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The global financial market recently faced a new variable, a surge in international oil prices, prompting a re-evaluation of the Federal Reserve's monetary policy path. In the third week of March, the market significantly rolled back expectations for interest rate cuts within the year, while in some segments, it even front-ran the possibility of rate hikes, showing a rapid interest rate readjustment. This suggests not merely an adjustment of expectations, but an widening divergence in policy perception between the market and the Fed.
Following the recent surge in international oil prices due to the outbreak of war, major investment banks have uniformly delayed the timing of the Fed's interest rate cuts to the second half of the year or even to year-end. This revision of outlook is based on the judgment that Fed officials' policy response criteria are weighted more towards inflation than the labor market.
In the U.S., the commodity most closely watched by the Fed and the administration is undoubtedly gasoline prices. According to AAA data, the national average gasoline price rose to $3.912 per gallon, a sharp increase of 33% from the previous month. This is highly likely to directly translate into upward pressure on consumer prices in the future.
In fact, according to CME FedWatch, the market is estimating a 15% probability of an interest rate hike at the April FOMC, and the scenario of rate cuts by year-end has disappeared. Rather, there's a growing sentiment that rate hikes are back on the table.
The bond market has already priced in the possibility of interest rate freezes until mid-2027, and recently, it has even begun to front-run interest rate hike scenarios. However, contrary to such proactive market reactions, the Fed's actual policy path is likely to be different.
Unless core inflation surges or inflation expectations go out of control, there is little room for the Fed to pull out the rate hike card again. Rather, contrary to the market's deletion of rate cut expectations, it is reasonable to view the Fed's policy direction as still leaning more towards interest rate cuts.
The decrease in real disposable income due to high oil prices will act as a factor dampening household consumption. Furthermore, non-residential investment by general companies, excluding AI-related expenditures, is expected to slow down in an environment of increasing uncertainty. Since these trends stimulate concerns about an economic slowdown in the U.S., the Fed will have no choice but to be extremely cautious about raising interest rates.
Ultimately, the recent surge in Treasury yields can largely be seen as a temporary phenomenon caused by some supply-demand factors. If Middle East instability does not escalate further, interest rates are likely to gradually stabilize, and accordingly, the U.S. stock market can also regain stability.
At this point, the most critical variable is the direction of international oil prices. The possibility that restrictions on passage through the Strait of Hormuz and damage to energy infrastructure due to the Iran war could lead to long-term supply shortages is a major concern for the market.
The International Energy Agency (IEA) assessed that this situation is evolving into the largest supply shock in history and could lead to a sharp decline in actual production. Market participants are concerned about the long-term persistence of high oil prices, even if the closure of the Strait of Hormuz ends, amid continued destruction of production facilities, psychological anxiety, and accelerated demand for replenishing strategic petroleum reserves (SPR).
Whether the U.S. deploys ground troops is expected to be the key turning point for all these variables. If the actual deployment of ground troops materializes, the likelihood of a prolonged war increases, which is highly likely to lead to sustained oil price increases → increased inflationary pressure → sustained upward pressure on interest rates. Conversely, if escalation is limited, there is also a possibility of some reversal of recently surged interest rates and a technical rebound in risk assets.
Subtle shifts in the market can also be read from the CFTC's speculative net position data.
In the foreign exchange market, long positions in the Euro significantly decreased, rapidly weakening bullish expectations, while short positions in the Yen expanded, strengthening bearish bets. In the stock market, short positions in the S&P 500 contracted, showing signs of somewhat improved investor sentiment, while long positions in the Nasdaq 100 were maintained, indicating continued preference for tech stocks.
In the commodity market, long positions in gold and silver slightly decreased, indicating weaker demand, while crude oil still maintained a high level of long positions.
In summary, speculative capital is showing a differentiated trend, partially reducing aggressive bets on risk assets while selectively maintaining or expanding positions. This suggests the possibility of a strong rebound in the stock market when interest rates stabilize, considering that the recent sluggishness in the stock market was primarily due to the surge in Treasury yields.
March 23 (Mon)
U.S.: Chicago Fed National Activity Index (Feb), Construction Spending (Jan)
March 24 (Tue)
Korea: Producer Price Index (Feb)
Eurozone: Manufacturing & Services PMI (Mar)
U.S.: Manufacturing & Services PMI (Mar), Unit Labor Costs & Nonfarm Productivity (4Q)
Bonds: U.S. 2-year Treasury Auction
Remarks: Fed Governor Michael Barr (Economic Outlook)
Conference: Bio-Pharma Innovation Summit (24-29)
Earnings: GameStop (GME), KB Home (KBH) After Market Close
March 25 (Wed)
Korea: Consumer Confidence Index (Mar)
Germany: Ifo Business Climate Index (Mar)
U.S.: Import & Export Price Index (Feb)
Bonds: U.S. 5-year Treasury Auction
Central Bank: BOJ Monetary Policy Meeting Minutes
Remarks: Fed Governor Myron (Digital Assets Summit)
Earnings: Pinduoduo (PDD), Paychex (PAYX) Before Market Open, Kaman Holdings (KRMN) After Market Close
March 26 (Thu)
Remarks: Governor Cook (Financial Stability), Myron (Fed Balance Sheet), Jefferson (Economic Outlook & Energy Impact), Fed Governor Barr (Economic Outlook)
Bonds: U.S. 7-year Treasury Auction
Earnings: Pony.ai (PONY) Before Market Open
March 27 (Fri)
China: Industrial Profits (Feb)
U.S.: Consumer Sentiment Index (Mar, Final)
Earnings: Carnival (CCL) Before Market Open
Currently, the market appears overly focused on the logical chain of rising oil prices → inflationary pressure → concerns about interest rate hikes. However, considering the negative impact of high oil prices on the real economy (slowdown in consumption, contraction in investment) and the Fed's policy response capability (managing core inflation and inflation expectations), the market's bet on interest rate hikes is somewhat excessive.
In the short term, the key variable is whether Middle East risks will further escalate, particularly whether the U.S. will deploy ground troops. The resulting oil price trends and the stability of Treasury yields will be the crucial factors determining the future direction of risk assets.
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