Oil and gas prices jumped after failed Hormuz negotiations
Brent oil price rose 5.95% over the week to $88.52 per barrel, while the TTF gas price index, considered the main benchmark for natural gas prices in Europe, jumped 10.59% to €61.42 per megawatt-hour. This not only reversed the previous week’s price decline but also reached an even higher level.
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The main reason for the price increase was not physical supply disruptions but diplomacy. Negotiations between Iran and Oman on opening the strait failed for the second time, and the US Treasury Secretary confirmed that Washington will maintain the maritime blockade of Iranian ports and is preparing additional measures.
The price rise was also supported by the International Energy Agency (IEA), which forecast the largest global oil supply deficit in the past five years. Although a large increase in US oil reserves midweek slowed the price rise, it did not change the overall trend.
Inflation in the US continues to slow
Annual inflation in the US fell from 3.5% to 3.4% in July, while core inflation, excluding food and energy prices, decreased from 2.6% to 2.5%. This is its lowest level since March 2021.
Although energy prices were still nearly 15% higher than a year ago and kept overall inflation elevated, they fell 1.5% over the month. At the same time, slower growth in housing rental prices helped reduce pressure on core inflation.
Producer prices remained unchanged over the month, although the market expected a 0.2% increase. The annual growth rate of producer prices fell from 5.5% to 4.7%.
This reduced pressure on the Federal Reserve, which is currently considering not cutting interest rates but possibly raising them. Markets now price the probability of a September rate hike at about one in three, and the 10-year US Treasury yield has fallen from a 19-month high.
Analysts surveyed by Bloomberg also lowered inflation forecasts, expecting inflation to remain near 3.3% by year-end and average 2.4% in 2027. Moreover, market expectations for another rate hike have shifted from autumn to year-end. However, since early July, fuel prices at US gas stations have gradually increased along with oil prices, so the further direction of inflation will largely depend on the situation in the Strait of Hormuz.
Stock markets barely moved but records remain
The S&P 500 index rose 0.36% over the week, reaching a new record of 7,785.76 points. The Nasdaq Composite increased by 0.14%, and the smaller companies’ Russell 2000 index rose 1.12%, also reaching a record level. Smaller US companies more often have loans with variable interest rates, so they benefit most when expectations for rate hikes decrease.
European stock markets showed mixed sentiment. The Euro Stoxx 50 rose 0.24%, and Germany’s DAX 40 index added 0.46%, remaining near record highs. Meanwhile, France’s CAC 40 fell 0.90%, mainly due to luxury goods and semiconductor sector stocks, while Spain’s IBEX 35 was practically unchanged, down just 0.10%.
Europe imports most of its energy resources, so rising oil and gas prices turn into an inflation problem here much faster than in the US. Additionally, the European Central Bank is currently the only major central bank still actively raising interest rates.
France’s inflation in July was confirmed at 2.1%. The euro strengthened 0.28% against the dollar to $1.1567 – this change reflects more the declining US interest rate expectations than changes in the eurozone economy.
Gold and silver continue to rise
Gold prices rose 0.91% over the week to $4,380.40 per ounce, while silver increased 2.61% to $64.99. The rise in precious metal prices was supported by slower inflation, lower bond yields, and ongoing geopolitical tensions in the Middle East.
US retail sends inventory signal
US retail sales fell 0.6% in July. This is the first decline in nine months and a much worse result than the slight growth forecast by the market. At the same time, the preliminary August consumer confidence index also deteriorated significantly.
The market reacted quite calmly to these data, but this is the first clear sign that higher energy prices are reaching US consumers.
Excluding car and fuel sales, retail sales fell 0.2% – mainly due to a third consecutive month of declining online purchases and lower spending on electronics and household appliances after rapid growth earlier in the year. Demand for other goods remained fairly stable. The annual retail sales growth rate slowed to 4.8%, after exceeding 5% in the previous four months.
Eurozone industry loses some momentum
After four months of growth, eurozone industrial production fell 0.1% in June. In the UK, production volumes remained unchanged over the month, while declines in Italy, Spain, and France were offset by growth in Ireland’s manufacturing sector, considered volatile. Compared to the same period last year, eurozone industrial production was still 0.2% higher. However, Germany’s figure remained 0.5% lower than a year ago. Pharmaceutical and automotive production volumes were lower than last year, while computer and electronics manufacturing continued to grow steadily.
This week’s market focus
In the eurozone, investor attention will focus on the ZEW economic expectations surveys. The German economic expectations index is expected to rise from 26.3 to 30 points, and the eurozone index from 23.4 to 25.4 points. This would indicate that professional investors believe the worst part of the energy price shock is already priced in, although the current economic situation assessment remains very negative at -77.6 points.
Final July inflation data in the eurozone should confirm the preliminary 2.9% annual inflation and 2.5% core inflation estimates. These data are currently very important because the ECB raised interest rates for the first time since 2023 in June, left them unchanged in July, and markets almost certainly expect another hike in September.
The July ECB meeting minutes will show how close the central bank was to deciding on a rate hike at that time. German producer prices are forecast to rise 0.5% after a 0.3% decline in June. This will provide an early signal of how quickly higher energy prices are passing through to broader economic pricing.
At the end of the week, preliminary August Purchasing Managers’ Indexes (PMI) will be released – some of the earliest business activity indicators and the first data reflecting the new oil and gas price surge.
In July, the overall eurozone PMI was 52 points. The manufacturing sector index is expected to slightly decrease to 51.8, and the services sector to 51.5 points. Germany’s manufacturing sector should remain in the sustainable growth zone at 52 points, while the services sector index is likely to rise to 50.2 points. Meanwhile, France remains the weakest major eurozone economy – its services sector PMI is forecast at 49.4 points, below the 50-point threshold separating growth from contraction.
The most important event in the US this week will be the Federal Reserve’s July meeting minutes. Since the base interest rate remains at 3.75% and inflation still exceeds the target level, investors will seek to assess how seriously the central bank considered another rate hike before softer inflation data were released last week.
US industrial production is forecast to increase 0.3% month-on-month, compared to 0.1% growth the previous month. Import prices are expected to rise 0.1% after a prior 0.3% increase. These data will show how much tariffs and energy prices are raising the cost of imported goods in the US market.
Regional US manufacturing surveys are expected to weaken slightly but remain in positive territory. The New York manufacturing index should fall from 15.6 to 10.6 points, and the Philadelphia index from an unusually high 41.4 to 24.3 points. New unemployment claims are forecast to remain stable at about 210,000.
Preliminary US PMI figures released on Friday should also signal economic expansion, although at a slower pace. The manufacturing PMI is expected to be about 54.0 points, and the services PMI 53.9 points, compared to 54.6 points in July. This still indicates economic growth, but its momentum is gradually weakening.
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