First Light News: Iran conflict deepens; Oil trades back in triple digits; Fed rate-cut odds collaps

Good morning,

Worst session for Stocks since the conflict began
It was another wild ride in the markets on Thursday, with US Stock benchmarks posting their worst sell-off since the Middle East conflict began. The S&P 500, the Nasdaq 100, the Dow Jones, and the Russell 2000 small caps index wrapped up the session down 1.5%, 1.7%, 1.6%, and 2.2%, respectively.

Around 400 S&P 500 Stocks closed lower, with only 100 finishing in the green, and just three sectors ended the session higher: Energy (no surprises there), Utilities, and Consumer Staples. Mag Seven Stocks also closed lower across the board, and Airlines were hammered as jet fuel costs rise.

No place to hide
I think the session’s key point from a market perspective was safe-haven demand, or lack thereof. The circle of refuge continues to get a lot smaller.

Spot Gold ended Thursday down 1.9% and is now on the doorstep of the widely watched US$5,000 barrier; US Treasury bonds were hit as inflation expectations continue to build, while the USD continued to explore higher terrain, as did Oil prices. WTI is fast closing in on US$100 per barrel, following a 9% rally yesterday, and Brent closed north of US$100 at the close of trade.

Khamenei sets a defiant tone
Iran’s new Supreme Leader, Mojtaba Khamenei, made his first public statement, which was read aloud via state TV. The overarching message was ‘defiance’, stating that the Strait of Hormuz ‘should’ remain closed and threatened to open new ‘fronts’ if the conflict continues. This hardline stance dashed hopes of a more compliant leadership and, as you would expect, sent Oil higher, along with US yields, and the USD on a haven bid.

In a widely watched monthly release, the IEA – International Energy Agency – described events in the Middle East conflict as ‘the largest supply disruption in the history of the global Oil market’. The IEA was set up to deal with Oil price shocks just like this and is one of the most authoritative sources on the Oil market; it is also worth highlighting that the IEA noted that member countries are expected to release an unprecedented amount of emergency Oil supply – 400 million barrels – which clearly did very little to tame the upside in Oil prices. Also noteworthy, the agency stated that shipping flows through the Strait have dropped by an eye-popping 90% according to its estimates.

Private credit cracks widen
Private credit fears also continue to make headlines. JPMorgan has begun restricting some lending to private credit funds; Morgan Stanley is limiting redemptions from one of its private credit funds; Cliffwater’s US$33 billion fund is facing double-digit withdrawal requests; and Blue Owl is defending a US$1.4 billion loan sale.

PCE inflation data on deck
Despite geopolitical concerns remaining at the forefront of market focus, we have a relatively busy calendar ahead. The January PCE price index data should garner most of the macro spotlight, with the YY headline print expected to remain steady at 2.9%; YY core, on the other hand, is forecast to modestly accelerate to 3.1% from 3.0% in December. Assuming the headline and core report are as anticipated, this will show that price pressures remain a full percentage point higher than the central bank’s target.

I think it is also worth noting that PCE data is tracking higher than CPI – PCE tends to trail CPI – which was reported earlier this week and showed February headline and core remained steady at 2.4% and 2.5%, respectively. This ‘inversion’ largely stems from the fact that the CPI tracks only what is referred to as ‘out of pocket’ expenditure, whereas the PCE is broader and covers all consumption. Another factor likely to be driving this division is the weighting methodology. For example, housing/shelter components carry more weight in the CPI than in the PCE, and this has been slowing. Healthcare is another example, with the PCE weighting larger than CPI, and we have seen prices rise in this sector.

Elevated price pressures and a softening jobs market are, of course, not ideal for the Fed, which is widely expected to leave the target rate on hold at 3.50-3.75% next week. In fact, according to market pricing (OIS), only 16 bps of easing is implied by year-end, meaning a rate cut this year may not even be on the table.

If inflation comes in hot today, this may underpin yields and the USD. Given that the USD remains overstretched to the downside according to the positioning data, and the haven bid is expected to remain in play as long as the Middle East conflict continues, a beat may feed into this environment.

Written by FP Markets Chief Market Analyst Aaron Hill