Oil Prices Fuel US Inflation, Putting Expectations for Another Fed Rate Hike This Year to the Test

Daily News

Summary:

US producer prices recorded their largest increase in four and a half years in September. Meanwhile, the failure of the Russia-Ukraine energy ceasefire has left WTI crude oil testing the $96-per-barrel level.

【Headlines】

1. Israeli officials say the US and Israel have discussed contingency plans for strikes on Iran.

2. US PPI posts its largest increase in four and a half years in September; higher oil prices boost retail sales.

3. Hammack: Deteriorating inflation expectations could force the Fed to take more aggressive action.

4. IEA pledges to release more than 20 million barrels of diesel as soon as possible, but markets are disappointed by the lack of an expanded release.

5. US 30-year mortgage rates hold at 7.4% for an eighth consecutive week.

6. Russia-Ukraine energy ceasefire fails to materialize as WTI crude tests the $96-per-barrel level.

Detailed

Israeli Officials Say US and Israel Have Discussed Contingency Plans for Strikes on Iran

On October 15 local time, Israeli media, citing Israeli security officials, reported that Israeli and Western intelligence indicated Iran was taking extreme military measures. In response, Israeli Prime Minister Benjamin Netanyahu spoke by phone with US Secretary of State Marco Rubio that day to discuss plans for potential military strikes against Iran.

However, the report said officials from both Israel and the United States assessed that developments had not yet reached a point requiring immediate military action. US President Donald Trump had previously said that the United States would not attack Iran before the November 3 midterm elections. Netanyahu also said Israel would not take military action before its parliamentary elections on October 27.

US PPI Posts Its Largest Increase in Four and a Half Years in September; Higher Oil Prices Boost Retail Sales

Data released by the US Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) for final demand jumped 1.3% in September, marking its largest increase since March 2022. Rising costs for goods and services provided further evidence that inflationary pressures were spreading beyond energy products into broader segments of the economy.

Other data showed that US retail sales rose more than expected in September, largely because consumers were paying more for gasoline. After adjusting for price increases, however, the underlying growth trend in retail sales slowed, consistent with economists' expectations that consumer spending growth would weaken in the fourth quarter.

Hammack: Deteriorating Inflation Expectations Could Force the Fed to Take More Aggressive Action

Cleveland Fed President Beth Hammack said on Thursday that the Federal Reserve might need to respond more aggressively if public inflation expectations deteriorated.

"My concern is that if an inflationary mindset takes hold—that is, if the public begins to expect price pressures to become increasingly persistent—monetary policy will have a harder time doing its job," Hammack said. If such an inflationary mindset becomes entrenched, the Fed may need to take more forceful action.

IEA Pledges to Release More Than 20 Million Barrels of Diesel, but Markets Are Disappointed by the Lack of an Expanded Release

The International Energy Agency (IEA) agreed to release more than 20 million barrels of diesel onto the market as soon as possible. It also agreed to accelerate the release of the remaining oil from the record emergency stockpile it pledged to draw down in March, aiming to boost supply and ease surging energy prices.

A source familiar with the discussions said the planned release of 20 million barrels of diesel was smaller than the 50 million barrels previously discussed.

Trump has repeatedly urged European Union countries to tap their strategic reserves, warning that they could otherwise face the risk of a US ban on diesel exports. He hopes to bring energy prices down before the November 3 midterm elections.

US 30-Year Mortgage Rates Hold at 7.4% for an Eighth Consecutive Week

Data released by Freddie Mac on Thursday showed that the average rate on a 30-year fixed-rate mortgage in the United States remained at 7.4%, near its highest level since November 2023 and above the 6.27% recorded during the same period last year.

US mortgage rates have remained elevated for eight consecutive weeks, marking their longest such streak since 2021. Over that period, rates have risen by a cumulative 75 basis points. The rapid increase in borrowing costs is forcing sellers to cut prices and dampening homebuying demand.

Data from real estate brokerage Redfin showed that pending home sales in the United States fell 4% month over month in September, the steepest decline in more than three years. The measure dropped to its lowest level since 2014, excluding the early months of the COVID-19 pandemic in 2020.

Lisa Sturtevant, chief economist at Bright MLS, expects high mortgage rates, rising inflation and weak consumer confidence to cause a significant slowdown in the US housing market this autumn. Existing-home sales could fall below 4 million units for the first time since the 1990s.

Russia-Ukraine Energy Ceasefire Fails to Materialize as WTI Crude Tests the $96-Per-Barrel Level

In early Asian trading on Friday, WTI crude was trading at around $96.15 per barrel, after touching a one-month high of $98.32 on Thursday. Although Trump announced an energy ceasefire, Russia continued missile and drone attacks on targets in Ukraine, including power plants. Markets were also weighing the possibility that the United States could ease sanctions on tankers belonging to the global shadow fleet.

Discussions concerning the shadow fleet began several days after Trump temporarily lifted sanctions on Russian diesel, in an effort to ease the global oil price surge. A US official said the talks were focused on whether Washington might allow legitimate oil shipments to be transported aboard vessels that had previously been sanctioned.

Today's Economic Calendar

10:00 (UTC+8) Bank of England Governor Andrew Bailey speaks

11:30 (UTC+8) Federal Reserve Chair Kevin Warsh speaks

12:15 (UTC+8) Bank of Canada Governor Tiff Macklem speaks

14:30 (UTC+8) Bank of Japan Deputy Governor Shinichi Uchida speaks

21:15 (UTC+8) US September industrial production, month over month

TBA (UTC+8) Reserve Bank of New Zealand Governor Anna Breman speaks

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