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MARKETS

US stocks gained marginally overnight on further signs of easing inflation. However, 10-year yields rose, limiting overall gains as investors digest a fresh round of macro data, including October Retail Sales and Producers Price Index, while contemplating the path ahead for inflation, rates, and growth.

US retail sales were firmer than expected in October, data released on Wednesday showed, but a cool read on producer prices helped take the hawkish edge off.

The soft Producer Price Index (PPI) reading has the potential to magnify the message conveyed by the Consumer Price Index (CPI) report. The suggestion is that disinflation might be in the pipeline, or that's how overly enthusiastic market participants will likely interpret the message.

Taken together, the retail sales report and the PPI figures were highly accommodating to a Goldilocks interpretation, although after Tuesday's fireworks, it may already be in the price.

The top market question now is whether traders and investors preemptively assuming a sequence of subdued US macroeconomics will lead to a Federal Reserve easing cycle starting in late Q1 2024.

To be sure, the convergence of factors, including i) weaker payrolls and retail sales, ii) subdued CPI and PPI, iii) uninspiring consumer sentiment, and iv) ISM disappointments, strongly supports the idea that monetary policy is belatedly exerting its influence and that this time isn’t different after all.

Jerome Powell recently introduced the concept of "head fakes" into discussions, emphasizing a commitment not to be misled by premature inflation reports. However, this week's updates appeared more substantial, with core and supercore prices falling below expectations. Additionally, headline producer prices experienced the most significant month-over-month decline since April 2020.

Still, there is a concern that the markets might be currently overestimating the likelihood of a comprehensive accommodative stance from the Federal Reserve.

Officials have alluded to the mechanical effect of receding inflation on the real policy rate, making "insurance cuts" in 2024 probably inevitable.

The logic is clear-cut: With a decline in inflation, the necessity to reduce rates becomes apparent unless there is an intention to tolerate an inadvertent policy tightening.

However, this differs from rate cuts intended to eliminate restrictive policy settings. In the "insurance cuts" envisioned by many in the market, the Fed essentially prevents the real policy rate from increasing—cutting to maintain the status quo. Cutting to support the economy actively is something different altogether. The last thing the Fed probably wants is too many sessions like Tuesday’s pre-holiday merrymaking engendering the single most significant one-day financial conditions easing impulse of 2023. 

Hence, this still buoyant US consumer and thoughts of the Fed likely to keep the Fed Fund in a more restrictive setting likely explains the rise in 10-year US yields despite the dulcet inflationary tones.

We may be getting ahead of ourselves, and the price action earlier this week (i.e., following the CPI report) indicated just how far behind positioning was vis-à-vis the swiftly evolving rates sentiment.

OIL MARKETS

Oil prices nosedived after government data showed U.S. crude oil stockpiles spiked above consensus last week while demand for refined fuels fell.

Wednesday's move lower in the oil complex also came as US 10-year yields and the U.S. Dollar Index reversed higher.

The market has been grappling with conflicting messages over the past few weeks. OPEC+ is talking up tight markets on China demand. At the same time, The International Energy Agency (IEA) said that global oil markets will not be as tight as expected this quarter, as supply had outpaced upgrades to demand.

 Those supply gains have come from unexpected sources like Venusuals, an overt signal that the relaxation of US sanctions will lead to a pickup in exports. And due to improved lateral wellhead drilling technology, US shale oil production is also rising faster than expected.

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