US diesel prices have exceeded $6 a gallon for the first time ever, reaching a national average of $6.0556, according to the American Automobile Association. In California, prices were nearing $8 a gallon. This rise increases the risk of further energy-driven inflation, especially as the peak demand season for the fuel approaches. The surge in diesel prices is attributed to ongoing conflict and supply disruptions in the Middle East, particularly Washington's war with Iran, which has driven crude oil prices above $100 a barrel.
Despite the spike in diesel costs, US stocks and Treasuries saw some relief as oil prices eased, with Brent crude falling to $103.63 a barrel after hitting a four-month high. Traders are now keenly focused on August's US inflation report, which is expected to show a 0.4% increase in the consumer price index, primarily due to higher gasoline costs. The core CPI, excluding volatile energy and food components, is projected to increase by a more moderate 0.2%.
Money markets are pricing in a 67% chance of a Federal Reserve interest rate hike next week, driven by concerns over oil-driven price pressures pushing global bond yields to multi-year highs. The yield on 10-year Treasuries declined two basis points to 4.94%. Analysts like Raphael Thuin of Tikehau Capital note that equity markets will likely be influenced by bond yields and oil prices in the coming days, with concerns rising about second-round inflation. Kevin Thozet of Carmignac believes that strong earnings growth expectations in the US market should help shield stocks from a significant drawdown, citing a vibrant tech story with Oracle Corp. jumping 7%.
The increase in diesel prices is expected to significantly impact the cost of everyday goods, as diesel is crucial for freight, delivery networks, and the entire food supply chain. This means higher transportation costs for perishable foods and farm equipment. Some businesses, including Amazon, UPS, FedEx, and the USPS, have already implemented fuel surcharges to offset rising costs, which will eventually be passed on to consumers, particularly affecting grocery prices.
