Oil continues rally as summer demand bolsters prices

Oil breaks $80/barrel

Oil prices rose by more than 3.5% during the week, up to highs above $81/barrel, despite weak industrial readings from China, the world’s largest crude importer. A reading on Thursday indicated U.S. inventories declined by 2.55 million barrels, higher than the consensus 2.26 million, as summer demand seems to be taking its toll. The outlook for oil is relatively bullish for the next few months, as demand should only increase as we approach the widespread travel during the July Fourth holiday. Altogether, strong demand offset the losses oil suffered at the end of May when OPEC+ announced plans to increase supply in Q4 of this year.

While the rising prices are good news for producers, corporates with short exposure to crude may want to consider hedging to protect themselves against rising costs.

Mixed signals from various economic indicators

There were new readings for several economic indicators last week, beginning with manufacturing data early in the week. Empire State Manufacturing came in at -6.0, beating the more pessimistic consensus of -10.0, while Industrial Production in the U.S. also outperformed expectations at 0.9% growth month-over-month. The Housing Market Index and Retail Sales, by contrast, fell short of expectations. Equities rose modestly throughout the week, with the S&P 500 breaking 5,500 during intraday trading for the first time.

Bank of England holds rates constant

The Bank of England elected to hold rates at the level of 5.25% last week, consistent with market expectations. Market expectations of a rate cut at the bank’s next meeting in August ticked up after the statement released on Thursday, and now sit at just around 50%, bolstered by inflation recently hitting the bank's 2% target. Overall, the increased expectation of imminent cuts in England comes soon after Canada and Europe have already begun their cutting cycles, as inflation in these countries has fallen more quickly than in the United States. This disparity helped fuel U.S. dollar strength, as the more hawkish rate environment in the U.S. tends to bolster the dollar against foreign currencies.

For companies with foreign expenses, USD sales and floating-rate debt, the next few months could make for an interesting interplay between risk outcomes across asset classes. If inflation in the U.S. comes in hotter than expected, for example, rates may stay elevated for longer than expected (or even rise), while the dollar will likely strengthen against foreign currencies. This could lead to unsustainable FX gains within operating income, due to dollar strength, while metrics further down the income statement suffer as a result of rising interest expense. This is a good example of how natural offsets do not always translate to clean accounting results in every line item. Chatham often works with companies to ensure they are protected from both a pure risk perspective and in terms of accounting noise.

(Related insight: "BoE holds rates to wait for further data, while ECB proceeds with first rate cut since 2019")

The week ahead

There will be several public appearances from various Federal Reserve officials next week, and markets will be sure to analyze their messaging for clues about the future of U.S. rates. Data releases will include new home sales, durable goods orders, and the Fed’s preferred inflation metric, PCE.