Investors Eye Tariffs, Oil and Rates as Middle East Truce Takes Hold
Oil prices sink as tariff hikes loom, and now the spotlight is on rate-cut forecasts and the Fed.
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Investors are digesting the drama of the Israel-Iran fighting and starting to take a harder look at the economy. In addition, tariff hikes are looming, and there is a surge in negotiations with Canada and the European Union to beat the deadlines.
Fed Chair Jerome Powell will appear before Congress for a second day and is expected to repeat the same message he delivered in the House on Tuesday. Powell indicated that the Fed is open to an interest-rate cut, but Fed forecasts indicate that inflation is likely to uptick soon due to tariffs, and that is preventing any policy change at this time.
Morgan Stanley MS indicated that it expects seven interest-rate cuts to hit in 2026, starting in March, which will drive rates down to 2.5%-2.7%. The only way that is happening is if there is a substantial slowdown in economic activity. The bears are still anticipating extremely negative fallout from tariffs, but the market has stubbornly refused to embrace this outcome.
With the indexes hovering at all-time highs, talk about potential market tops is very likely to accelerate. The biggest obstacle confronting the anticipatory bears is that the news flow keeps surprising on the positive side. The Israel-Iran conflict turned out to have a very favorable outcome, despite talk about the potential for WWIII. Oil prices dropped sharply, which helped relieve inflationary pressures, and there continues to be optimism that trade deals will be reached that will help avoid some negative economic consequences.
The bear's biggest problem is that they have been too anticipatory. They keep betting that something negative will hit at any time, and when it doesn't, they are stuck and have to reposition to deal with more upside in the indexes.
The market needs some digestion at this point. If the indexes can consolidate a bit, it will help to provide a foundation for a stronger breakout into new high territory.
Keep in mind that we have inflation data coming up on Friday and the rebalancing of the Russell indexes. Friday should see some of the highest volume of the year on the rebalancing. The next big event after that will be the start of second-quarter earnings reports in a couple of weeks.
We have a mostly flat start on Wednesday morning.
At the time if publication, DePorre had no position in any security mentioned.
