It's All Crude Now and Does the Fed Get Normalized?

I've said it before and will keep saying it until it isn't the case: crude is everything now. If crude goes up, the Fed is behind the curve. If crude goes down, the Fed can be patient. If crude collapses, the Fed can do another round of QE.

I do not expect crude oil to rip higher following the Fed meeting this week, but that is a probability not a certainty. To put my thinking in different terms, if I was Powell (not me in Powell's shoes as Fed Chair, but actually Powell and trying to manipulate everything), I'd announce a 100bps hike on Wednesday and then say we do not plan any more hikes this year and will not hike again unless inflation moves significantly higher. I would even get specific and say something such as, "if crude is below $100, we do not see the need for more rate hikes." This would be done with the intention of making a one-and-done hike and also restore Fed independence from the stock market.

The biggest risk for markets is the Fed gets dovish too early, or is perceived as too dovish. My gut tells me they don't want to be dovish, but Powell's terrible messaging since November, clipping the hawkish pivots with his dovish press conferences, gives me pause. The Fed ended QE in 2010, 2011, 2014, and ended QT in 2018 after several months of pain. The wait-and-see attitude prevalent at the Fed says they should let things play out for several months no matter what. However, Powell reversed course in January 2019 after hiking in December 2018. Powell negated the Fed's hawkish turn in November 2021 and December 2021 with his dovish-sounding press conferences. Even his Senate confirmation hearing in January 2022 sent oil higher. Every time he opens his mouth, he has undercut the Fed's inflation fighting. That's why I'm less confident about this Fed meeting. On policy, I think they will meet expectations. Stocks could go either way off that news. The big risk I see is that Powell screws up again in the press conference and turns the meeting into a dovish event that sends oil ripping.

The Fed's best course is to err on the side of hawkishness because there is no February meeting. Whatever the Fed initiates on Wednesday is the official policy until the next meeting in 7 weeks.

Here is a chart of ZB, long-term treasury futures, to drive home the apocalyptic market action that will follow a breakout in crude and inflation expectations: the only thing separating stock market bulls from total destruction is the ZB horizontal at 152'28 and a long-term support line around 148 currently.

To view that another way, if ZB completed that pattern and hit the measured move, and the 10-year treasury yield went to the same place as it was the last time ZB was at that target price, it would be at the blue horizontal above 3.50 percent.

Thinking about things in a grander sense, consider how the public is rapidly rejecting pandemic policy. Masks, forced vaccinations and lockdowns are starting to being abandoned at a rapid clip. What the charts are telling me is that the Federal Reserve is at great risk of being normalized, of having the market reject quantitative easing. Of forcing normalization of rates because the 10-year yield was at 3.50 percent in 2011 at far lower inflation rates, and why shouldn't it be there with a CPI at 7 percent? The market is a force unto itself, it is Nature. It doesn't care about Uncle Sam's finances, of a sub-unit such as the housing market, or whatever other thing will be "destroyed" by higher rates (assuming that predictions of doom are even accurate) any more than a hurricane cares about the structural integrity of a building. If the market wants to normalize, it will normalize. The Fed cannot stop it. Rate hikes and rate cuts take the market to the same place once the market decides it has had enough of the Fed's intervention. We are again at a crossroads.