The S&P 500’s eight-day winning streak cut short by flip-flopping Fed

• Stocks and rate traders keep betting that the hike cycle is over, but the Fed isn’t sure it’s done enough to fight inflation.
• U.S. oil inventories and waning global demand are hurting oil prices.
• The U.S. consumer is facing paradoxes: jobs take longer to find and credit card delinquencies are on the rise, yet travel and leisure spending are strong.

U.S. Federal Reserve (the Fed) Chair Jerome Powell’s recent comments brought a halt to eight days of consecutive gains in the U.S. stock market. Shifting back to a more assertive policy stance, Powell reiterated the Fed's commitment to further tightening monetary policy if needed. While it may seem like the Fed is constantly changing its mind, this is actually a strategic response to evolving market conditions, rather than indecisiveness. The Fed makes adjustments based on market reactions and economic indicators. Following Powell’s last address, credit conditions improved markedly and the market's expectations for future interest rates significantly decreased. By alternating between taking an accommodating stance (favouring lower interest rates) and a more assertive approach, he can stabilize rapid market fluctuations and prevent interest rates from dropping too low, simply through his public statements. Powell's speeches are not merely informative: they are a deliberate and integral part of the Fed’s monetary policy strategy. However, this stance, along with his comments on the labour market and gross domestic product growth, did not align with market expectations, leading to increased selling pressure on both stocks and bonds.

At the same time, a historically poor 30-year Treasury bond auction exacerbated market concerns. The auction exhibited a large "tail" and a lower bid-to-cover ratio, which indicated a reduced demand for long-term U.S. debt. This event was further complicated by reports of a ransomware attack on China's largest bank, ICBC, which disrupted its U.S. Treasury market settlements and may have impacted the auction. These factors, combined with Powell's remarks, led to a broad sell-off in the stock market and a strengthening of the U.S. dollar.

Oil prices continued their downward trend, hitting four-month lows. They were influenced primarily by concerns over slowing global demand and bearish U.S. energy inventory. This shift in market focus away from the Israel-Hamas conflict has brought more attention to signs of decelerating global growth. Contributing to the downward pressure on oil prices, private U.S. energy inventory data revealed a significant increase of 11.9 million barrels in crude stock. This data received extra attention as the official Energy Information Administration (EIA) release was postponed due to system maintenance. Additionally, supply dynamics were affected by developments in the Middle East and Russia. Reports indicate that the Iraqi government has been discussing resuming oil flows through the export pipeline from Iraq to Turkey, which would be significant for global supply.

TripAdvisor and Disney's results showed that there is still strong and enduring spending in travel and leisure. Both companies reiterated how strong this segment is for their business during their earnings calls this week. Yet, while consumer spending in travel and leisure remains strong, there are underlying challenges in the job market and financial stability. The spread between hiring and firing is widening. Continuing claims rose to their highest since April, indicating a slowdown in hiring. At the same time, credit card delinquencies surpassed their pre-pandemic levels. This situation reflects a complex economic landscape where robust spending coexists with growing unemployment and financial pressures.

Listen to this week’s podcast for further insights.