War Note and FOMC Preview

In this War Note and FOMC preview - we discuss the latest Asian market action, highlight our FOMC preview and coin toss odds of the rate hike tomorrow, talk energy markets, and much more.

Don Johnson (@DonMiami3), Chief Economist

Good Tuesday evening MacroEdge Readers & Community,

This evening we’ll keep the note brief - John has a fantastic piece of his thoughts on the FOMC meeting tomorrow (below) - and I am going to cover four topic areas that I think are relevant for the evening. While I expected to cover the non-op oil and gas opportunity component, we are going to kick that to Thursday evening and focus primarily on the latest Middle East war updates and the FOMC meeting tomorrow. As I’ve stated several times over the past few weeks, I think July and September present the only opportunity for the Fed to actually hike this year. Employment data sort of continues to meander lower (the aggregate basket of employment activity), and inflation is way too high. Now of course, I acknowledge that some will say the Fed didn’t make a policy error in 2008 when oil hit all-time highs, and that’s true - but the inflation of the last 5+ years now has been much more embedded and the forces at play are very different (things like record retirements, poor youth demographics, a massive market bubble) - the list goes on and on.

This evening we’re going to explore four primary topic areas - the latest geopolitical updates from the last 48 hours - where we will discuss Houthi involvement and the $85 Brent threshold for escalation that I suspect Iran is now using as a signal to ‘flare up’ the conflict through things like action against tankers - as we’ve seen tonight - or with their latest missile barrage at a US base in Jordan - which has conflicting reports on impact. We’ll also cover the Asia situation - which is one of great volatility as the semiconductor and memory trade suffers its biggest challenge of the cycle. The cyclical industry is facing tremors - not yet a ‘cracking moment’ - but one that gives those of us with ‘memory’ flashbacks to similar technology troubles seen in Dotcom. While I do suspect that governments will intervene in markets as they seemingly always do, the last hike from the Bank of Korea was a useful signal that excess had gone absolutely out of control - to have that much leverage sloshing around a country that small - and with workplace issues in people quitting to trade and gamble full-time - it was something that policymakers were eventually going to address.

We will also cover the FOMC preview - in which I outline the roulette scenario for tomorrow. July and September, in my opinion, present the only opportunities for the Fed to move rates higher this year. There are, of course, significant implications if they do that - namely for the entire technology sector - and for other sectors like CRE. Yields have indeed pulled back some in recent days - but regardless of how it goes - I suspect that the vote itself will be extremely close tomorrow between 50/50 as members disagree with how to proceed. When a supply shock becomes a structural shift in supply chains that may last a year, the stakes are higher and different. Lastly, I will briefly touch on gasoline and diesel, and we’ll explore if they’re telling the real story of market tightness versus front-month crude prices that continues to paint a mixed picture.

A relevant post on ‘X’ from my friend Dario in Hong Kong:

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Next Reports

• Thursday - Midweek Macro Note & Exploring Non-Op Oil and Gas Opportunities

• Saturday - Redeye Macro Note

• Sunday - Weekly Macro Note

Latest Geopolitical Updates from the Last 48 Hours

• Houthi forces ink agreement with the Chinese on Red Sea passage

• Yemen discusses similar toll structure for the Bab-el-Mandeb as is currently seen in Hormuz.

• Iran launched a pre-emptive strike on a US base in Jordan in the early morning hours - sending crude and gasoline higher and erasing most losses from the last two trading days.

• The US continues to enforce the blockade of Iranian ships.

• Trump met with both Netanyahu and Zelenskiy today - and Ukraine’s Foreign Minister did everything but directly apologize over the targeting of a Chevron contractor ship.

• $85 Brent remains the level I think Iran intervenes at to lift oil, and lower than that they are not comfortable with.

• Spreads continue to show market tightness.

• With the Strait of Hormuz effectively entirely closed, there are really two outcomes between now and October: massive escalation of the conflict to reopen the Strait, or continue to buy time through TACOs to keep oil in a subsidized range while trying to negotiate a deal - the latter is now becoming the riskier strategy because the US simply is running out of time now to do so with the oil inventory situation.

Asia Situation

In Asia - both Korea and Japan continue to see very large drawdowns - the KOSPI in Korea is down 20% in two trading sessions - driven by losses in its hyper-concentrated cap-weighted names. You’ll know the importance of these in our Global Bubble Index - which I will update over the weekend - though I also highlighted today that Spain and the TSX in Canada have not broken yet, unlike the KOSPI and Nikkei.

The KOSPI is now down almost 50% since late June - one of the largest and fastest major index declines in history.

As I expected, the won is also strengthening alongside the move:

The Nikkei is off about 3% in the evening session:

Both of these technical patterns had been flagged weeks ago as we started the Asia Note (Pt) series.

It’s also time for the yen to rally - or else the Prime Minister will be stepping down:

FOMC Preview

Tomorrow everyone will be obsessed with the FOMC outcome and decision - look at the vote over the actual headline - and the statement for direction on September.

Continued below: FOMC Preview, Gasoline and Diesel Telling the Real Story?, Most Critical FOMC Meeting Ever (Sort of) - Preview (John Galt)