Asia open: Fed cuts on the table

Markets

The apparent sea change in tone from the Federal Reserve regarding potential rate cuts in 2024 is hugely significant. While "insurance cuts" have been considered an option, recent comments from Fed officials suggest a more explicit willingness to cut rates in response to lower inflation.

If inflation continues to decline and the Fed refrains from cutting rates, the real policy rate will continue to rise. This situation could be precarious, especially if the economy is losing momentum. The idea of risk management cuts has been discussed before. Still, the recent remarks from Chris Waller on Tuesday provide a more unambiguous indication that the Fed is inclined to cut rates if inflation continues to fall, regardless of the broader economic conditions. 

Before Tuesday, I'm not sure anyone thought " insurance cuts" carried any delta. Still, Waller referencing a time frame on the sea change now means we could get the soft cuts out of the way by the beginning of Q2, which would invariably bring the rest of the market's implied 2024 rate cuts forward. 

The implication for rates is a possible acceleration of November's short squeeze. For equities, confirmation from a Fed official that cuts are indeed on the table probably seems too good to be true. But more to the point is the explosive rally in November may hold folks back until month-end rebalancing is completed before setting the stage for odds on Santa Rally

Oil prices

Oil prices have risen in response to a Wall Street Journal report indicating that Saudi Arabia is advocating an additional 1 million barrels per day (bpd ) insurance production cut evenly distributed among OPEC+ producers. This move is a measure to limit a projected supply overhang during the first quarter of 2024. The OPEC+ alliance, comprising 23 nations, has been engaged in negotiations for deeper production cuts, and the proposed additional cut could be as significant as 1 million bpd, effective for the first three months of 2024.

A buildup in global oil inventories persisted despite earlier collective reductions of 5 million bpd since mid-summer. The Energy Information Administration's Wednesday inventory report revealed a sixth consecutive weekly increase in U.S. commercial oil stockpiles through Nov. 24, with stocks building nearly 30 million bbl since mid-October.

There is increasing speculation that deeper OPEC+ cuts may encounter strong resistance, particularly from the United Arab Emirates and African producers such as Angola and Nigeria. These countries resist accepting lower production baselines, even under weaker market fundamentals. The dynamics within the OPEC+ alliance continue to play a crucial role in determining production policies and addressing global oil supply challenges.

Due to this ongoing disagreement among African members, the short-term price action may revert to a knee-jerk bounce even if it ultimately leads to a modest group cut. This is because the market will perceive a higher probability of reduced OPEC compliance in the future.