Last Friday, West Texas Intermediate (WTI) crude oil prices hit their highest point in over two years. They moved above the 50-day moving average and finished the week on an up tick. Oil prices have wildly skyrocketed. This increase comes amidst shifting economic indicators that underscore the role of consumer sentiment, inflation expectations, and global capital flows in influencing trends.
Today’s performance of WTI is historic, as it marks an important turning point in the energy market. Perhaps one of the biggest positive drivers of EM demand for oil will be the continued softness of the US dollar, analysts say. A weaker dollar makes US commodities more attractive to foreign buyers. This sudden increase in affordability injects major new demand potential from countries like Brazil and Mexico, whose currencies are quickly appreciating against the dollar.
Besides the dollar’s value, there are constant pressure for more energy due to the emergence of artificial intelligence (AI). As companies invest heavily in AI technologies, their energy needs are expected to increase, which could further support oil prices and related sectors. A boom in recent demand corresponds with the most recent data. These reports highlight how capital expenditures (capex) for both energy and technology companies have skyrocketed.
On at least one key economic indicator, the news may not be so rosy. A national survey released in early December shows a slight uptick in general consumer confidence, but the present situation has soured. Though consumers might be a bit more optimistic about what’s to come, their current situation is not as rosy. Surprisingly, mixed feelings are developing as inflation worries retreat. All of this overall dovishness seems to be confirmed by recent data from Michigan’s consumer sentiment survey, which indicate that one-year and five-year inflation expectations have dropped considerably.
Further, core personal consumption expenditures (PCE) showed slight alleviation, coming in at 2.8%, down from 2.9%. This drop is a welcome sign that inflationary pressures are still weighing on the economy. It also indicates that such pressures may be stabilizing or even receding somewhat. These shifts in inflation measures have the potential to radically alter the course of future monetary policy by the Federal Reserve. This is particularly acute in the case of interest rate hikes.
One company in the corporate sector is stealing the show. Just last week, its five-year credit default swaps (CDS) suddenly spiked, reaching a 16-month high. This shift means heightened investor alarm about the company’s creditworthiness in face of higher expenses and an uncertain economy. Once again, the company is on a gerbil-race to build out its data-center capacity. This urgency is driven by the skyrocketing demand for cloud services and AI infrastructure.
At the same time, Asian markets have proven to be surprisingly resilient. Second, Chinese equities are hot. The publication of positive trade data indicating vigorous export performance contributed to the positive weather, increasing investor morale significantly. As China is still one of the largest players in global trade, this trend could have even larger ramifications on global markets.
Meanwhile in Japan, the 10-year yield continues to surge. This historic shift shows the dramatic change in investor sentiment due to domestic economic headwinds and global market impacts. When yields are rising, they can be a sign that investors expect more interest rate hikes or inflation, causing investors to want to reangle their portfolios.