Stocks Stumble, Bonds Rise as Crude Oil Prices Tumble

The overnight trading session started on a high note, with positive vibes from Asia and Europe, and a surge in GameStop shares due to the latest meme stock antics by Roaring Kitty. However, the mood quickly soured following a disappointing Manufacturing ISM print, indicating a potential stagflation scenario. This led to a resurgence of the hard landing trade, with both yields and equities falling.

Investor Reactions to Economic Data

"In the past, investors have responded positively to weaker-than-expected data, hoping it would hasten the Federal Reserve's policy easing. However, now they are reacting to soft data with fear," said Jose Torres of Interactive Brokers, as reported by Bloomberg. The downward trend in Treasury yields that began late last week continued into this week, and equities fell for the third consecutive day.

Unexpected Market Movements

An unexpected trend has emerged, as noted by The Market Ear: the Nasdaq has been moving in the opposite direction of the US 10-year yield. This is unusual since tech stocks usually benefit from falling rates, leading traders to conclude that "something is changing."

Stagflation Fears on Wall Street

It appears that fears of stagflation are becoming a cause for concern on Wall Street. The US economic surprise index has fallen back to its summer 2022 lows, and the S&P500 is showing signs of bad breadth.

Pressure on Cyclical Stocks

Following the disappointing ISM print, cyclical stocks were under significant pressure. The Goldman Sachs cyclical vs. defensive pair trade experienced its second-worst session of the year, with the basket falling to its lowest level since February. Despite this, market activity was relatively subdued, with volumes down 9% compared to the 10-day moving average. However, Goldman Sachs' trading desk reports that overall activity levels were up 24% compared to the previous two weeks.

Crude Oil Prices Crumble

While stocks fluctuated, crude oil prices fell sharply. The commodity began to falter as soon as trading opened, and then plummeted following the disappointing ISM and Construction spending data. Currently, oil is the only asset pricing in a recession, while all other asset classes are pricing in a soft landing.

Buybacks Keep the Party Going

Despite the early setbacks, the day was fairly uneventful, with hedge funds and long-only investors pulling back. The market was kept afloat thanks to stock buybacks. Goldman Sachs reports that it saw another active week on the buyback desk, with volumes finishing significantly higher than the average daily trading volume for both 2023 and 2022.

Looking Ahead

With the earnings season mostly over, traders will now turn their attention to inflation trends. The upcoming jobs report represents the next big test, according to Chris Larkin at E*Trade from Morgan Stanley. This report comes ahead of next week's Federal Reserve meeting, with the swaps market showing no signs of interest rate cuts anytime soon.

Final Thoughts

The Market Ear's observation that something beneath the surface of the market is shifting seems accurate. What do you think about this situation? Do you agree with their assessment? Feel free to share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which takes place every day at 6pm.