U.S. futures rose and oil prices fell despite intensifying clashes in the Middle East and ahead of what could become one of the most consequential reads on inflation in years.
Futures for the S&P 500, Dow Jones Industrial Average and the Nasdaq all rose 0.6% on Friday.
Yemen ’s Iranian-backed Houthi rebels captured a strategic island in the Bab el-Mandeb Strait at the entrance of the Red Sea, two officials said Friday in a swift advance that further threatens oil exports by Saudi Arabia through one of the world’s key commercial lanes.
On Friday, the International Energy Agency reported that Saudi oil production fell to a three-decade low last month due to Houthi attacks on its energy facilities.
Oil prices eased on Friday, but are up around 8% for the week on renewed fighting. Brent crude, the international standard, was 3.6% lower at $103.74 per barrel after earlier rising above $108. It was approximately $72 a barrel in late February, before the start of the war.
Benchmark U.S. crude fell 3.4% to $99.02, days after racing above $100 for the first time in months.
On Friday, diesel prices soared to an all-time high above $6 a gallon on average. Diesel can have an outsized impact on inflation because of its prevalent use in transportation, shipping and manufacturing.
Russia and the Middle East, which combined refine up to 17% of the world's diesel fuel, are both being affected by geopolitical violence that has upended operations.
Oil flowing through the Strait of Hormuz, a narrow waterway critical for global oil transport, remains “well below pre-war levels,” ING commodities strategists Warren Patterson and Ewa Manthey wrote Friday. That’s “underscoring how fragile the situation has become,” they said.
Even if oil prices retreat as tensions ease, they are likely to remain at elevated levels for the rest of the year, adding to inflation uncertainties, said Yu Song, chief China economist at UBS Securities in a commentary.
Wall Street, however, is focused on Friday’s inflation report, which is shaping up to be among the most consequential in years.
The Federal Reserve is considering whether to lift its short-term interest rate next week, with some officials saying Friday’s report could swing them either way. And longer-term interest rates jumped Thursday, partly because of fears of higher inflation, pushing mortgage borrowing costs higher.
The government is expected to report that headline inflation ticked down last month, to 3.3%, from 3.4%, according to data provider FactSet. That is still above the Fed’s 2% target. And higher gas prices are expected to push inflation back up next month. Gasoline prices in the U.S. have never been this high this late in the year.
The bond market has been volatile with U.S. Treasury yields well above pre-war levels, fueled by higher energy prices and inflationary pressures as well as rising U.S. government debt.
The yield on the 10-year Treasury was at around 4.94% on Friday, up from 4.83% on Wednesday.
In Europe, Britain's FTSE 100 rose 0.6% to 10,671.99 after official data showed that Britain's economy in July grew faster than economists had expected. Germany's DAX gained 0.7% to 25,538.82, while France's CAC 40 climbed 0.6% to 8,167.60. Asian markets declined.
In other dealings, the U.S. dollar fell to 153.97 Japanese yen from 154.42 yen. The euro was trading at $1.1597, down from $1.1612.
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