A week where financial news felt secondary

• Markets react to the conflict in the Middle East
• Inflation is slowing, yields are rising: is the Fed done?
• Oil is see-sawing again, and deficits are growing fast.

The market's initial reaction to the conflict in the Middle East was somewhat predictable. Treasury futures showed gains, the U.S. dollar strengthened, crude prices soared and stocks dropped (although they regained lost ground very quickly). The U.S. dollar, after an initial surge, reversed its gains, due to dovish remarks from the U.S. Federal Reserve (the Fed). Despite their generally hawkish stances, both Dallas Fed President Lorie Logan and Vice-Chair Philip Jefferson acknowledged that the higher Treasury yields (which we talked about here in the recent weeks) could influence financial conditions and the fight against inflation, even if the Fed were to pause rate hikes. This suggested a possible change in the Fed's anticipated policies, and odds of further rate hikes fell on the news. However, yields remained very volatile all through the week, and we expect that to continue going forward.

The U.S. Consumer Price Index (CPI) for September showed a slight increase beyond expectations, with the core rate matching predictions. Although U.S. inflation is slowing, it's not happening quickly enough for some. While these figures aren't alarming enough for the Fed to raise interest rates, they don't give full assurance that it will stick to its current stance. Given global events and rising long-term yields, however, most believe the Fed won't make any major policy changes based on these numbers.

Oil prices moved around a lot this week. OPEC's recent data suggested an unprecedented supply deficit this quarter. This came as demand hit a record peak and Saudi Arabia, the group's leader, reduced its production. According to a recent report by Bloomberg, figures from the Organization of Petroleum Exporting Countries indicated that global oil inventories are set to decrease by approximately 3 million barrels a day in the year's last quarter. If this comes to fruition, it will represent the most significant deficit in three decades. Additionally, the number of active U.S. crude oil rigs has dropped by five, currently standing at 497 (its lowest level since February 2022).

The earnings season has kicked off, with Pepsi's earnings report standing out, demonstrating robust earnings and a positive outlook, which underlined continuing consumer resilience. LVMH, positioned within the luxury goods sector, experienced slower growth than anticipated. However, it mentioned that even if the roaring years might be behind it, its growth aligned with historical averages. These are promising indicators for the next few weeks, which will be determinant in understanding how the economy is impacting businesses.

Listen to this week’s podcast for further insights.