rock and a hard place. Picture this( see below): a backdrop of drooping economic surprises set against the rising curtain of inflation surprises. It's a challenging combination that leaves the Fed with minimal room for maneuvering.

The dilemma is apparent: Should the Fed consider cutting rates to prevent GDP from taking a nosedive? It may seem like a logical move to keep the economic ship steady as it navigates into the following year. However, the spectre of inflation looms large, casting a shadow over any potential rate cuts.

Is it the calm before the storm? The options market seems to think so. According to Andrew Tyler, head of US Market Intelligence on JPMorgan Chase's trading desk, the S&P 500 Index is poised for a potential swing of 1.3% to 1.4% in either direction by Friday. This forecast is based on the price of at-the-money straddles that expire that day.

It's akin to a suspense thriller unfolding on the trading floor. Will the CPI report send shockwaves through the market, stirring fears of inflation run amok? And what will the Fed's response be? 

In the world of high finance, uncertainty is both the name of the game and the bane of traders' existence. As the week progresses, all eyes will be on the numbers, waiting to see which way the wind blows and whether the calm will give way to a tempest of market volatility.

Ah, the familiar dance of the markets leading up to a significant event like the FOMC meeting. It's like watching a jittery cat on a hot tin roof until about noon on Wednesday, with traders anxiously eyeing every tick and twitch in the charts.

But let's be honest: the market's nerves will have been thoroughly shaken out when the ice cubes clink in the bottom of that midweek G & T's. It's like the calm after the storm, except in this case, the storm was more like a tempest in a teapot.

FOREX MARKETS

The EU election results have unveiled a predictable trend—a shift to the right in France, Germany, and beyond. However, President Macron's surprise move to call a snap parliamentary election has injected unforeseen political risks into the mix.

While it's unclear what prompted Macron's decision, the move introduces a level of uncertainty that markets weren't prepared for. No matter how well-intentioned, political maneuvers always carry risks, and the current situation is no exception.

CENTRE-RIGHT PARTIES WON THE MOST SEATS

As traders weigh the potential outcomes, there's a palpable sense of caution in the air. The euro could face further downward pressure as investors factor in the additional political uncertainties. After all, in the fast-paced world of currency trading, anything unexpected can send shockwaves through the market.

With the robust employment report in hand, the likelihood of a more hawkish stance from the Fed at this week's FOMC meeting has escalated. Our projections already anticipate the Fed's postponement of its rate-cutting plans, given the stagnant progress this year in bringing inflation back to the coveted 2.0% target. With that in mind, it's a foregone conclusion that the dot plot will read 2 instead of 3.

The employment data serves as a double-edged sword, providing evidence of a resilient labor market ( good for growth)while simultaneously bolstering the case for the Fed to hold off on rate cuts. ( bad for inflation)

But it's time to streamline central bank communications by scrapping the Summary of Economic Projections (SEP) and press conferences in favor of concise statements after policy meetings, which have their merits. Let's face it; the average person's understanding of monetary policy is about as clear as mud. Just tune into X ( Twitter) for confirmation on that last point. Central banks may overestimate the public's interest in their intricate deliberations.

Expecting Main Street to tune into central bank press conferences or pore over detailed economic projections is akin to searching for unicorns in Times Square. The reality is that these events rarely make waves outside financial circles. When was the last time a central bank press conference trended higher than the latest Kardashian scandal? Exactly.

OIL MARKETS

Crude oil prices staged a rally, with investors brushing off recent higher for longer interest rate concerns and embracing a more optimistic demand outlook.

The market sentiment also got a boost from news of additional sanctions on Iran's shipping sector, with the US Treasury cracking down on entities involved in illicit oil transport.

Last week's decision by OPEC to potentially increase output was revisited as the market digested comments from the group indicating a readiness to adjust production changes if needed. Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, reiterated the kingdom's dedication to oil market stability and its agility in responding to evolving conditions.

It's a classic case of market reassessment, where recent developments are being reevaluated in a more positive light. As uncertainty diminishes, oil prices find renewed support, showcasing the dynamic nature of the energy market.

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