The Markets
The apparent change in tone from the Federal Reserve regarding potential rate cuts in 2024 is 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 fall and the Fed refrains from cutting rates, the real federal funds rate will continue to rise. This situation could be precarious, especially if the economy loses momentum. The idea of risk management cuts has been discussed before. However, the latest comments from Chris Waller on Tuesday provide a clearer indication that the Fed is inclined to cut rates if inflation continues to fall, regardless of the broader economic conditions.
Prior to Tuesday, I’m not sure anyone thought “insurance cuts” carried any delta. Still, Waller’s reference to a timeframe for the change now means we could get the soft cuts out of the way by early Q2, which would inevitably move up the rest of the 2024 rate cuts implied by the market.
The implication for rates is a possible acceleration of the November 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, November’s explosive rally may hold folks back until the month-end rebalancing is complete, before setting the stage for the chances of a Santa rally.
Oil Prices
Oil prices have rallied in response to a Wall Street Journal report that Saudi Arabia is advocating an additional 1 million barrels per day (bpd) insurance production cut, evenly distributed among OPEC+ producers. The move is a measure to limit a projected supply overhang in the first quarter of 2024. The 23-nation OPEC+ alliance is negotiating deeper production cuts, and the proposed additional cut could be as much as 1 million bpd, effective in the first three months of 2024.
Despite earlier collective cuts of 5 million bpd since mid-summer, global oil inventories have continued to build. The Energy Information Administration’s inventory report on Wednesday showed a sixth consecutive weekly increase in U.S. commercial oil stocks through November 24, with inventories building by nearly 30 million bbl since mid-October.
There is growing speculation that deeper OPEC+ cuts may face strong resistance, particularly from the United Arab Emirates and African producers such as Angola and Nigeria. These countries are reluctant to accept lower production levels, even under weaker market fundamentals. The dynamics within the OPEC+ alliance continue to play a critical role in determining production policy and addressing global oil supply challenges.
As a result of 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.
