3rd October 2023
Data was referred to as the ‘new oil’ throughout most of the twentieth century. The collection and analysis of data has become the foundation of technology firms’ trillion-dollar operations, while the rise of renewable energy should mean that the days of oil are numbered.
Recent developments, however, have shown that predictions of oil’s doom were highly exaggerated.
Climbing oil prices
One of the biggest drivers of worldwide inflation was the rise in oil prices brought on by Russia’s invasion of Ukraine last year. Prices gradually dropped, but in recent weeks, they’ve started to rise once more.
Last week, the price of oil kept on climbing. Brent crude broke the $97 per barrel barrier in the middle of the week before dropping to $95.41 at the end of the week. Even so, this was an increase of 2.2% on the previous week.
The likelihood that central banks will decrease interest rates in the near future may be diminished as a result of these high prices, which may create more inflationary pressures.
Increasing inflationary pressures
Markets are really fearful of this. A premature dovish move by the Federal Reserve would be ‘unforgivable’ according to Mark Dowding, Chief Investment Officer at Bluebay. He noted:
“If inflation was to re-accelerate, then this would put the Fed in a very difficult position, and it may need to endorse further aggressive tightening in order to restore price stability, with this resulting in a more severe recession were this to be the case.
“Looked at in this context, and with the economy remaining robust, it is easy to understand why the Fed messaging continues to highlight the prospect of one more hike in the coming quarter, with little prospect of lower rates until well into the second half of 2024.”
US stocks face worst month of 2023
While the rise in oil prices helped raise the stocks of energy companies, there were few other winners in the US as the S&P 500 fell for a fourth straight week.
Even though the NASDAQ had a meagre 0.1% increase, this was not enough to save September from becoming the worst month for both indexes in 2023.
Facing the potential US government shutdown
Fears of a US government shutdown, which escalated throughout the course of the week, did not help equities.
Despite the fact that the Republicans currently hold a tenuous majority in the House of Representatives, House leader Kevin McCarthy found it difficult to reach an agreement on funding with his party’s diverse wings.
In the end, Congress was able to approve a short-term budget agreement over the weekend – that will only last 45 days. This might put more pressure on US markets later in the year.
New growth for UK economy
Due to the close ties between the US and European economies, it was only natural that the prospective US government shutdown would have an effect on Europe’s respective indices as well. Overall, the FTSE 100 fell 1.0% and the MSCI Europe ex UK index lost 0.7%.
On the continent, there was some good news as well though. The Office for National Statistics (ONS) in the UK revised its Q1 GDP figures. Previously, it had predicted a 0.1% increase in the UK’s GDP. It now thinks the UK economy expanded by 0.3%.
ONS chief economist Grant Fitzner said:
“Our new estimates indicate a stronger performance for professional and scientific businesses due to improved data sources. Meanwhile, healthcare grew less because of new near real-time information showing the cost of delivering services.”
With the new growth, the UK economy expanded 1.8% between the end of 2019 and the second quarter of 2023, outpacing France and Germany (albeit lagging behind the 6.1% seen in the US). Given the recent general lacklustre economic attitude in the UK, the news will be particularly welcome.
Latest European inflation data
Regarding Europe, the European Central Bank (ECB) published its inflation data for September last week.
Thankfully, European markets continued to show declining inflation. September saw a decrease in headline inflation from August’s 5.2% to 4.3% in September. This was also less than the 4.5% the markets had anticipated.
This is probably the start of an accelerated decrease in eurozone inflation, particularly in core prices, according to Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics. Claus noted:
“It is still early days, but if this rate of disinflation in core goods is sustained, we see scope for significant downgrades in eurozone core inflation forecasts next year.
“Our preliminary updated forecasts point to core inflation next year at 2.2%, 0.3% lower than previous, reflecting lower than anticipated non-energy goods inflation. We could be wrong. Monthly pricing in non-energy goods is notoriously volatile, but at this point the ECB’s 2024 forecast for core inflation at 2.9% is a sitting duck.”