Oil price surge fuels inflation concerns in markets.

The Effect of Rising Oil Prices on Inflation and Stock Markets

Oil prices are climbing on Monday, which may add more upward pressure on inflation. While stock markets worldwide are making only modest moves, S&P 500 is trading 0.1% higher in early trading. Dow Jones Industrial Average is up 226 points, or 0.7%, at 33,500, and Nasdaq composite is 0.4% lower.

The 6% jump in oil prices is denting one of the main themes that helped stocks rise in the first quarter. The turmoil in the banking system and continued slowdown in inflation could push the Federal Reserve and other central banks to take it easier soon on their hikes to interest rates. The Fed has already jacked rates up at a feverish pace over the last year in hopes of undercutting high inflation.

Higher rates can slow down the economy, but could cause a recession later on. Higher interest rates hit all kinds of stocks, but they tend to hit high-growth companies the hardest. That puts extra pressure on the Big Tech stocks that already have an outsized effect on the S&P 500 and other indexes because of their immense size. In the first quarter, hopes for easier interest rates meant Big Tech stocks were among the main reasons for a gain in the S&P 500.

Fear of Banking Industry Troubles

The banking industry’s troubles could lead to a pullback in lending to all kinds of companies, which could further hurt the economy. Hope on Wall Street has been rising that the Fed may already be done raising rates and that cuts to rates could even happen later this year. Such cuts would release some of the pressure on the economy, which is still growing thanks to a strong job market but has shown pain in the housing market and other corners.

Cuts to rates tend to act like steroids for financial markets. U.S. stocks have tended to return an average of 8% in the three months following the peak of the Fed’s federal funds rate. One big exception is if the economy is about to enter a recession near the tail end of a rate-hike campaign.

Effect of Cutting Interest Rates on Financial Markets

Goldman Sachs doesn’t expect a recession this time around, but if one does hit, its strategists say the S&P 500 could fall more than 20% from today’s level. That’s why so much furor has built among traders as they bet on how much further the Fed will raise rates.

On Friday, they were leaning slightly toward the Fed holding steady at their next meeting in May, which would be the first time in more than a year that it didn’t hike rates. But following Monday’s leap for oil prices, bets have built that the Fed may hike rates by another quarter of a percentage point in May, according to CME Group.

Short-term Treasury yields also rose with such expectations. The two-year yield climbed to 4.11% from 4.04% late Friday. Longer-term yields were more steady. The 10-year yield, which helps set rates for mortgages and other important loans, ticked up to 3.49% from 3.48%.

The Effect on Oil Prices on Inflation

The 6.2% rise for a barrel of U.S. crude oil to $80.39 got a push higher from Saudi Arabia and other major oil producers announcing that they would cut production from May until the end of the year. Less supply of oil would raise its price, as long as demand stays steady. And the weekend’s announcement comes on top of a reduction announced last October, one that infuriated the Biden administration.

Brent crude, the international standard, rose 6% to $84.72 per barrel. It’s roughly back to where it was a month ago, though it’s still well below where it was in March 2023, when it topped $130 per barrel after Russia’s invasion of Ukraine raised worries about energy supplies.

“This will create both political waves across Europe and even higher general inflation in the USA, leading to renewed pressure on the Federal Reserve to keep hiking rates aggressively,” Clifford Bennett, chief economist at ACY Securities, said in a report.

Winning and Losing Stocks and Indexes

Higher interest rates hit all kinds of stocks, but they tend to hit high-growth companies the hardest. That puts extra pressure on the Big Tech stocks that already have an outsized effect on the S&P 500 and other indexes because of their immense size. In the first quarter, hopes for easier interest rates meant Big Tech stocks were among the main reasons for a gain in the S&P 500.

Amazon was one of the heaviest weights on the index Monday after it slipped 0.9%. Tesla fell 3.4% after it said over the weekend that its deliveries in the first three months of the year fell short of analysts’ expectations, even though it still set a record. On the winning side were big oil companies, which benefited from the rise in energy prices. Exxon Mobil jumped 5.3%, and Marathon Oil soared 9.8%.

Stock indexes were mixed across Europe and Asia. AP Business Writer Elaine Kurtenbach contributed.

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