The Case for Lower Oil Prices

If you follow markets at all, you are probably aware that this past week was “inflation week” in America.

The Producer Price Index (PPI), which measures price changes at the wholesale level, was released on Tuesday, with the measure of retail price changes, the Consumer Price Index (CPI), following closely on its heels on Wednesday.

The 5-Day chart for the S&P 500 (above), shows that the numbers were considered good for stocks, or at least were well received by stock traders. There was an initial move up in early trading on Tuesday before the index lost ground to finish basically flat, but the CPI release on Wednesday prompted a big jump in the index that was not just sustained over the course of the day, but which actually grew larger by the close.

Most will be aware that that reaction is more about what the CPI report says about expectations for the Fed’s actions than it is about the actual impact of inflation. The slightly better than expected print for CPI made Wall Street hopeful that the Fed might continue to cut interest rates, thus stimulating economic growth. Obviously, that would also be good for oil, and the reaction in crude futures (CL) was very similar to that in the stock market.

After greeting flat to slightly good PPI numbers on Tuesday with a collective shrug of the shoulders, traders bought aggressively on Wednesday, despite news of a peace deal between Israel and Hamas that would have reduced fears of escalation in that conflict.