Oil Jitters Pre-FOMC

Markets bet on “higher for longer.” Treasury yields were up across the curve today, with the 2-year up ~4bps to 5.09% and the 10-year up ~6bps to 4.36%, as traders bet that the Fed will hold rates higher to curb inflation driven by rising energy costs and after hotter-than-expected inflation data from Canada. Equities were down today, with most major groups in the S&P500 dropping, offset by some mega-cap gains. Major equity indices declined 0.2% – 0.3% on the day.

Housing starts hit multi-year lows. New home construction in the US declined to the lowest level since 2020 as higher rates have made homes less affordable. Residential starts declined 11.3% in August, largely driven by less multifamily construction. On the other hand, applications for new construction increased to the highest level in ~1-year and permits to build single-family homes grew the most since May 2022, indicating positivity about future demand. Regardless, mortgage applications have hit multi-decade lows and it’s unclear when rates will decline to make homes more attainable.

Oil prices disrupt inflation outlook. Rising energy costs helped tip the US into recession in the mid-1970s, as well as the early 1980s and 1990s. Supply restrictions from Russia and Saudi Arabia have driven oil prices up ~30% since June, with US crude benchmarks reaching ~$92 per barrel recently (below 2022 highs, but a concerning trend nonetheless). Since rising oil prices both boost inflation and curb economic growth, it becomes trickier for the Fed to choose tightening or loosening in response. Policymakers are also concerned that higher gas prices will drive up consumer inflation expectations, but recent consumer sentiment data has shown that this is not yet the case.