Oil price surge stokes investor fears of further US interest rate hikes
Equity markets demonstrated uncertainty as investors awaited a critical United States inflation report. Their apprehension stemmed from the fear that the recent oil price surge might push consumer prices upward, pressuring the Federal Reserve to increase interest rates once more.
The Federal Reserve asserted that its monetary policy decisions will be driven by data, considering a variety of figures. Throughout 2023, these figures have primarily indicated that over a year of tightening is yielding the intended effect.
This perception had nurtured the hope that the rate hike in July would be the final one and that officials would permit its measures to permeate the economy, thereby taming inflation. However, recent robust data, particularly concerning the job market and services sector, have reignited speculation of further hikes. This sentiment has been exacerbated by the surge in oil prices to their highest in 10 months.
This surge is attributed to both Saudi Arabia’s and Russia’s decision to reduce output until year’s end and to flooding in Libya impacting its pumping capacity.
Stephen Innes at SPI Asset Management noted the impact of escalating oil prices on worldwide markets. He highlighted the inherent risk they pose to the Fed’s inflation and interest rate perspective.
Innes suggested that while the current surge might not trigger a September hike, oil prices exceeding US$90 per barrel could justify another rate increase in November or December. He also warned that the rise in crude could instigate a significant increase in headline inflation, possibly prompting the Federal Reserve to adopt a more aggressive stance than investors currently anticipate.
An upcoming US consumer price index reading today, followed by the producer price index tomorrow and the Fed’s policy meeting the following week, is anticipated with interest.
Asian equity markets displayed a lack of direction in the morning session, fluctuating between gains and losses.
Hong Kong saw a slight increase after five consecutive days of decline, while Shanghai, Taipei, and Jakarta also experienced a rise.
However, Tokyo, Sydney, Singapore, Seoul, Wellington, and Manila experienced a decrease.
This lacklustre performance followed a disappointing lead from Wall Street, where tech giants, including Apple, Amazon, and Alphabet (Google parent), experienced a downturn.
Investor attention is also on Japan, as the yen’s recent rally this week dwindled, falling to 10-month lows against the dollar due to heightened expectations of another Fed hike.
This development is concurrent with growing expectations that Japan’s central bank is preparing to transition away from its extremely lax monetary policy at some point.
Key figures around 0230 GMT included a 0.3% decrease in Tokyo’s Nikkei 225 to 32,675.89 (break), a 0.2% increase in Hong Kong’s Hang Seng Index to 18,058.18, and a 0.1% increase in Shanghai’s Composite to 3,139.37.
The dollar/yen was up at 147.35 yen from 147.15 yen on Tuesday, the euro/dollar was up at US$1.0754 from US$1.0732, and the pound/dollar was down at US$1.2488 from US$1.2492.
West Texas Intermediate increased by 0.2% to US$89.05 per barrel, Brent North Sea crude increased by 0.2% to US$92.20 per barrel, New York’s Dow fell by 0.1% to 34,645.99 (close), and London’s FTSE 100 rose by 0.4% to 7,527.53 (close).
