Market Commentary: Oil hits a fresh 10-month high

Market Commentary: Oil hits a fresh 10-month high

Markets:

  • CAD leads, JPY lags
  • Gold down $9 to $1912
  • US 10-year yields down 1.6 bps to 4.27%
  • WTI crude oil up $1.60 to $88.89
  • S&P 500 down 0.5%

Yesterday’s price movements essentially affirmed that the market is adopting a cautious approach, waiting for the release of CPI data and the ECB’s announcements. The recent information from the ECB strongly implies an impending interest rate increase, albeit one with a dovish tone. The euro gained momentum later in the day following reports suggesting that the 2024 inflation forecast would be revised upwards, surpassing 3%.

In the foreign exchange market, currency fluctuations were mostly contained within specific ranges. However, USD/JPY managed to recover some of the losses it incurred on Monday, despite minimal support from the bond market. This aligns with the prevailing trend of “buy USD/JPY unless there’s a compelling reason not to,” which has influenced the foreign exchange market throughout the year.

Oil prices attracted significant demand and reached a fresh 10-month high, contributing to the strength of the Canadian dollar. USD/CAD declined by 15 pips to 1.3556 and has retreated more than 130 pips from its Monday peak.

The British pound initially weakened in early European trading due to disappointing employment data but managed to regain some ground despite an unfavorable risk environment. This could be attributed to position adjustments in anticipation of today’s critically important CPI report.

EIA boosts 2023 world oil demand growth but cuts 2024 forecast

  • Sees world oil demand 50k bpd higher this year.
  • Sees demand 250k bpd below previous levels next year.
  • Sees 2023 demand up 1.81 mbpd.
  • Sees 2024 demand up 1.36 mbpd.
  • Global oil inventories are forecast to fall by 0.2 million b/d in the fourth quarter of 2023.
  • forecast U.S. gasoline consumption will average 8.9 million b/d in 2023 and 8.7 million b/d in 2024. The 2024 forecast is down by 0.2 million b/d from our August STEO due to lower working-age population.

WTI crude oil was last up $1.85 to $89.13.

US August CPI preview: Are we worried about now or later?

The beginning of the trading week in the United States has been relatively uneventful (although not in Tokyo), but this is set to change on Wednesday with the release of the August consumer price index (CPI) report.

While this data point is unlikely to have a substantial impact on the likelihood of a September Fed rate hike, which is currently estimated at only 7%, it will influence the pricing for November and December, which is approaching a 50% probability.

There is an ongoing discussion in the market regarding the significance of either the headline or core CPI. Let’s begin by examining the anticipated outcomes:

  • Headline +0.6% m/m and +3.6% y/y
  • Core +0.2% m/m and +4.3% y/y

The headline number is expected to accelerate from July while the core is expected to moderate.

In general, the market tends to favor core indicators as a more reliable reflection of the underlying trend, although the market’s reaction may not be straightforward. Investors will closely analyze specific details like housing and used car prices to gauge deeper underlying pressures. The cost of shelter has played a significant role in keeping inflation higher than it otherwise would be, but the lag in owners-equivalent rent is why the markets are anticipating a return to lower inflation.

The primary focus is on energy, particularly the resurgence in oil and gasoline prices. This aspect was further emphasized by the recent spike in WTI crude oil prices to a 10-month high of $88.90 on Tuesday. The increase in oil prices poses a major concern for the markets and is one of the reasons the market is now evenly split on the possibility of an ECB interest rate hike on Thursday.

The US economy isn’t slowing down as rapidly as initially anticipated, as highlighted by Walmart and Bank of America today, emphasizing the resilience of consumers. This will exert pressure on the Fed to consider further interest rate hikes.

Furthermore, here’s what Goldman Sachs has to say as a preview for Wednesday’s US August CPI report:

  • A 3.1% decline in used car prices and a 0.2% decline in new car prices in August, reflecting lower used-car auction prices and continued increases in auto dealer promotional incentives.
  • Residual seasonality and higher airfares (+6%) resulted in a 4.3% increase in public transportation prices this month.
  • Shelter inflation remains roughly at its current pace (we forecast rent to increase by 0.40% and OER to increase by 0.48%), as the gap between rents for new and continuing leases continues to close.

Going forward, Goldman Sachs expects monthly core CPI inflation to remain in the 0.2-0.3% range in the next few months. They expect continued moderation in shelter inflation and lower used car prices to be offset by a swing in the CPI’s health insurance component when the BLS incorporates new data and a methodological change in October. Thus, Goldman Sachs forecasts year-over-year core CPI inflation of 3.8% in December 2023 and 3.0% in December 2024.

Author: Jacky.T

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