Key facts
- Australian fuel prices are forecast to increase by 20 to 30 cents per liter in the coming weeks.
- Global oil prices have reached their highest point since mid-May.
- US bond yields approached 5%, a level not seen since 2007.
- Australia's 10-year bond yield climbed to 5.38%, a 15-year high.
- The S&P/ASX 200 index is projected to finish the week down 3%.
- The US Federal Reserve may increase interest rates again due to rising energy costs.
Australian fuel prices are poised to rise by an additional 20 to 30 cents per liter in the coming weeks, mirroring a surge in global oil prices that reached their highest point since mid-May. This escalation is fueled by a confluence of factors, including the intensifying Middle East conflict, concerns over US fiscal policy, and expectations of further interest rate hikes by the US Federal Reserve.
Investors have reacted by dumping stocks and bonds, pushing US bond yields towards 5% for the first time since 2007. This global trend has pulled Australia's 10-year bond rate up to 5.38%, marking a fresh 15-year high. The international benchmark, Brent crude, traded above $US108 a barrel by late Friday.
Steve Miller, an investment strategist at GSFM, described the market environment as a "deadly cocktail" of high oil prices, US fiscal irresponsibility exemplified by Donald Trump's $US5,000 'dividend' promise, and concerns about the US Federal Reserve's independence. Miller noted that Trump's pledge exacerbates the deficit for political gain, contributing to market jitters.
Tai Hui, chief market strategist for Asia-Pacific at JP Morgan Asset Management, explained that rising long-term borrowing rates typically dampen stock valuations. However, he noted that optimism surrounding the global economy and significant investment in artificial intelligence has provided a tailwind for global stock markets, particularly on Wall Street. Since the start of the US-Israel war in late February, the S&P 500 has risen about 10%, contrasting with a 5% fall in the ASX 200. Hui suggested investors are nearing a critical juncture, debating when the sustained rise in yields will prompt a significant shift from stocks to bonds.
Economists are warning of a new era of structurally higher interest rates post-Covid. Financial markets are pricing in an 80% chance of a fourth rate hike by the Reserve Bank of Australia on September 29. Jonathan Kearns, chief economist at Challenger, stated that the RBA must react to persistent inflationary pressures, even as the economy shows resilience. He believes the central bank's inflation-fighting credibility is at stake, with inflation not forecast to return to the 2.5% target until early 2028.
Meanwhile, Vivek Dhar, CBA's head of commodities research, cautioned that diesel prices could increase by 10-30 cents a liter from their current level of over $A2.50. Unleaded petrol prices in major east coast cities could rise from around $A2.10 to $A2.30 per liter. Dhar highlighted that while oil prices are closely watched, the supply of refined products, particularly diesel, poses a more immediate threat to the economy and inflation, as there are fewer workarounds for disruptions in this area.