Originally published by Rivkin Securities
US stock markets had a strong finish to the week last week with the Dow Jones closing almost 0.9% higher and the S&P 500 0.67%. This represents the best start to a year since 2003. Slightly stronger than expected CPI data released on Friday initially caused markets to react as though this may signal a faster pace of rate hikes (i.e. gold sold off, and bond yields rose) however these moves were soon retraced. Gold then went on to make a new three-month high and is now close to its six-month highs. The reversal in gold may have been traders recognising that gold is traditionally seen as an inflation hedge and high inflation should therefore be bullish for gold prices. The CME FedWatch tool predicts almost no chance of a rate hike at the January FOMC meeting while there is an over 70% chance of a rate hike at the March meeting.
The pace of the rise in oil prices has surprised most market watchers with WTI oil now firmly above US$64 per barrel. WTI oil is now up 24% in the last three months in a rally that has seen very few retracements. Oil inventories continue to decline with total US inventories having fallen 11.8% (including drawdowns from the Strategy Petroleum Reserve) since the end of March last year. At the current pace of declines, oil inventories will be back at the 5-year average within the next 2-3 months. Many believe that oil prices above $60 will self-correct as this level of prices will encourage substantially more drilling in US shale which will lead to increased supply. On the other hand, production continues to decline in Venezuela as its oil infrastructure starts to crumble from a sustained lack of investment. Higher oil prices may ultimately contribute to higher inflation.
Data Releases:
- No Significant Data