US inflation is proving to be rather sticky, with the latest reading coming in hotter than expected for the third consecutive month. A contributor to these elevated readings is no other than the soaring oil price.
- Oil prices exceed $90/barrel
- US CPI surprises to the upside for the third consecutive month
- Gold and bonds rally, while equities see-saw
- Currency volatility persists
Escalating geopolitical tensions fuel oil prices to six-month high, amplifying inflationary threats
The recent surge in oil prices, catapulting beyond $90/barrel for Brent Crude reflects a confluence of factors driving the oil price trajectory. Geopolitical unrest in the Middle East and supply disruptions orchestrated by the Organization of the Petroleum Exporting Countries (OPEC) and its allies are the primary catalysts behind this upward momentum. However, as oil prices soar, the spectre of inflation looms large, casting a shadow over global economic stability.
Geopolitical tumult in the Middle East has emerged as a pivotal force propelling oil prices to new heights. Heightened tensions between Iran and Israel, with the looming possibility of military confrontation, have instilled apprehension amongst traders, fostering an environment conducive to price escalation. Iran’s vow to retaliate against Israel, along with protracted negotiations between Israel and Hamas, underscores the fragility of the current geopolitical landscape.
Concurrently, supply constraints resulting from OPEC+ production cuts have further exacerbated the situation, intensifying concerns about inflationary pressures. The surge in oil prices, soaring by nearly 18% this year, poses a significant challenge to central banks worldwide, as they grapple with persistently sticky inflation. With Brent futures edging closer to $91/barrel and West Texas Intermediate surpassing $86/barrel, the ripple effects are reverberating across global markets, eliciting fears of a broader inflationary spiral. Despite initial optimism among traders, who were foreseeing a return to $100/barrel, concerns regarding the sustainability of this price level for the benchmark Brent Crude have arisen.
In the face of these drivers, investors are recalibrating their expectations regarding monetary policy, anticipating a prolonged period of tight monetary measures to combat inflation. Recent statements from the United States (US) Federal Reserve (Fed) expressing apprehension about stalled progress on inflation, signals a potential delay in anticipated rate cuts, further complicating the economic landscape.
Looking ahead, market participants are closely monitoring updates from OPEC’s monthly oil market report and the International Energy Agency’s assessments, to glean insights into supply dynamics and demand forecasts. However, the overarching concern remains the inflationary implications of sustained oil price hikes, prompting policymakers to adopt a vigilant stance.
The surge in oil prices, propelled by geopolitical tensions and supply constraints, underscores the multifaceted challenges confronting global economies. As inflationary pressures linger, policymakers face the daunting task of striking a delicate balance between economic stability and the imperative to address burgeoning inflationary threats. In navigating these turbulent waters, proactive measures and astute policymaking are indispensable to mitigate the risks posed by escalating oil prices.
US inflation jumps again in March, posing challenges for rate-cut outlooks
The latest US Consumer Price Index (CPI) report for March brought with it another surge in inflation, challenging expectations and raising concerns about the path to eventual rate cuts by the Fed. Key indicators revealed significant upticks, with both the headline and the core CPI exceeding forecasts.
The core CPI, which excludes volatile food and energy costs, rose by 0.4% from February, marking the third consecutive month of increases. On an annual basis, the core CPI increased 3.8% year-on-year, maintaining its momentum from the previous month. Similarly, the headline CPI is 3.5% year-on-year, surpassing economists’ predictions.
Several factors contributed to the inflationary pressures observed in the March report. Housing and gasoline costs played a significant role, driving over half of the overall CPI gains. Despite expectations for a moderation in shelter prices, rent and owners’ equivalent rent both increased by 0.4%, highlighting persistent challenges in this sector. Additionally, the so-called supercore services gauge, excluding housing, saw a notable acceleration, driven by rising car insurance and medical-care costs.
The robust inflation report has prompted a reassessment of expectations regarding Fed monetary policy. Anticipation of interest rate cuts in June has been tempered, with some economists now suggesting a later date, potentially as far away as September. This shift in sentiment has reverberated across financial markets, with Treasuries and stock futures tumbling while the dollar strengthened against most major currencies.
Economists view the core CPI as a more reliable indicator of underlying inflation trends. The latest data, showing a 0.4% increase from the previous month and a 3.5% rise from a year ago, underscores the persistent inflationary pressures facing the US economy. This unexpected strength in inflationary metrics has led to adjustments in market expectations, with a reduced likelihood of rate cuts and increased volatility in currency markets.
The market reaction to the March CPI report reflects the growing uncertainty surrounding inflation dynamics and their implications for monetary policy. With expectations shifting, policymakers must navigate a complex landscape to ensure stability and sustained growth. As inflationary pressures persist, the path forward remains fraught with challenges, requiring vigilance and adaptive strategies.
MARKET RECAP
Global markets react to inflation data
The recent release of conflicting inflation data has sent ripples across global financial markets, affecting various asset classes including commodities, bonds, equities, and currencies. This article delves deeper into the nuanced reactions observed in each market segment, highlighting their interconnectedness and their implications for investors and policymakers alike.
Commodities
Gold prices edged, wiping out earlier CPI driven losses, to trade up to $2,380 per ounce on Thursday, reaching a new all-time high as investors grappled with the implications of the inflation data and its potential impact on monetary policy decisions by central banks. The uncertainty, stemming from divergent US inflation figures, has prompted investors to seek refuge in safe-haven assets like gold. The geopolitical tensions in the Middle East have further underpinned gold’s appeal, contributing to its upward movement. Moreover, expectations of rate reductions in the second half of the year have added support to gold prices as investors seek alternative stores of value amidst expectations of looser monetary policy.
Bonds
Bond yields witnessed notable movements across different regions, reflecting changing expectations regarding monetary policy and inflation dynamics. The US 10-year Treasury note yield remained near five-month highs at 4.53%, signalling expectations of higher interest rates for longer. Similarly, the UK 10-year government bond yield surged to 4.3%, its highest level since 24 November 2023, driven by hawkish remarks from Bank of England officials and stronger-than-expected US inflation data.
In South Africa, the 10-year government bond yield mirrored the upward trend of its US counterpart. Elevated inflation and robust economic indicators in the US have raised doubts about the timing and extent of Fed rate cuts, influencing expectations for interest rates in South Africa. Additionally, concerns about looming domestic inflationary pressures have led investors to anticipate a prolonged period of unchanged interest rates by the South African Reserve Bank.
Equities
Equity markets have been particularly sensitive to inflation data and its implications for corporate earnings and valuations. US stocks swung between gains and losses on Thursday, following a nearly 1% decline the day before, as investors reassessed the implications of the inflation data for monetary policy. In Europe, Frankfurt’s DAX 40 index edged down 0.2%, and the United Kingdom’s FTSE 100 also experienced a slight decline, mainly attributed to a sell-off in financials. However, there were positive movements in other sectors, with the chemicals index rising by 1.3% and oil and gas shares gaining 0.8%.
The performance of individual stocks within sectors has also varied, reflecting divergent expectations and company-specific factors. Technology and communication services stocks have outperformed their peers, driven by strong earnings prospects and continued innovation. On the other hand, financials and energy stocks have faced headwinds, grappling with uncertainties surrounding interest rates and commodity prices.
Currencies
Currency markets have been in flux as investors recalibrate their expectations in response to inflation data and central bank communications. The US Dollar Index eased slightly to 105.1 on Thursday yet remained close to its strongest level since mid-November 2023. The euro weakened to $1.07/€, its lowest in about two months, while the British pound stabilised just below the $1.26/£ mark.
The South African rand traded around R18.75/$, eliminating gains witnessed earlier in the week. The currency found support in rising gold prices amidst geopolitical tensions and inflationary concerns, leading investors to trim expectations of interest rate cuts by the Fed this year. However, uncertainties surrounding global interest rate trajectories, domestic economic conditions and the upcoming general elections have all contributed to the rand’s volatility, with investors closely monitoring developments for further insights into its trajectory.
The conflicting data continues to inject volatility into global markets, prompting investors to reassess their strategies and adjust their expectations for monetary policy decisions by central banks. As economic indicators continue to unfold, market participants will closely monitor developments across commodities, bonds, equities, and currencies for further insights into the evolving financial landscape.
Key Indicators:
USD/ZAR: 18.76
EUR/ZAR: 20.09
GBP/ZAR: 23.52
GOLD: $2,386.44
BRENT CRUDE: $90.50
Sources: Bloomberg, Reuters News, Refinitiv and Trading Economics.
Written by: Citadel Global Director, Bianca Botes.