We always talk about ‘the market’ like it is a living, breathing thing. The market thinks this, the market is worried about that. But of course, there is no single market that is all-knowing and all-seeing. There isn’t, right? It’s just an amalgamation of millions of individual decisions that we assign agency to.
That being said, markets certainly have themes and, as we have half-joked in the past, can really only focus on one or two things at a time. All anyone could talk about in March and April was the Gulf and threats to the oil supply. But little did we know at the time that the peak in talk also coincided with the peak in prices. Brent crude closed at roughly $72 on Friday, basically back to where it was pre-war.
What did the talking heads on oil miss? They certainly nailed the idea that inventories were being seriously depleted in the West. For example, levels in the U.S. have rarely been lower.
But in a way, the fear of an oil crunch acted to prevent the crisis itself. China entered 2026 with massive oil reserves….
…and once the war started, their imports fell off a cliff. Few anticipated this at the time… 
…and this gets to a larger issue. Economists think oil demand is rather inelastic. If prices go up 50%, the world will consume roughly the same amount as before the price spike because life has to go on. But over the last few months, it has become apparent that governments, businesses, and consumers change their consumption habits far more than we originally thought in response to price spikes. We’ve seen numbers in the 5-to-8-million-barrel range per day of demand that simply disappeared when Brent moved over $100.
The other notable factor is the idea that the spice must flow. All during the crisis, ships still moved through the Gulf, although at much reduced levels from before the war. Oil flowed through the Saudi pipeline at a much faster rate. The dark fleet did what dark fleets do…. they fly under the radar. 
Where Is The Puck Going?
The market has moved on to the next thing to worry about, and it is going back to the greatest hits list - inflation and the likelihood of imminent rate hikes. The new Fed Chairman took his new bully pulpit for a spin last week, and the general consensus was that he’s hawkish. He certainly talked a good game by unequivocally standing up for the Fed’s 2% inflation target. The market quickly moved to price in a touch more than one rate hike in the U.S. by the end of 2026, and this came at the same time as the European Central Bank hiked by a quarter-point. 
Certainly, part of the reason tech stocks sold off this week is due to the more hawkish outlook. It’s also behind the rally in the dollar and the shellacking given to silver and some mining stocks.
This week’s inflation numbers did little to dissuade the market from the idea that rate hikes are fast approaching. The core PCE came in at +0.32% in May, on the low side of expectations but still the fourth highest monthly print in the last 12 months (3.9% annualized). The 12-month change, at 3.4%, is the highest reading since Oct. 2023. The 6-month annualized rate is above 4%. 
But nothing is going to happen quickly at this Fed. Chairman Warsh made a big deal of his initiative to create five task forces to study the Fed’s operations. Specifically, they are going to look into:
1. Fed communications - probably end to the dots, and fewer press conferences (please!!!)?.
2. Fed's balance sheet – should they shrink the balance sheet, and if so, how?
3. Use and reliance on existing data sources – maybe they are starting to doubt the accuracy of the government’s statistics?
4. Productivity and jobs in an era of transformation – this is so 1990s – will AI lead to rising productivity, and if so, has the trade-off between growth and inflation changed?
5. Fed's inflation frameworks – possibly reassessing the Fed’s 2% target.
Anyone who has worked in corporate America or academia has seen this movie before. Appoint a task force, take a few months to find candidates to everyone’s liking, decide on a meeting schedule and lunch options…. yawn….I’ve lost interest before chapter four!!!
There are already hints that Mrs. Market is moving on. The bond market has started to price in a much more subdued inflation picture going forward. 
WTI prices under $70 might do that!! But we’d also make a broader, but admittedly more speculative, point. It seems as if the Fed were truly worried about inflation above target, they’d have moved already and used crude oil as an excuse. But we suspect there’s no appetite on anyone’s part to tighten monetary policy to quash prices and then be blamed for the associated real economic pain. The creation of these task forces strikes us as building the institutional support for moving the goal posts. But time will tell.
(Other) Charts We Found Interesting
- Inflation is about more than just oil. Apple raised prices virtually across the board this week, due in large part to surging memory prices. But just as monetary policy can’t do much to dictate the direction of WTI, central banks can’t do much to dictate DRAM prices.
- The other thing the market is worried about is the supply/demand backdrop for the equity market. It’s no secret that AI spending is now larger than corporate buybacks + dividends.
- But it is striking that none of the hyperscalers have authorized any buybacks this year!!
- Not only do we live in the world of multiple trillion-dollar-plus market cap companies, but investors are flocking to trillion-dollar ETFs.
- It’s not particularly unusual for the S&P to stumble when a new Fed Chairperson is sworn in.
- Keir Starmer’s resignation now makes it five British leaders who have stood down mid-term since the Brexit vote 10 years ago. So far, the markets have taken things in stride but give it time – I’m sure Burnham will find a way to snatch defeat from the jaws of victory.
- If this isn’t progress, I don’t know what is – if Paul Revere were to make the same journey from Boston to Lexington today, he could stop at 7 Dunkin locations (source Angela Morabito).
Have a good weekend
Charles Blankley
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