US stocks traded sideways Monday amidst little market-moving news as investors position ahead of Wednesday’s scheduled FOMC statement, a slew of housing data, and more micro news in a corporate catalyst-rich period. And bond markets are marching to the indifference of US equities with little in the way of price action.
With a quorum of central bank meetings taking center stage this week, a palatable air of uncertainty engulfs global markets. While US stocks and bonds have been treading water, oil prices are on the rise, which complicates the policy decisions of major central banks, including the Federal Reserve, ECB, and Bank of England. These central banks are grappling with elevated inflation levels, and the trajectory of oil prices, especially if they remain high for the remainder of the year, may play a crucial role in their future policy decisions as they aim to manage inflationary pressures.
Indeed, for Central Bankers, the rising cost of oil and its potential impact on inflation comes at the most unwelcome time, adding a high level of policy complexity as they enter the last mile of their ultra-marathon challenge to tame inflation.
But as always, The Federal Reserve’s FOMC meeting on Wednesday is expected to set the tone for global markets. While the Fed is likely to keep rates unchanged, it is expected to convey a resolutely hawkish stance through its statement and dot plots, potentially holding out the possibility of one more rate hike later this year to the 5.50-5.75% range.
Interestingly, despite the inflationary impact of rising oil prices, the stock market has shown resilience, with major indexes like the Dow, Nasdaq, and S&P 500 posting marginal gains on Monday. This suggests that investors may have become somewhat immune to these factors, at least in the short term. But at some point, investors may need to factor in the deflationary impact of rising oil prices.
The dynamics of higher oil prices in the current context are different compared to the early stages of the Ukraine conflict in 2022. In 2022, the global economy was gradually emerging from the initial shock of the COVID-19 pandemic, and consumers in the US and Europe had accumulated significant savings due to lockdowns and reduced spending. As a result, these consumers were better positioned to absorb the higher oil prices without significantly cutting back on non-oil consumption.
However, the situation has evolved since then. Many of these accumulated savings have been spent, and households may have less of a financial buffer to absorb rising energy costs. Consequently, higher oil prices in the current environment can exert more significant pressure on household budgets, potentially reducing consumer spending in other areas of the economy.
On the other hand, once US consumers fully grasp the geopolitical nature behind rising oil prices( Saudi and Russian collusion), they may start cutting back on non-essential travel, creating demand destruction at the pump.
Still, if oil prices remain sticky above $90 for another few weeks, we will likely see non-OPEC producers, including the US, Guyana, and Brazil, add barrels to the market and push back the current tightness.
Finally, the expected increased volatility over the next few weeks is valid, especially as we approach the critical October earnings season.
This could lead to a stock market pullback as investors hedge for a higher VIX. During this period, companies often announce whether they will surpass or reduce their full-year goals( aka beats or misses). This year’s corporate updates may substantially impact financial markets and lead to heightened market volatility as investors react to the earnings beats and misses.
