Oil prices spike into the Fed meeting

If you thought it would be plain sailing into the FOMC meeting later this evening, think again. Markets are back in panic mode. The Brent crude oil price is surging and is higher by another 5% today, the gold price is down 2.8% and is below $5,000 per ounce, bonds are getting sold off and yields are surging and the dollar is rallying. This is a volatile backdrop to the Fed meeting, who also must factor in a strong reading for last month’s PPI report.

Looking at producer prices first, they unexpectedly rose sharply in February and final demand PPI is expanding at a 3.4% annual rate, up from 2.9% in January. Durable goods ex transport were also strong for January, rising  at a 0.4% rate. This data has cast doubt on a Fed rate cut for this year. There is now just less than one cut priced in, with US Interest rates expected to end the year at 3.43%. The market is currently expecting the Fed to prioritize inflation risks over growth, especially since the US is more insulated from the full effects of a spike due to its position as the world’s largest energy producer.

On the oil front, the oil price is surging and is back above $108 a barrel, as the conflict escalates further. Iran has warned Gulf nations that their energy assets and infrastructure are now legitimate targets after attacks on its giant South Pars gas field by Israeli forces. The risk is that an oil shipping crisis is morphing into an oil supply crisis. Unsurprisingly, this has spooked a market that was wiling to grasp hopeful signs that tankers were slowly getting through the Strait of Hormuz, and that countries like Saudi Arabia and Iraq could get oil into the market through alternative routes.

Global stocks are now a sea of red. Consumer stocks and corporates that are sensitive to interest rate changes are in the firing line today. In Europe, the FTSE 100 is leading markets lower and is down more than 1% after some hefty losses for British American Tobacco and Unilever. The latter is down more than 3% after it announced that it was considering splitting its food assets into a separate entity, which has not been well received by the market. While oil is driving the bus when it comes to overall risk sentiment, there are some unique factors that are also weighing on stocks. The two combined means that the FTSE 100 is underperforming its European peers on Wednesday afternoon.

Overall, every time the oil price spikes above $100 per barrel, risk assets shudder. We know this playbook well since it has been the same since the  start of this conflict, and it will stay that way until there is a meaningful deescalation, which we have yet to see materialize.

The Fed is in focus today, but it has no bearing on this conflict. The Fed must react to the situation it finds itself in and today has been a clear sign that this conflict is definitely not over.

Chart 1: Brent crude oil spikes again

Source: XTB