There's no doubt this week is simply 'action-packed'. On Monday news about situation in China discouraged risk-assets investments and let crude oil go significantly down. On the other of side of the globe, dollar index seems to weaken for another week in a row what takes us to discussion about incoming Fed decision. Trying to find answers, we asked Luke Suddards (Finimize) to share his thoughts on the recent events.
I think given China is the largest importer of crude in the world their lockdowns are definitely weighing on the commodity, however, the more important factors in my opinion are the increasingly ominous global economic outlook and a less interventionist OPEC+. Investors also seem to have become less sensitive to the Ukraine War, which was a significant driver of crude in the first half of 2022 as a large geopolitical risk premium was priced in. I'd say the balance of risks are to the downside for oil going forward. Hedge Funds have significantly raised their short bets on the crude ETF XLE, which one would infer as a bearish price signal for crude.
Yes, it could definitely put a pep in the step of the dollar. We know the dollar has been driven by a hawkish Fed and they place a lot of importance on the jobs and inflation data. If the NFP comes in well above consensus then the Fed pivot narrative would take a hit and a higher terminal rate would likely be priced in, which would be dollar positive. The dollar index is sitting on a key support threshold in the form of the 200-day SMA. If it holds this it would be a positive signal for the greenback's prospects. However, I do think we see softer NFP reports going forward as the tech layoffs and leading indicators for job vacancies roll over.
The market currently is pricing a 71% chance of a 50bps hike from the Fed at their December meeting. If we see upside surprises in jobs and inflation data, then yes we would likely see a higher probability for a 75bps hike priced in by markets. However, the Fed strategy as noted in the minutes and communicated by various FOMC members seems to be a slower pace of hikes such as 50bps, but higher end rates as well as holding them at that level for longer instead of flipping to cuts immediately. So it wouldn't necessarily be a guarantee that strong data points would shift the Fed to a 75bps hike.
