Inflation, energy, and bond market interventions

Kimberly Adams (0:01)

Inflation Holds Steady and Keeping an Eye on the Oil Markets.

From Marketplace in Washington, I'm Kimberly Adams. We just got consumer price index data for August. Prices were up four-tenths of a percent, which means annual inflation is running at 3.4 percent. This is in line with expectations, but it's still way above what the Federal Reserve would like to see. And it's just one of several important economic readings that we got in this busy week for the markets. To help break it down for us, I'm joined by Russ Mould, Investment Director at the UK-based firm AJ Bell. Russ, thanks for joining us.

Russ Mould (0:37)

It's an absolute pleasure, Kimberly. Thank you for having me.

Kimberly Adams (0:38)

US stocks have been sliding this week. With fresh inflation data today and the Fed meeting next week, what do you see as weighing most on the markets right now?

Russ Mould (0:48)

It's interesting. The inflation figure is clearly going to be extremely important, but I think financial markets have been looking at rising US government bond yields and the combination of efforts from the US Treasury led by Mr. Scott Percent to try and intervene in currency, commodity and bond markets, which given his record as a hedge fund manager, he probably knows he really shouldn't be trying because once you set up a big target, financial markets will go looking for it. So I think financial markets have been looking at bond yields, gathering US government debt and wondering what the implications of that is, even before we get to how inflation could start to influence Federal Reserve monetary policy.

Kimberly Adams (1:24)

How effective have these interventions been so far?

Russ Mould (1:27)

Not terribly. US Treasury yields have continued to go up. In fairness, the Japanese yen has actually started to gain ground, though that may be more because of expectations of a Japanese interest rate increase next week. And the oil price, as we can see, has been very, very volatile, but the most recent trend has been up, not down, despite ongoing reductions in US strategic petroleum reserves.

Kimberly Adams (1:46)

Let's focus on energy markets. This time last week, Brent Crude was selling for $95 a barrel. This morning, it's still well over $100 a barrel. What are you watching for that could potentially make a dent in energy prices, or I guess this is the new normal?

Russ Mould (2:04)

So far, financial markets have been comfortable, convinced, happy to believe that the April Paris Agreement and the June Memorandum of Understanding between Washington and Tehran meant that escalation militarily was over. That would lead to de-escalation, and the logical conclusion of that direction is ultimately a peace settlement. And that is what markets have been pricing in ever since April.

So the re-escalation of military conflict this week has shaken that cosy consensus coupled with, again, a further reduction in strategic petroleum reserves, and also from a technical financial market point of view, it does look as if more oil traders are short and betting against oil prices than long and betting with them right now. So the higher the oil price goes, the more pressure there is on the shorts to cover and actually start buying oil to try and cover up their situation. So that could create some technical buying, which has got nothing to do with what's going on in the real world at all.

Kimberly Adams (2:58)

The European Central Bank yesterday raised its benchmark interest rates. It's the second time it's raised rates since the US-Iran war again. It cited the conflict as a direct driver of inflation. Do you think other central banks, including our own here in the US, will follow?

Russ Mould (3:14)

We'll find out next Wednesday when Mr. Kevin Walsh, the new chair of the Federal Reserve, makes his latest statement after the Federal Open Markets Committee meeting. Markets are putting a three in four chance on a rate rise from Mr. Walsh and his colleagues of a quarter point.

It's obviously a very difficult one because the economy on one hand is running hot, the stock market is running hot, inflation is running hot. On the other, Mr. Walsh won't want to see government borrowing costs go up too much because of the debt situation. And there is a president who is calling for cheaper money, not more expensive money. So any decision that Mr. Walsh makes will be seen by one political spectrum or the other as a political move, not an economic one. So it's not an easy decision for the Federal Reserve to make, but markets think they will lean towards higher rates. The Bank of England is expected to do nothing next Thursday and the Bank of Japan is expected to raise interest rates next Friday, all for similar reasons.