Oil is hitting new highs again. The ECB has reached its peak interest rate

By JustMarkets

On Thursday’s stock market close, the Dow Jones Index (US30) increased by 1.00%, while the S&P 500 Index (US500) added 0.85%. The NASDAQ Technology Index (US100) closed positive by 0.81% on Thursday.

Weekly US Initial Jobless Claims rose by 3,000 to 220,000 from expectations of 5,000, indicating a stronger than expected labor market. The data boosted equities and reinforced the assumption that the Fed will be able to achieve a soft landing for the US economy. The US goods and services price index for August accelerated to 1.6% y/y from 0.8% y/y in July, the highest reading in 4 months and slightly stronger than expectations of 1.3% y/y. US retail sales for August rose by 0.6% m/m, which was stronger than expectations of 0.1% m/m. The probability of a rate hike by the US Fed has decreased further. Markets estimate the odds of a 25 bps rate hike at the September 20 FOMC meeting at 2% and a 25 bps hike at the November 1 FOMC meeting at 35%.

Equity markets in Europe were mostly up yesterday. Germany’s DAX (DE40) rose by 0.97%, France’s CAC 40 (FR40) gained 1.19% on Thursday, Spain’s IBEX 35 (ES35) added 1.44%, and the UK’s FTSE 100 (UK100) closed positive by 1.95%. The ECB decision contributed to the growth of European indices. Yesterday, the ECB raised the main refinancing rate by 25 bps to 4.50% from 4.25% and said the new level would make a “significant contribution” to controlling inflation. The ECB signaled its intention to maintain this rate, stating the following: “Based on the current assessment, the Governing Council considers that the ECB’s key interest rates have reached levels that, if maintained for a sufficiently long time, will make a substantial contribution to the timely return of inflation to target.” In other words, the ECB hinted at the end of the tightening cycle. The ECB also lowered its 2023 eurozone GDP forecast to 0.7% from the previous forecast of 0.9% and raised its 2023 inflation forecast to 5.6% from the previous forecast of 5.4%.

Oil prices are creeping higher, raising concerns about the impact on the downward trajectory of inflation. Prices for West Texas Intermediate crude, the US benchmark, are up 15% year-to-date and are above $90 a barrel. Prices for Brent crude, the international benchmark, are up 5% for the year and have also crossed the $90 mark. Saudi Arabia and Russia recently agreed to extend voluntary oil production cuts until the end of this year, reducing the global market by 1.3 million barrels of oil and boosting energy prices. Yesterday, oil prices were supported by news from China. The Bank of China (PBoC) lowered the reserve requirement ratio by 25 bps to 10.50% from 10.75%, which could stimulate economic growth and boost energy demand in China, the world’s second-largest oil consumer.

The EIA natural gas inventory report published on Thursday showed an increase of 57 bcf over the last week. This reflected negatively on prices as inventories came in above expectations at 50 bcf, although below the 5-year average for this time of year of 76 bcf. As of September 8, natural gas inventories were up 15.7% YoY and 6.8% above the 5-year seasonal average, indicating a sufficient natural gas supply.

Asian markets were mostly up on Thursday. Japan’s Nikkei 225 (JP225) rose by 1.41% yesterday, China’s FTSE China A50 (CHA50) gained 0.08%, Hong Kong’s Hang Seng (HK50) ended the day up by 0.21%, and Australia’s S&P/ASX 200 (AU200) ended Thursday positive 0.46%.

The People’s Bank of China (PBoC) lowered the reserve requirement ratio for most banks by 25 bps to 10.50% from 10.75%. Lowering the norm frees up cash for banks, allowing them to lend more to businesses and consumers. It will also lead to more liquidity in the Chinese economy, which could boost growth.

Data released on Friday also showed that China’s industrial production and retail sales rose more than expected in August. However, fixed asset investment declined, and new home sales fell, indicating that much of Asia’s largest economy remains under pressure. Chinese stocks have suffered significant losses for the year amid growing concerns that the country’s economic recovery is much slower than initially expected.

S&P 500 (F)(US500) 4,505.56 +38.12 (+0.85%)

Dow Jones (US30) 34,921.53 +346.00 (+1.00%)

DAX (DE40)  15,805.29 +151.26 (+0.97%)

FTSE 100 (UK100) 7,673.08 +147.09 (+1.95%)

USD Index  105.36 +0.60 (+0.57%)

• – China Industrial Production (m/m) at 05:00 (GMT+3);
• – China Retail Sales (m/m) at 05:00 (GMT+3);
• – China Unemployment Rate (m/m) at 05:00 (GMT+3);
• – Eurozone Trade Balance (m/m) at 12:00 (GMT+3);
• – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+3);
• – US Industrial Production (m/m) at 16:15 (GMT+3);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.