Rising Oil Prices Fuel U.S. Inflation Concerns... Tension Ahead of PCE Release

April CPI and PPI Rise...
Consumer Sentiment Hits a Low
Market Focuses on Potential Rate Hike

Amid growing concerns about inflation in the United States due to the prolonged Middle East war, market attention is focused on the U.S. Personal Consumption Expenditures (PCE) index, which is scheduled to be released this week. The Federal Reserve has recently maintained the stance that the recent inflationary pressures are 'temporary,' and whether the upcoming data will provide evidence for this view remains a key question. Some market participants are predicting that the Fed may accelerate its policy shift toward tightening.

According to the Wall Street Journal (WSJ) and other sources on May 25 (local time), the U.S. Bureau of Economic Analysis (BEA) will release the second estimate of first-quarter Gross Domestic Product (GDP) and the April PCE price index on May 28. The core price index, which excludes the highly volatile food and energy sectors, is one of the most closely watched indicators by the Fed. The Financial Times (FT) reported that economists expect the core price index to have risen by 3.4% year-on-year, which would be the highest level since mid-2023.

This data is expected to confirm that inflationary trends could persist. The ongoing inflationary trend has already been observed through the April U.S. Consumer Price Index (CPI) and Producer Price Index (PPI). The April CPI rose 3.8% year-on-year, the highest in three years, and increased 0.6% from the previous month. The April PPI also surged 1.4% from the previous month, far exceeding the market forecast of 0.5%. In addition, the U.S. consumer sentiment index released this month fell below its historic low recorded in June 2022.

The main driver of inflation is energy prices. Oil prices are fluctuating around the $100 mark as the United States and Iran approach ceasefire negotiations. According to Investing.com, Brent crude futures for July, the international benchmark, started trading at $97.84 per barrel on the afternoon of May 25 (local time), up about 2%. The previous day, prices had dropped 7% on hopes of reopening the Strait of Hormuz, but rebounded as prospects for a deal dimmed. West Texas Intermediate (WTI) crude futures rose 1.2% to $91.40 per barrel.

Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, told the FT, "If the data indicate broad-based inflationary pressures, it will become increasingly difficult for the Fed to explain these as temporary or energy-related factors." He added, "Given recent inflation and consumer sentiment, there is a high likelihood that we are headed in the wrong direction." Daniel Ivascyn, Chief Investment Officer (CIO) at PIMCO, also recently suggested the possibility of a policy shift by major central banks, including the Fed, stating, "If long-term inflation expectations become even more seriously unanchored, tightening will occur even if there is some economic slowdown."

This situation is expected to pose a dilemma for Kevin Warsh, the newly appointed Fed Chair. U.S. President Donald Trump, who has advocated for interest rate cuts, appointed Warsh as Chair; however, the market has recently begun to reflect the possibility of a Fed rate hike within this year. According to Investing.com, the interest rate swap market is pricing in a 0.25 percentage point rate increase by the end of the year.

Meanwhile, another point of market interest is the end of the earnings season, which has helped offset heightened inflation fears. Currently, about 90% of the companies listed on the S&P 500 index have reported their earnings. This week, companies including Dell Technologies, Costco, Best Buy, and Dollar Tree are set to announce their results. U.S. corporate earnings in the first quarter of this year have been exceptionally strong. According to London Stock Exchange Group (LSEG), first-quarter corporate profits are projected to increase by 29% year-on-year.

This content was produced with the assistance of AI translation services.