Oil prices spike as US-Iran strikes revive supply fears, Fed hints at rate hike

Oil prices jumped on Monday after fresh US-Iran fighting in the Strait of Hormuz, while global stocks were mixed as Federal Reserve boss Kevin Warsh hinted he was ready to raise interest rates. The moves come as inflation stays stubbornly high at 3.7 per cent, nearly double the Fed's two per cent target.

Warsh signals rates may go higher

Speaking at the Jackson Hole symposium in Wyoming, Warsh said the Fed had work to do on inflation. He described current price growth as concerning and said he would be hard-pressed to call financial conditions restrictive, a sign that rate hikes could be coming. But he stopped short of promising one.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” Warsh said. “I stand here today committed to a discipline, not to a decision.”

Wall Street's three main indexes fell on Friday. Short-term US Treasury yields rose, the dollar firmed, and gold slipped. Asian markets were mixed on Monday, with Tokyo, Hong Kong, Sydney, Taipei, Jakarta and Mumbai closing lower, while Seoul, Shanghai, Singapore, Bangkok and Wellington gained. Paris rose at the open, Frankfurt dipped, and London was closed for a holiday.

Oil jumps after US strikes on Iran

The latest tension began when the United States attacked Iranian rocket launchers on an island in the Strait of Hormuz, its first strikes on Iran in a month. Tehran retaliated by hitting US military targets in Jordan. Both main crude contracts rose more than two per cent on Monday.

West Texas Intermediate crude gained 2.5 per cent to $85.51 per barrel. Brent North Sea crude rose 2.8 per cent to $90.53 per barrel. The conflict has entered its sixth month, and the strait, which carries about a fifth of global crude and gas, is largely closed. US officials have vowed the economic asphyxiation of Iran to force it to reopen the waterway.

Quintex Intel's Stephen Innes said the clash puts a floor under oil just as Warsh puts a ceiling on how much inflation patience markets can expect from the Fed. “Physical flows through Hormuz have improved materially from their worst levels, which is precisely why crude had started giving back some of the fear premium, but the latest exchange shows how fragile that progress remains,” he said.

Data and naira implications

Focus now shifts to US jobs data this week and the consumer price index next week. Chris Weston at Pepperstone said an inline payrolls print would make next week's core CPI report the major decider for the market's Fed belief system. Invesco's David Chao said a September rate hike is possible but not locked in.

For Nigeria, higher crude prices could boost export earnings, but they also raise the cost of refined fuel imports and keep the naira under pressure. Currency markets showed the dollar at 159.87 yen, the euro at 1.1586 dollars, and the pound at 1.3538 dollars, with the euro buying 85.57 pence.