Federal Reserve spooks markets despite a dramatic crude oil decline

Ed Mertiri |

Sources: S&P Global

It was another tough week for U.S. equities as the S&P 500 gave up 6%. Consumer Staples was the best, or, rather, the least-worst–performing large-cap segment, off 4%. Energy plunged 17% and is now the worst-performing large-cap segment month-to-date. A large drop in oil prices contributed to S&P 500 Energy’s weakness: the S&P GSCI All Crude Index retreated 8% last week as front-month WTI prices finished at a one-month low. Surprisingly perhaps, the decline was partially due to expanding Russian exports, which, according to research grew 12% in the first five months of 2022. Energy prices are notoriously volatile but if lower crude oil prices can be passed though after refining, which remains a big question, it could help reduce inflation.

Markets briefly looked to stabilize after the Federal Reserve announced a rate increase of 75 basis points, versus the previously expected 50. However once investors digested the press conference commentary, it seems they became more fearful of inflationary pressures and sent the market tumbling further, putting the S&P 500 squarely into bear territory. Risk off sentiment was driven by factors including the Fed-led global monetary policy shift, concerns about policy mistakes in both directions, and rising skepticism of a soft landing. The post-FOMC meeting commentary didn't help, which included Minneapolis' Kashkari saying he'd support another 75bp hike and continue with 50bp hikes until inflation is well on its way to 2%.

Coming up this week, Federal Reserve Chair Jerome Powell’s testimony on monetary policy in front of the U.S. Senate on Wednesday will be closely watched for clues on the future course of interest rates, while a range of Purchasing Manager Indices across the Eurozone, the U.K. and the U.S. will be scrutinized for signs of economic deceleration on the back of tighter liquidity conditions worldwide.

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