An Energy Shock and Rate Hikes Could Mean a 2022 Style Bear Market | Eric Wallerstein | Clocktower

Wallerstein argues that China’s resumed crude purchases and potential refined-product exports or stockpiling are important to the oil market, while Houthi involvement and uncertain Iranian negotiations have helped keep oil near $90. The energy shock is already visible to consumers, with gasoline prices cited near $7 per gallon.

The episode frames higher oil prices as a monetary-policy shock rather than simply a sign of stronger growth: oil near $105 pushed global front-end rates and the yield curve higher, while the probability of a rate hike rose from 33% to 66% after Chair Warsh’s speech, CPI, and higher oil. Wallerstein warns that a prolonged conflict could bring higher refined-product and food prices, tighter policy, and a technical recession in Europe.

Wallerstein sees the Federal Reserve as divided over whether the neutral rate has risen materially—from 3.1% to figures as high as 5.3%—with hawks potentially favoring three or four more hikes toward 4.5% and doves preferring to stop. He sees greater downside growth risk than the Fed because fiscal drag, a supply shock, and additional hikes could arrive together.

The labor-market and credit consequences of further tightening depend on whether policymakers have correctly estimated the short-run neutral rate. Wallerstein says a sharp labor-market deterioration after several hikes would indicate that neutral had not risen as much as believed, while strong commercial and industrial lending currently provides economic support.

Wallerstein describes a potential 2022-style macro environment in which fiscal drag, tariffs, structurally higher energy and food prices, and tighter global liquidity pressure both growth and markets. He therefore sees a garden-variety bear market increasingly approaching his base case, despite remaining bullish on U.S. growth, because energy shocks, elevated valuations, central-bank tightening, and fiscal drag could combine.