The Stock Market Is About to Experience Problems Due to Rising Oil Prices

 After the most recent Consumer Price Inflation statistics for July showed a very modest increase of 0.2%, stocks surged on Thursday.

source: Yahoo Finance

There are indicators that the volatile energy components are inflecting again, which has substantial implications for Fed policy and investor portfolios, despite the fact that investors may be praising a benign report that was mostly in line with Wall Street expectations.

The headline CPI, which includes the volatile energy and food prices, reached a four-decade high of 8.9% in June of last year and has since fallen sharply.

The comparisons from one year ago are currently falling because the peak occurred 13 months ago. This indicates that base effects reduce the likelihood of further year-over-year losses as long as the month-over-month numbers continue to rise, which they do.

In fact, from 3.0% in July, the headline inflation rate rose to 3.2% in 2018. Energy was also a net contributor to inflation for the two most recent reports in June and July rather than a deflator as it had mainly been since July of last year.

Fuel oil was up a staggering 3.0% for the month in the most recent CPI report, although falling 26.5% year over year. Likewise, utility gas increased 2.0% in July but decreased 13.7% from a year earlier. The petrol component, which is carefully studied, fell 19.9% from the previous year but increased 0.2% for the month.

The monthly increase in energy subcomponents is not always cause for concern. However, short-term charts for crude oil, natural gas, and even the entire commodities complex as a whole are screaming "bullish" and suggest further potential gains in the figures for inflation in the months to come.

That is the unexpected inflation that the market may force the Fed to act again.

Take into account that the price of WTI crude oil (CL=F) has recently increased to around $85 — it hasn't been this high since November 2022 and is up 23% in the last six weeks. Comparably, $3 was just reached for the first time since January by natural gas futures (NG=F).

The S&P GSCI Index (SPGSCI), a comprehensive index of commodities prices, has also risen to its highest levels since late January and is ready for a breakout after plunging over 40% from its 2022 peak.

Investors in the stock market also appear to be getting ready for continued energy outperformance. The best-performing large-cap sector for the current month and the last three months is the S&P Select Energy SPDR Fund (XLE). Energy was among the industries with the lowest year-to-date performance as recently as May.

Investors might feel at ease if the Fed continues on its current trajectory and keeps short-term rates "higher for longer." Investors have not, however, factored in the possibility that the Fed could face another round of growing price inflation, which would probably necessitate raising its benchmark rate to 6% or higher.

Not to jump the gun, but energy futures could reverse once more. An incorrect breakout on the charts would perplex traders and temporarily relieve pressure on the inflation statistics.

However, if the price of energy commodities keeps rising, a significant downgrading of market expectations for the economy would appear to be unavoidable.


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