HomeContributorsFundamental AnalysisHappy CPI-Day, With Love, OPEC

Happy CPI-Day, With Love, OPEC

The S&P 500 slipped below its 50-DMA, as Apple’s new iPhone15 failed to spark buying interest for the heavily battered stock on Tuesday’s product reveal. Apple shares fell 1.70%. Oracle dropped 13.5%, the most in 21 years, after reporting slower cloud sales growth whereas investors were hoping AI to make numbers look more beautiful than what was announced. Still, the company chairman said that ‘companies in the area have signed contracts to purchase more than $4 billion of capacity from Oracle’s cloud service.’ It didn’t help. Google on the other hand fell more than 1%, but yesterday’s fall was certainly due to a global lack of risk appetite rather than the fact that the biggest antitrust trial of the modern times against Google started in Washington yesterday. The trial will last two months. Google is accused to have expanded its monopoly through exclusive contacts and deals that made it the default research engine on phones and internet browsers, rather than through innovations. Honestly, I hear that, but the antitrust news has barely impacted any Big Tech in the past, I don’t see why this time would be different.

Crude at a 10-month high

I have a good and a bad news for you, regardless of how bullish or bearish you are in oil. I will start with the good news for planet and inflation. The IEA said that it forecasts demand for coal, natural gas and oil to peak before 2030, thanks to ‘renewables increasingly outmatching gas for producing electricity, the rise of heat pumps and Europe’s accelerated shift away from gas following Russia’s invasion of Ukraine’. The IEA’s executive director Fatih Birol said that this is the ‘beginning of the end of the fossil fuel era’. That’s the good news, and that could’ve pulled oil prices lower. BUT NO, US crude rallied past the $89pb, as OPEC, on its end, forecasted a shortfall of around 3.3mbpd next quarter thanks to Saudi Arabia’s supply cut extension. If that’s the case, a deficit of 3.3mbpd would be the highest in over a decade according to Bloomberg. And the oil deficit next quarter is obviously a bigger concern than a peak in oil demand before 2030.

The million-barrel question is, what’s the upside potential in oil prices? In the actual inflationary environment, the rally should not extend too far, and prices could hardly stay sustainably above $90pb. Rising oil prices lead to rising inflation and inflation expectations, which then fuel hawkish policies from global central banks, and increase the recession odds. Recession odds weigh on demand prospects, hence should jeopardize the oil’s rally at some point. Big Oil companies are however a safer play for energy investors as 1. they immediately benefit from rising oil prices, and they have juicy dividend yields, and regularly announce stock buybacks when they make a lot of cash, and 2. as bad as it sounds, they will be the ones that could make the energy transition happen effectively on a large scale.

US inflation

Today, the US will release its latest inflation update, and it will be very important in terms of where the Federal Reserve (Fed) expectations will be headed, especially for the November meeting. The headline inflation is expected to have ticked higher from 3.2% to 3.6% in August, due to the spike in energy prices, but core inflation may have eased from 4.7% to 4.3%.

How do you interpret the mixed set of numbers? Well, you can’t really tell by looking at yearly numbers at this stage, because the base effect is very strong, which makes the numbers a bit ‘outdated’ if you are trying to predict where inflation is headed next (which really matters). The headline inflation is expected to have jumped to 0.6% on a monthly basis in August, that’s an annual inflation rate of 7.4%. Of course, it doesn’t mean that inflation will hit 7.4% (I hope not). But a 0.6% monthly rise in inflation is a big jump. And energy prices don’t soothe investors’ nerves at this point.

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