Renewed US and Iran strikes have raised oil and gas prices
The price of Brent crude oil ended the week at $96.28 per barrel. It rose 7.8% over the week, marking the best performance since July. Meanwhile, the price of TTF natural gas futures, considered the main benchmark for European gas prices, increased by 7.42% to €71.95 per megawatt-hour. This marks the fourth consecutive week of growth, with prices reaching their highest level since 2023.
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The main reason was clear: after about a month of relative calm, the US and Iran exchanged direct military strikes. This almost halted commercial tanker traffic through the Strait of Hormuz. On Thursday, only four vessels passed through, compared to an average of about fifteen over the past ten days. Tensions were further heightened by threats from the Israeli Defense Minister to strike Iran’s energy infrastructure.
Market participants factored in increased supply risks for the upcoming winter season. This particularly affected the gas market, as Europe remains dependent on liquefied natural gas (LNG) supplies from the Persian Gulf region, needed to replenish gas storage facilities.
Since the beginning of the year, energy prices have already risen significantly. Brent crude oil has increased by about 58%, while TTF gas prices have risen nearly 150%.
The outlook for the coming winter is becoming increasingly challenging. At the beginning of September, gas prices in Europe were more than twice as high as a year ago, and gas storage was only about 65% full. This is the lowest level for this time of year in a decade, leaving Europe less protected against supply disruptions at a time when risks in the Persian Gulf region continue to rise.
European stock markets fell, US markets remained almost unchanged
Higher energy prices negatively impacted European stock markets. Germany’s DAX 40 index fell 1.97%, France’s CAC 40 lost 1.46%, and the Euro Stoxx 50 decreased by 1.43%.
Europe imports most of its energy, so more expensive oil and gas directly increase costs for both companies and households. This is happening as the European Central Bank leans towards tighter monetary policy and higher interest rates.
An exception was Spain’s IBEX 35 index, which ended the week practically unchanged, rising 0.04%.
Meanwhile, changes in US stock markets were minimal. The S&P 500 index rose 0.09%, the Nasdaq Composite by 0.40%, and the smaller companies’ Russell 2000 index by 0.11%. Unlike Europe, the US is a net energy producer, so the energy price shock has a smaller negative impact on the country’s economy. Additionally, investor interest in companies related to artificial intelligence helped maintain market stability.
Stronger-than-expected US labor market data strengthened the dollar
On Friday, it was announced that the US economy created 162,000 new jobs in August, while the market expected about 55,000. June and July results were also revised upward, adding a total of 55,000 additional jobs.
The unemployment rate remained stable at 4.1%. Weekly initial jobless claims averaged below 210,000 in August, remaining at historically low levels. Average hourly wages increased by 0.3% over the month, but annual wage growth continued to slow, reaching 3.1% in August.
Following this data, financial markets increased the probability that the US Federal Reserve will raise interest rates at the September 15-16 meeting. The probability rose to 60-65%, compared to about 55% before the data release. As a result, US bond yields rose and the US dollar strengthened.
US business sentiment diverged: services sector strengthens, manufacturing slows
In August, US business surveys showed a mixed picture. The ISM services sector index rose to 55.4 points, while the manufacturing sector index fell to 54.6 points from 55.6 in July.
The main difference was in demand dynamics. The new orders indicator in the services sector reached the second highest level since early 2022. Meanwhile, manufacturers recorded the slowest new orders growth in five months and increasingly noted supply chain issues, leading to more active supplier risk management.
In other major economies, the situation was almost the opposite. At the end of summer, manufacturers’ sentiment in China and the eurozone improved due to faster new orders growth. In the services sector, sentiment diverged: in China, it slightly recovered after a sharp drop in July, while in the eurozone it remained essentially stable.
As bond yields rise, gold and silver prices fell
Gold prices at the end of the week were $1,429.8 per ounce, down 1.08% from the previous week. Silver fell 1.42% to $66.05.
Most of the price decline occurred after the US labor market data release. As bond yields rise and the dollar strengthens, precious metals, which do not generate interest income, become less attractive to investors. This time, this factor outweighed the safe-haven demand driven by increased geopolitical tensions.
The euro weakened 0.18% against the US dollar to $1.1622 per euro. The change was small and mostly recorded on Friday.
Eurozone retail trade started the third quarter weakly
In July, eurozone retail trade volumes fell by 0.6%, after growth in the previous two months.
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The largest decline was recorded in Germany, where trade volumes fell by 3.4%, mainly due to lower sales of non-food products and fuels. Sales also declined in Spain and Italy, although most eurozone countries saw growth.
Latvia stood out, with retail trade volumes increasing by 2.5% over the month, the fastest growth in the eurozone.
Year-on-year, eurozone retail trade turnover in July was only 0.6% higher than a year ago. This is the weakest annual result in the past two years. Food sales continued to grow steadily, but non-food sales stopped growing after several months of increase, and fuel sales volumes, excluding price effects, have been declining since April.
Food prices become another inflation risk
Rising food commodity prices in global markets are starting to pose an additional inflation risk, although food inflation in the eurozone is currently at its lowest since mid-2021.
Instability in the Black Sea region and droughts have increased agricultural commodity prices. According to the Bloomberg food price index, at the beginning of September they were more than a quarter higher than a year ago, with wheat prices up more than 30%.
Economists surveyed by Bloomberg expect eurozone inflation to remain around 3.3% by the end of the year and to slow to about 2.3% on average in 2027. However, further global food price increases remain one of the main risks to these forecasts.
This week’s focus – ECB meeting
The most important event this week will be the European Central Bank meeting on Thursday. Markets and most economists expect a 0.25 percentage point interest rate hike. The deposit facility rate would increase from 2.25% to 2.50%, and the main refinancing operations rate from 2.40% to 2.65%. The market estimates the probability of such a decision at about 99%.
The main reason is inflation. In August, consumer prices in the eurozone were 3.3% higher than a year ago, compared to 2.9% in July. This is the highest level since September 2023. Almost all of the inflation acceleration was due to energy, whose prices were 14.3% higher than a year ago. Food inflation remained stable at 1.2%.
Core inflation, excluding energy and food prices, was 2.4%, slightly lower than in July, when it was 2.5%.
Since the rate decision itself is unlikely to be a surprise, market attention will focus on updated ECB economic forecasts through 2028 and on ECB President Christine Lagarde’s comments on possible further monetary policy direction. Economists are almost evenly split on the likelihood of another rate hike in December.
The rest of the eurozone economic data calendar for the week is quite modest. On Monday, it was announced that German industrial production fell 1.1% in July, despite expectations of slight growth. This again highlights the challenges facing Europe’s largest industrial economy.
Confirmed eurozone GDP data showed the economy grew 0.6% quarterly and 1.2% annually in the second quarter. This is a significant improvement after stagnation in the first quarter.
Final German inflation data for August will also be released on Thursday. Inflation is expected to remain unchanged at 2.9%. No major economic data from France, Italy, or Spain are scheduled this week.
The most important US indicator will be the consumer inflation data for August, released on Friday. This is the last major inflation indicator before the Federal Reserve meeting on September 15-16.
Economists forecast that consumer prices rose 0.4% over the month, compared to 0.1% in July, mainly due to higher fuel prices. Annual inflation is expected to remain at 3.4%. Core inflation, excluding food and energy prices, is expected to decrease from 2.5% to 2.4%.
After strong labor market data, higher-than-expected inflation would strengthen arguments for another rate hike. Producer price data released on Thursday are also expected to show faster price growth.
Market participants will also watch US inflation expectations indicators, as the Federal Reserve has repeatedly emphasized their importance for price stability.
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