Crude Oil is currently putting on one of the largest rallies in its history since November 4 when it closed at an all-time low. This could prove to be a major turning point for this market. However, the volatility that is set to arrive in the coming months is not something that should be ignored.
Dow Jones Industrial Average
In the lead-up to the US consumer price index release on December 15, traders were betting on a less aggressive Federal Reserve rate hike than expected. That could help demand for crude oil.
Consumer prices rose in the US by 0.1% in November. However, that was down from a 7.7% year-over-year rise in October. It was also the weakest reading of inflation since June, when year-over-year growth hit 9.1%. Traders were also worried that the Fed would slow down its aggressive tightening campaign.
With the index due to be released before the NYSE opens, the market will likely be very volatile. During a CPI release, the S&P 500 typically moves upwards by between 3.5 and 7 percent.
The dollar slipped as bond prices dropped. It was essentially flat against major currencies, although it still hovered close to its weakest levels in seven months.
S&P 500
The US stock market ended the week on a positive note. The Dow Jones Industrial Average and Nasdaq Composite surged. And with it came the highest price of crude oil in a month. But a key gauge of inflation is still on the chopping block.
The latest inflation report showed a softer CPI number than expected. This led to speculation that the Federal Reserve may be ready to scale back its aggressive rate hikes.
Meanwhile, corporate earnings are likely to see their first decline in a decade. Analysts expect the S&P 500 to post a year-over-year decline of 4% in the coming months. Yet, the stock market may have already priced that into its price.
With the Fed set to meet next week, traders are betting that the Fed will slow down its rate hiking campaign. As a result, crude oil prices and Treasury yields are both on the rise.
Nasdaq Composite
Crude oil prices rallied on Monday, the day before the Lunar New Year, as investors were bracing for the release of the US consumer price index (CPI). The CPI data, released before the NYSE opens, is expected to print at 7.7% on a month-over-month basis. But, the October CPI print came in much weaker than expected, raising investor expectations that inflation is cooling.
Investors are also expecting the Fed to slow its aggressive rate hike campaign. San Francisco Fed President Mary Daly said she would take note of the CPI reading, but did not indicate if the Fed was ready to change course.
While inflation has been a driving force in the Fed’s rate hike campaign, the Fed has said it does not plan to cut rates in the near term. In fact, Atlanta Fed President Raphael Bostic said his base case is no cuts next year.
Copper
The CPI is often seen as a metric that will determine the direction of monetary policy. With inflation falling, markets are betting on a less aggressive rate hike from the Federal Reserve. This can be favorable for demand for crude oil.
While the US consumer price index increased in October, it was the smallest increase since January. Meanwhile, import prices rose, causing the US dollar to slide.
Despite the uncertainty, the major averages rallied. The Dow jumped 684 points, while the S&P 500 climbed 5.5%. The Nasdaq Composite advanced 4.5%. Even gold added to the gains, gaining for the first time in a month.
China reopened its borders, which has led to a jump in base metals and other commodities. As China’s economy gets back on track, commodity prices will continue to rise. That could also lift inflationary pressure.
Inflation reports
Crude oil prices have posted the biggest rally in nearly two months. The rally could be related to the refining freeze that has been occurring on the Gulf Coast. However, it’s also been fueled by a rise in commodity prices. A fall in the 10-year Treasury yield has also pushed the price of crude up.
This week saw a range of economic reports that traders are eager to digest. The University of Michigan Consumer Sentiment Index was up to 64.6 in January. Meanwhile, the MBA Mortgage Applications Index will be released weekly. There were also big banks reporting on their final quarter results.
Traders are still betting on another rate hike from the Fed. But, the recent volatility in the US Dollar has sparked speculation that the Fed might be ready to tone down its aggressive policy approach.
