US inflation to rise on Oil but core rate to slow

US annual inflation rate expected to reach 3.6% in August

By Ahmed Azzam | @3zzamous | 13 September 2023

  • Oil prices near 10-month highs.

  • OPEC predicts a 3.3 million barrel per day shortfall in Q4.

  • UK GDP contracts by 0.5% in July.

  • US inflation data awaited.

Oil prices hold near ten-month highs

Oil prices continued to hover near ten-month highs on Wednesday, with West Texas Intermediate (WTI) and Brent crude futures holding steady at $89 and $92 per barrel, respectively. This price stability comes as market participants anticipate that output cuts by major oil producers will significantly tighten the oil market in the coming months.

OPEC (Organization of the Petroleum Exporting Countries) has recently forecasted a substantial shortfall of 3.3 million barrels per day in the fourth quarter, further driving bullish sentiment in the oil market. In contrast, the United States Energy Information Administration (EIA) expects a more moderate deficit of 230,000 barrels per day, but this still underscores the growing concerns of tightening supply.

Euro maintains steady stance as ECB eyes persistent inflation

The euro remained steady after experiencing an overnight rally, which was triggered by a Reuters report suggesting that the European Central Bank (ECB) anticipates inflation in the Eurozone to remain above 3% throughout the next year. This report prompted traders to increase their bets on a potential rate hike by the ECB at its upcoming meeting, although most economists are still cautious about the likelihood of such a move.

Tech rout and bond market volatility

In the wake of a sharp sell-off in technology companies on Tuesday, US stock futures edged lower, with the Nasdaq 100 index sliding by 1.1%. This decline was notably driven by Apple's nearly 2% drop in stock price, which occurred despite the tech giant's announcement of its latest products, including the highly anticipated iPhone 15.

On the bond market front, Treasury two-year yields, which are particularly sensitive to Federal Reserve policy, remained above the 5% threshold. In contrast, yields on 10-year Treasuries held steady at 4.29%. A recent US 10-year bond auction on Tuesday recorded the highest yield since 2007, indicating investors' demands for additional compensation due to concerns over elevated inflation levels and increasing government debt issuance.

Economic data highlights

In economic data, the United Kingdom saw its GDP contract by 0.5% in July, exceeding expectations, following a 0.5% gain the previous month. This contraction was accompanied by a 0.7% decline in industrial output and a 0.8% drop in manufacturing production. Meanwhile, the Eurozone is eagerly awaiting the release of its industrial output figures, which are expected to be disclosed later.

Furthermore, market participants are eagerly awaiting the release of US inflation data, which could reveal a year-on-year increase to 3.6% from the previous 3.2%. It is worth noting that core inflation, excluding volatile food and energy prices, is anticipated to show a slight decrease from 4.7% to 4.3% year-on-year, adding an additional layer of complexity to the evolving economic landscape.