Three Thoughts on the Oil Spike
(2 min read)
Oil prices have jumped significantly since the drone attack on Saudi oil facilities. But markets are so far taking a sanguine view of the moves and appear to be pricing the spike as temporary. Here are three other points to note:
1. US inflation expectations have picked up, but have been lagging behind oil moves for a while now. If we look at US inflation-linked bonds markets, we find that implied inflation expectations do generally move with oil prices. However, since June they have been lagging behind the moves higher in oil prices. This is still the case with the oil surge (see chart). The Fed will be heartened by this and will likely look past the inflationary impact of higher oil. Instead, they will focus on the negative growth implications and so tomorrow’s expected 25bps will probably be realized.
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