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Oil Gives up Early ‘China Rally’ on Fed’s Hawkish Harker

By Barani Krishnan

Betting positively on China is probably one of the riskier plays in oil these days when the Fed remains a bigger factor.

Reports that Beijing was “easing” on Covid restrictions — reducing the quarantine period for visitors to seven days from 10 — sent crude rallying almost 3% at one point Thursday before the market gave a chunk of those gains back by the close on fresh tremors over hawkish Fed talk.

Philadelphia Fed President Patrick Harker raised the inflation-fighting ante among the central bank’s speakers when he admitted that “the Fed is actively attempting to slow the economy in order to reduce high inflation.”

Most Fed speakers have refused to openly say the United States needs to have slow, or even negative growth, in order to curb inflation stubbornly hovering around four-decade highs of more than 8% a year.

Economists have accused the Fed of being slow itself to the inflation-fight. They say its move now to overcompensate for its early inaction, with the most aggressive rate hikes in 40 years, will almost certainly trigger a U.S. recession. Most of the central bank’s senior officials refute that assertion.

“The R-word remains a dirty one across markets and each time a Fed speaker suggests that even remotely, risk assets tend to suffer,” said John Kilduff, partner at New York energy hedge fund Again Capital. “Harker was making little attempts to disguise his thoughts about a recession today, by outrightly saying the Fed needs to slow the economy.”

Kilduff also said that betting positively on China over Covid has never proven to be a good thing of late. “China has a greater tendency to lock down over Covid than to open up, and they’ve proven that again and again over the past year.”

New York-traded West Texas Intermediate crude, the benchmark for U.S. crude, settled up just 43 cents, or 0.5%, at $85.98 a barrel, after reaching a session high of $87.14 earlier.

London-traded Brent oil, the global benchmark for oil, finished down 3 cents, 0.03%, at $92.38 per barrel.

Inflation, as measured by the Consumer Price Index, stood at 8.2% for the year to September, not too far from the 40-year peak of 9.1% during the 12 months to June.

The Fed’s target for inflation is a mere 2% a year and it has said it will not back off on interest rate hikes until it achieves its aim. Since March, the central bank has raised rates by 300 basis points from an original base of just 25. The Fed intends to add another 125 basis points to rates before the year-end, with economists expecting further hikes in 2023.

The American economy could land in 1990-style of a mild recession by spring next year as unyielding inflation and the Federal Reserve’s response of jumbo-sized interest rate hikes come to a head, Fitch Ratings said in a report Tuesday.

Fitch slashed its U.S. growth forecasts for 2023 and 2024, citing one of the most aggressive inflation-fighting campaigns in Fed history. U.S. Gross Domestic Product is forecast to grow by 0.5% next year, versus its June forecast of 1.5%, Fitch said.

High inflation will “prove too much of a drain” on household income next year and shrink consumer spending to the point it causes a downturn by the second quarter, Fitch added.

The Fitch forecast came on the heels of projections by Bloomberg economists on Monday that a U.S. recession is effectively certain over the next year.

Investors, economists and business leaders have warned for a while that the world’s largest economy was on the verge of a downturn — just 2.5 years after the last recession that broke out with the coronavirus pandemic in mid-2020.

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