Reuters reported on the 20th (local time) that high oil prices are emerging as a new burden on the U.S. stock market, which is shaken by the U.S. Federal Reserve’s tightening move and the Ukrainian crisis.
Reuters said there are concerns that high oil prices could lead to more aggressive Fed austerity as they increase corporate and consumer costs and encourage further rises in prices that have already soared.
The price of West Texas Intermediate (WTI) in the U.S. jumped about 40% since December last year, reaching a record high of $95.46 a barrel on the 14th.
The recent rise in international oil prices is attributable to concerns over the rising possibility of Russia’s invasion of Ukraine, one of the world’s largest oil-producing countries, with demand for crude oil increasing as the economy recovers from COVID-19.
Peter Cardillo, chief economist at Spartan Capital Securities, said inflation will worsen if international oil prices exceed $125 a barrel, forcing the Fed to tighten more aggressively, adding that this would not be good news for the stock market.
The U.S. Consumer Price Index (CPI) jumped 7.5% year-on-year in January, the highest in 40 years.
In particular, fuel oil prices jumped 9.5% month-on-month and 46.5% year-on-year, the highest increase. Overall energy costs also rose 0.9% from the previous month and 27% from the same month last year, respectively, with red lights already on.
Oxford Economics predicted that whenever international oil prices rise $10 a barrel, CPI will also rise 0.3 percentage points from a year ago, fueling consumer prices, which will lead to aggressive tightening of the Fed.
However, with oil prices soaring to the highest level in seven years and the proportion of energy stock markets much smaller than a decade ago, Bianco CIO predicted that inflation concerns will affect the stock market more than a slight increase in energy companies’ profits.
This year, the Standard & Poor’s (S&P) 500 index fell about 8%, while the 10-year government bond yield rose about 0.4 percentage points (40bp), exceeding 1.9%.
Meanwhile, Fedwatch of the Chicago Mercantile Exchange (CME) Group estimated a 0.25 percentage point increase in March based on the federal fund rate (FFR) futures price over the weekend at 78.9% and a 0.5 percentage point increase, respectively.
