Oil Down 7% on Week as U.S. Inflation Simply Unyielding

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By Barani Krishnan

AiVIF.com -- The Federal Reserve’s one-step-forward-two-steps-back fight against inflation is costing oil more dearly than the market’s optimists would want to admit.

Crude prices were down as much as 7% on the week, giving back about half of the past two weeks’ gains, after latest readings for U.S. retail sales and inflation showed the central bank was barely winning in its year-long battle against price pressures.

“The global growth outlook remains a major downside risk, also,” Craig Erlam, analyst at online trading platform OANDA, said, pointing to new lockdowns in China, the world's largest crude oil importer, which has been fighting COVID flare-ups after a week-long holiday. 

“With labor markets remaining tight and inflation stubborn, further downgrades could be on the cards,” Erlam added.

New York-traded West Texas Intermediate crude was down $2.92, or 3.3%, at $86.19 per barrel by 12:40 ET (16:40 GMT). For the week, it was down 7%. U.S. crude benchmark rose 17% over two prior weeks, in a powerful start to October, after a 12.5% drop in September and 24% loss for the third quarter.

London-traded Brent oil was down $2.43, or 2.6%, at $95.10 per barrel after a 13% rise over two prior weeks. The global crude benchmark was down 11% in September and dropped 22% in the third-quarter.

Friday’s declines in oil came as data showed U.S. retail sales were flat in September and below expectations as inflation at near 40-year highs took a toll on consumer appetite — the most dynamic sector of the economy.

The zero percent growth in retail sales for last month was below a minimum 0.2% expected by economists and compared with the 0.4% reported by the Commerce Department for August. 

For the year to September, retail sales were at 8.4% versus the 9.4% registered in the 12 months to August.

Retail sales are a major indicator of consumer spending, which accounts for 70% of U.S. gross domestic product.

The September numbers for retail sales came on the heels of Thursday’s reading of the U.S. Consumer Price Index (CPI), which showed a 0.4% growth for last month — double economists’ estimates and four times higher than the expansion in August. The annual CPI growth of 8.2% for September was also not too far from the 9.1% expansion seen during the year to June, which marked a four-decade high.

Taken together, the retail sales and CPI numbers suggested the Fed was still far behind in its fight against inflation. 

The central bank has raised interest rates by 300 basis points since March to curb runaway price pressures and is likely to add another 125 basis points before the year-end. Economists expect further hikes in 2023, making any talk of “peak-inflation” irrelevant for now.

"Given the acceleration of core CPI prices, the Fed will remain resolved to increase rates by at least 125 bps before year end," Oxford Economics' Matthew Martin in a note. "Slowing global trade flows, higher rates, and waning domestic demand will continue to support lower import prices, barring any further unexpected shocks to supply chains.”

Economists have warned that the Fed could push the United States into a deep recession with the sharpest rate hikes in four decades, pointing to the high-flying housing sector and one-time ebullient stock market as the central bank’s potential victims.

Wall Street’s top 500 stocks indicator, S&P 500,  is down almost 25% on the year while tech stocks barometer Nasdaq has plunged 33%.

U.S. mortgage rates, meanwhile, climbed to 6.7% two weeks ago, their highest levels in 15 years as Fed rate hikes caused borrowing costs for home loans to swell.