Will the Fed Sink Stocks as the Oil Surge Cancels Rate Cuts?
Will the Fed Sink Stocks as the Oil Surge Cancels Rate Cuts?
By:Ilya Spivak
The markets are in trouble if Fed rate cuts stall as surging crude oil prices fuel inflation fears.
- Crude oil steadies as Strait of Hormuz fears ease, cooling inflation concerns
- Stocks, bonds, and the dollar look to the FOMC meeting for direction cues
- Selling pressure may strike markets if the Fed weakens rate cut commitment
Have markets found their footing, or are they simply waiting for the next catalyst?
Crude oil prices have slipped into a holding pattern after an early-week pullback that put the brakes on market fears of a lasting supply shock, at least for now. That has helped stabilize broader financial markets, but a lack of follow-through suggests traders are hesitant to fully embrace a risk-on rebound ahead of a pivotal Federal Reserve meeting.
Relief seemed to come after comments from Iran’s foreign minister over the weekend indicating that the Strait of Hormuz remains open to most global shipping, with restrictions applying only to “enemy” vessels. That message was quickly reinforced as Indian tankers carrying liquefied petroleum gas successfully transited the strait, signaling that global supply flows might prove to be less hampered than previously feared.
US-Iran war: has the oil shock been defused?
If adequate oil supply continues to reach major consumers like China and India, the risk of a severe global supply disruption that traders have feverishly priced in since the start of the US-Iran war may be overdone.
Markets appear to have accepted that narrative for now, prompting a modest pullback in crude prices and a corresponding easing of tension across global markets.
The reaction across asset classes points to caution rather than conviction.
Equities have held onto the week’s early gains but have struggled to extend higher, with the S&P 500 treading water after an initial bounce. Similarly, Treasury bonds rebounded while the US dollar pulled back from last week’s price extremes, but neither market shows convincing signs of trend reversal.
Gold dropped at the weekly open, as if to acknowledge a step down in geopolitical risk premium, but has since stabilized near the $5000/oz level marking the bottom of its three-week range.
Across the board, these moves appear corrective rather than transformational, with the markets consolidating recent moves rather than overturning them. Risk sentiment remains fragile, with investors reluctant to commit ahead of a major policy event.
Will the FOMC sink the stock market?
Expectations for monetary policy have shifted significantly in recent weeks. Markets are now pricing in one 25-basis-point (bps) interest rate cut this year, and another one next year. That marks a notable retreat from more aggressive easing expectations prevailing for much of the past year.
The logic that’s playing out in global markets seems straightforward: if energy prices remain elevated or resume their climb, the Fed may have little room to lower rates without risking a sharp rise in inflation.
That puts the upcoming meeting of the US central bank’s policy-steering Federal Open Market Committee (FOMC) squarely in the spotlight.
If officials acknowledge rising inflation risks tied to oil and signal a more cautious stance on rate cuts, markets may quickly come under renewed pressure. Conversely, if policymakers downplay the persistence of energy-driven inflation, risk assets may find a bit more room to breathe.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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