Pre-Open: Will the Fed Cut in 2023?

Although there was little fresh macro news to drive sentiment, US stocks are starting the week on a high note, building on last Friday's late rally as perhaps investors are deeply reflecting on easing concerns about inflation, rates, and the US economy's path from here on out.

Markets are assuming a pro-growth stance as investors get more comfortable with the idea of an improving macro backdrop ahead of a busy week of data from both a macro and micro perspective.

And if one takes a look under the hood, in the heat of the moment, it has that unmistakable feel of pandemic-era trading, supported by solid moves in Mega Cap Tech stocks, with the GAMMA+T (Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Meta, Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA)).

With little new news to guide sentiment, the overnight move could be a product of investors getting comfortable with the current macro backdrop while cleaning the slate of last week's trepidation or simply positioning ahead on next week's FOMC.

Indeed easing inflation pressure suggests the days of outsized hikes are behind us. That positive impulse is possibly providing a slight tailwind for risk assets after Fedspeak sealed the deal to a further downshift to a 25bp hike at the February FOMC meeting, with most officials across the hawk-and-dove spectrum signaling a preference for a slower rate hike pace.

However, will the Fed cut in 2023 is still the crucial question for risk markets amid a growing divergence in Fed pricing: the Fed indicates it intends to keep rates higher for longer into next year, but the market is pricing for the start of an easing cycle in H2-2023.

Commodities

Since the beginning of the year, most risky assets have quickly repriced a more friendly global growth outlook via China reopening. However, there is a clear divergence across the commodity space, with industrial and precious metals leading the China reopening charge.

At the same time, oil has lagged, perhaps a by-product of industrial solid growth impulses (metals) yet weaker consumer impulses(oil). And while there is some trepidation about oil consumption data post-Lunar New Year, we think this will be a transitory speed bump and continue to see a strong case for higher oil prices from a fundamental macro standpoint as it is more likely traders not pricing the expected consumer uplift in demand combined with the decline in Russian production.

Notwithstanding, oil prices will likely fly, especially if international travel continues to open up. Recent US dollar weakness suggests that we are likely past the peak in dollar appreciation, which should also support the broader commodity landscape  - the correlation of gold and copper with the DXY remains very negative. It is turning more negative also for oil.