CEO House View | Why Oil Prices Now Matter More Than the Fed

💡European equities, Southeast Asian markets, emerging markets, and Asian equities tied to the AI supply chain generally advanced in February. South Korea's KOSPI, in particular, gained +16.5% due to strong demand expectations in the memory sector, highlighting the robust performance of AI-related segments across these regions.

💡Key indicators suggesting a recovery in US corporate financing and capital expenditure include initial jobless claims holding at low levels, January nonfarm payrolls increasing by 130,000, and the Federal Reserve’s measure of the net percentage of firms reporting increased demand for domestic bank loans climbing to a near three-year high. These factors signal a gradual and moderate recovery in both investment and consumption.

💡Global economic expectation indices showed a significant improvement in February compared to January forecasts, with two-thirds of economies revising their growth forecasts upward. Concurrently, recession probabilities across major economies, including the US, Europe, Japan, Australia, and Taiwan, continued to decline, underscoring broad-based economic repair.

💡A notable divergence of views appeared within the Federal Reserve's latest meeting minutes, with several officials supporting a “two-sided” description for future policy decisions. This indicates the possibility that if inflation remains persistently above target, policy could respond in either direction, explicitly mentioning that raising the federal funds target range could be an appropriate option.

💡Milan, a close ally of Trump, exhibited an unexpected shift in tone by remarking in a February interview that the labor market is more resilient than expected, walking back his earlier stance favoring aggressive easing. He suggested that rate cuts this year could be reduced from 150 basis points to 100 basis points, signaling a move toward a more cautious policy stance.

💡The earliest plausible timing for the Federal Reserve to resume rate cuts is June, with September as the latest, ultimately contingent on oil prices. The Fed’s recent messaging has effectively ruled out rate cuts in the first half of the year, consistent with an outlook for easing to resume only after the new Fed chair takes office.

💡According to MacroMicro, the recent increase in crude oil prices is driven by fundamental improvements, in addition to geopolitical risks such as US–Iran tensions. The EIA’s latest data, showing an unusual negative year-over-year growth in US crude oil inventories, signals a meaningful recovery in demand as a primary driver for this rotation.

💡If WTI crude oil prices remain below $65 per barrel, the probability of a June rate cut increases, and equity exposure can be moderately raised. In this scenario, the broader market is likely to advance safely and forcefully, with healthy sector rotation and a high probability of success.

💡If WTI crude oil prices exceed $70 per barrel, rate cuts could be pushed back to September. In this scenario, equity exposure should be reduced on rallies, as the likelihood of a broader market pullback increases. This indicates a more constrained liquidity environment.

💡The bond market performance in Q2 is expected to be subdued, while gold positions should be maintained. Additional gold allocations are recommended opportunistically during periods of volatility, suggesting a cautious approach for fixed income and a hedge strategy for gold.