Markets looking for the next catalyst

• A good, if uneventful, week for markets as we head towards the end of earnings season.
• Signs emerged that spending is slowing. 
• The 10-year U.S. Treasury rate was off its high by a significant margin.

As the earnings season concludes, we now have a market facing the unknown in a week that was low on data. Doubts are particularly driven by conflicting signals from U.S. policymakers, indicating that hopes for a relaxed monetary policy might be premature. At the same time, markets are not as optimistic about U.S. Federal Reserve (the Fed) rate cuts as they once were. In fact, one might say that the Fed’s Dot Plots (the chart of Fed officials’ projections for its short-term interest rate) are predicting more aggressive rate cuts than the market expects.

In the commodities sector, oil prices showed volatility. After a spike in the middle of April, driven by escalated tensions in the Middle East, crude prices retreated to March levels. This pullback has eased inflation concerns somewhat, offering a breather to the broader market. Investors and analysts look to the next release of the U.S. consumer price index (CPI) for further clues on inflation, but with oil prices and the slowdown of wage growth and rent increases, there are reasons to be hopeful.

U.S. and European central banks are currently on divergent paths. The Fed has maintained an apparently stringent stance in its speeches; if not in those of Fed Chair Jerome Powell, at least in the various regional speeches. But on the other side of the Atlantic, European banks have begun loosening their policies. Notably, Sweden’s Riksbank initiated its first rate cut in eight years, a move that came soon after the Swiss National Bank's surprising rate reduction in March. This shift contributed to a surge in Europe's Stoxx 600 Index, which reached new highs propelled by strong corporate earnings.

The bond markets in the U.S. and Europe responded to this with significant rallies. Yields on U.S. 10-year Treasuries fell back to levels seen the previous month. Expectations are building in Europe for a potential rate cut by the European Central Bank (ECB) in the coming month, further fueling bond rallies.

On the corporate front, the financial strain on low-income consumers has been a recurrent theme this earnings season. Several major companies, including McDonald's, Starbucks and Tyson Foods reported challenges that reflected broader economic pressures. Starbucks' CEO Laxman Narasimhan pointed to consumer caution as a drag on performance, a sentiment echoed by McDonald's and Tyson Foods, which both noted dips in sales due to the economic pinch on lower-income groups.

Supporting these corporate insights, recent Fed data revealed a surprising deceleration in credit card debt growth, indicating a pullback in consumer spending to levels not seen since the onset of COVID-19. This trend was mirrored in sector-specific analyses from Bank of America, which highlighted weaknesses in consumer-sensitive stocks, especially in the travel sector. Disappointing performances by Expedia and Tripadvisor showed that travel may be starting to finally feel the impact of rising rates and high inflation.

Listen to this week’s podcast for further insights.