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Expect Zero Fed Cuts Now, China Risk, Oil Moving Up, Market Leaning


Last year, in the midst of fears of recession from hikes we were expecting cuts. Now the market caught up now expecting about seven cuts along with the Fed now expecting three cuts.


That said, I now think there's a real chance for zero cuts and maybe even a risk for some hikes.


Core CPI Holding


CPI core at .3 today and now a series of .3s (here) is not good enough for a Fed that's leaning to cut. The Fed 'thinks' they are restrictive but disinflation has mathematically officially stalled.


Fed officials came out talking about cuts this year but not timing. I would guess that a few more .3s forces Powell to abandon cut plans this year. The market is leaning too much for cuts and as of today I expect zero cuts this year with these type of numbers.


PPI comes out tomorrow and is expected to be weak. But it's biased by oil which is moving up and has the potential to breakout topside soon based on geopolitics with Oil rich Russia at war and now the Middle East issues building in the Red Sea.


Middle East geopolitical issues are a clear risk for oil to rise higher. But the Red Sea being blocked is also likely going to add back cost inflation for companies who will then likely start to pass along pricing to customers, ie reflation.


So just as the market AND Fed lean to cuts, the reality has shifted away from that real-time.


The longer inflation stays at .3 there's building risk that it can tick the other way back to .4. If that happens, uh the Fed will panic hike and the market is way leaning the wrong way for that. It would hit markets. I believe real-time reality is not aligned with market expectations.


A bright spot for the market is that the economy and jobs are holding up nicely. So the market can get jittery-down on no cuts but by year end can close the year up if the economy holds up.


China Risk


Let's switch to Taiwan. This weekend has Taiwan elections. China's threatened that if the current party who is leading in the polls wins, it risks war.


If China moves on Taiwan the market can be down 5% that day and tech stocks down 10%+ with further follow through risk days after.


I don't know how quickly China would react but the risk/reward of no China reaction -versus- a China reaction, is not favorable for markets.


Conclusion


Market leaning bullish but fundamentals have tilted real-time to some level of less bullish.



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