Oil Prices Keep Inflation Risk Alive Despite Softer U.S. Data

Stock markets and traders are breathing a sigh of relief after relatively benign U.S. inflation data, but there may be little time to relax.

Traders are watching oil prices and inflation data for signs that renewed price pressures could alter expectations for Federal Reserve interest rates.

Oil prices could still deliver an unpleasant surprise as higher energy costs put pressure on consumers, Adam Clark reported for Barron's Daily.

Coming into the week, the key question was whether hotter-than-expected inflation would force the Federal Reserve to raise interest rates at its September meeting. Relatively moderate consumer and producer price index readings have led traders to reduce those expectations.

The market was pricing in roughly a 30% chance of a September rate hike, down from about 45% a week earlier, according to CME FedWatch.

Investors interpreted the moderating inflation data as a positive signal for equities, sending the S&P 500 to another record high.

South Korea's Kospi Composite Index, a major benchmark for the global technology and semiconductor trade because of the large presence of memory-chip companies, also rebounded sharply from its recent lows.

CME says its FedWatch tool derives rate-change probabilities from 30-day federal-funds futures prices, making the figures market expectations rather than predictions by the Federal Reserve itself.