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Rising Oil Prices Could Prolong Federal Interest Rate Hikes

Miguel A. Rodriguez
Miguel A. Rodriguez
06 September 2023

There is expected to be less oil in the market as Saudi Arabia announced it will keep its production cuts constant until the end of the year and Russia also joined in the cuts. This, together with recent employment data from the US is thought to lead the Federal Reserve (Fed) to keep interest rates high for a longer than expected period of time. 

US labour market figures released

The US nonfarm payrolls and unemployment rate figures from last Friday continue to have an impact on the market even despite the holiday yesterday in the US.

Even though the unemployment rate increased to 3.8% and nonfarm payrolls came in below expectations, the numbers by themselves are insufficient for the Fed to decide to loosen monetary policy. Rate hikes are likely over, but as most Fed officials note in their statements, the current level of federal funds will need to be maintained for at least an extended period before inflation rates reach the 2% target, which could take some time, especially if oil prices continue to rise significantly and domestic demand is still strong.

Bond yields rose sharply

Due to this, bond yields spiked after the statistic was published, with the 10-year bond rising yesterday from 4.09% to 4.24%. Following a brief correction that can be categorised as technical in character, fixed income traders resumed selling treasury bonds.   

Even while this market action may seem strange, it makes sense if the Fed decides against lowering interest rates in the near or medium future.

Stocks reacted to increase in market interest rates

The rise in market interest rates caused stock indices to stop moving up after starting to do so at the end of August and to start falling again.

Sales in the Chinese stock markets following the release of the Caixin PMI services data, which continues to reveal a definite decline in the Asian giant's economy, had an impact on the stock markets' bad performance as well. Yesterday, the Hang Seng Index in Hong Kong decreased by more than 1.50%.

Therefore, in this context of increased interest rates and stagnant inflation forecasts, market sentiment deteriorates.

Oil prices are rising

With two weeks of continuous gains of more than $10 from recent lows of $77 in oil, this unfavourable feeling is being amplified.  

These ongoing price hikes in crude oil are a result of Saudi Arabia's announcement that it will maintain the 1 mbpd production cut until the end of the year, which is joined by more cutbacks by Russia. These factors, together with a still-strong demand, are what led to these continued increases in the price of crude oil.

DMO graph 6.9.2023.png

HongKong50 monthly chart September 6, 2023. Sources: Bloomberg, Reuters

Key Takeaways

  • US unemployment rate rose to 3.8%.
  • Nonfarm payrolls came in lower than expected.
  • Fed officials stated federal funds will have to be kept unchanged for a long time.
  • Bond yields rose sharply.
  • Treasury bonds were sold after a short-lived correction.
  • Stock prices fell for the first time after upwards climbs at the end of August.
  • The Caixin PMI services data for China showed a slowdown in the economy.
  • Oil has rallied over the last two weeks.
  • Saudi Arabia said it will keep production cuts stable until the end of the year.
  • Russia also cut its production further.

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The information presented herein is prepared by and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only.Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience, or current financial situation. 

Key Way Markets Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.