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If you live in America and are in the habit of watching financial television news first thing in the morning, as I am, you might think that there is only one thing of importance happening right now. The conviction of a former president on 34 felony counts in a Manhattan court is big news, of course, but it is unlikely to have an impact on markets, or maybe even on politics.
If nothing else, the trial showed that Donald Trump indulged in some dodgy business practices. If that is news to you, then you clearly haven’t been paying attention, and you have certainly never been involved in the world of real estate development in New York.
However, these are relatively minor indiscretions in the sense that it involved around only $130,000, and politically, the conviction will only serve to harden the attitudes of the already committed. It is news of historical importance, but it won’t, or at least shouldn’t, have any impact on stocks or any other market. Through a market lens, then, this is a distraction, and there are far more important things investors should pay attention to.
For instance, this weekend, OPEC+ meets. Market watchers, traders and investors are much less focused on the machinations of the oil cartel these days than they once were, but right now, that is a mistake. The inflation which plagued this country, and many others, wasn’t entirely due to a spike in oil prices, but high commodity prices as a result of post-pandemic supply chain issues were a big part of the cause.
If OPEC+ were to decide to tighten supply even more this weekend, it would push prices up, adding to inflationary pressure and making it more difficult for the Fed to cut rates any time soon. Fortunately, though, if you believe the market, that doesn’t look likely.
The front end futures contract for WTI, the main benchmark for US crude oil, has dropped significantly over the last two days. There seems to be some profit taking on short positions this morning in a “sell the rumor, buy the fact” way, but that doesn’t change the fact that oil traders, who have in the past proven to be pretty good at this kind of thing, don’t believe that OPEC+ will tighten.
The drop could even be seen as an indication that they are expecting the opposite, and there is a logical reason why that might be a possibility. The main mover for more rather than less oil production probably be Russia, who is still entrenched in a major war of their own making and presumably would like to sell as much oil as they can to help finance it.
Whether there is an actual increase or not, and whatever the short-term impact of the meeting is on crude, if the cartel doesn’t reduce output this weekend, it will remove one more potential impediment to a Fed rate cut coming sooner rather than later.
The same could also be said of the other thing investors should be paying attention to right now, the meeting next week of the ECB’s monetary policy setting body. It is widely believed that they will cut rates by 25 basis points, or 0.25%, at that meeting, probably prompting similar cuts from other countries in the region who aren’t a part of the EU.
The Fed is often the global leader that others follow when it comes to monetary policy, but in this case, where the FOMC seems to be looking for an excuse to cut rates, they will, I’m sure, be happy to use a cut by the ECB as just that.
If the Fed really is looking for an excuse to cut, they will be looking overseas because the domestic data on inflation has been inconclusive recently. That trend continued this morning, when the Fed’s preferred inflation measure, core PCE, was shown to have increased an “as expected” 0.2% last month. That was pretty good, but on an annual basis, the index increased by 2.8%, more than expected and well above the central bank’s 2% target.
Most objective analysts would see the data as a reason to hold steady with rates as they are, but Jay Powell seems to be more scared of prompting a recession than he is of inflation remaining above 2%. I am not saying that is wrong, just that it may make him look around for events and data to support a rate cut rather than reacting to domestic data that hints at not doing so.
If OPEC+ doesn’t cut output and the ECB does cut their benchmark rate next week, he will have the cover he needs to move the Fed towards a rate cut. So, while Donald Trump’s conviction may be dominating the news right now, traders and investors should be looking beyond a Manhattan courtroom for clues at to what stocks will be doing this summer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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