Stocks and bonds were generally lower this week as investors latched on to the US Federal Reserve’s narrative last week that interest rates are likely to stay higher for longer. Given the resilience of the US economy so far this year, there is now an expectation that monetary policy will need to be kept in a restrictive territory for longer.
The recent rise in oil prices continued this week, reaching a 10-month high of around $96 a barrel (Brent). US stockpiles of oil came in lower than expected, which compounded the concern already in the market following the reduction in supply previously announced by many of the world’s major producers. Having risen from $72 a barrel in June, investors are concerned about how this could impact inflation in the months ahead.
An elevated oil price acts like a tax on consumers and businesses, reducing economic activity. Increased production and transportation costs feed through to cause inflationary pressure, often impacting corporate profit margins. Over longer periods, countries that are net importers of oil face challenges from a larger trade deficit as they spend more on oil imports, which is likely to slow economic growth and also cause volatility to the country’s currency.
John Naylor, Chartered FCSI – Head of Investment Committee