Oil spikes

In the past week, we have seen a series of economic reports, most of which have gone by with barely a raised eyebrow, and equity markets continued to creep higher. That changed this morning when the news broke overnight that Israel had attacked Iran’s nuclear sites, killing the head of the Army. In response, Iran launched more than 100 drones.

Firstly, going over the economic data this week before we discuss the implications of last night’s news. The World Bank announced it has revised its global growth forecast down from 2.7% to 2.3%, while also lowering its forecast for U.S. growth from 1.8% to 1.4%. For all the known reasons, trade disputes, weaker consumer confidence, and slowing investment growth. Over here, the monthly GDP report came in weaker than expected, as the UK economy contracted by 0.3% in April, and subdued growth was reported across most industries. The report also highlighted declining employment trends. Neither of these factors seemed to significantly influence equity markets, although there was a modest rally in UK gilts, as the market anticipated that this news might help nudge the Bank of England towards cutting rates again.

We also had some US inflation data. May’s Consumer Prices Index came in slightly better than expected, possibly surprisingly, as May was the first month the Trump tariffs were in effect throughout; on the face of it, so far, tariffs appeared to have a negligible impact on prices. Yesterday, we had May’s Producer Price Index (PPI) report for the US, which showed a modest increase in prices. The PPI for final demand rose by 0.1% in May 2025. The US treasury market yawned as bond investors reacted little to the news, suggesting that these data points will not influence the Fed to cut rates at their meeting next week.

Since the middle of April, equity markets have staged a significant recovery, some would say defying gravity or reality, again closing in on their previous highs. Driven by the belief that the current economic data may indicate that the US economy is slowing, there is still little to suggest a recession. Given this situation, it seems to be the message that one ought to keep buying stocks. However, we witnessed in early April that when an unanticipated shock impacts sentiment, the decline can be swift and painful.

The oil price has been steadily rising this week. Several factors have contributed to this recent increase. A larger-than-expected decline in U.S. oil inventories has tightened supply, and there are already signs of escalating tensions with Iran. This news has pushed oil prices up again this morning and negatively affected equity markets. Consider oil as a tax on spending and growth; lower oil prices are akin to a tax cut, while higher oil prices signify a tax increase. Economies have been benefiting from lower oil prices, but a spike will further undermine consumer confidence, elevate prices, pose risks to growth, and restrict the Fed’s ability to reduce interest rates.