Freedom: Oil rally brings inflation risk back to the U.S. market

Freedom Broker analysts believe that a new spike in oil prices is amplifying inflation risks and could limit gains in U.S. equities. At the time of writing on October 8, Brent held above $100 per barrel. A continuation of the oil rally could push up long-term U.S. Treasury yields and increase pressure on valuations. The experts assess the risk balance for the upcoming session as negative, while maintaining their base forecast of one more 25-basis-point Fed rate hike in 2026. 

Geopolitical tensions support prices

Brent crude in premarket trading on October 8 traded above $100 per barrel. Freedom analysts link the price rise to reports that the White House asked the Pentagon for plans for new strikes on Iran, although a final decision has not yet been made. Additional tension comes from ongoing attacks on tankers in the Strait of Hormuz.

According to the experts, further oil price gains could intensify inflationary pressure and lift long-term U.S. bond yields. For the equity market, this implies the risk of expensive financing persisting longer and limiting the expansion of company valuations.

Additional tension comes from ongoing attacks on tankers in the Strait of Hormuz. Analysts warn that further increases in oil prices could drive up the already high yields on long-term U.S. Treasuries. 

A Fed pause in October remains possible

Another guidepost for investors was a speech by Fed Governor Christopher Waller. He said that returning inflation to 2% will likely require an additional rate hike. However, tightening at several consecutive meetings is not necessary.

Freedom Broker believes this stance allows for a pause in October. Among the arguments in favor of further hikes, Waller cited economic growth, the ongoing energy shock, and additional demand linked to the development of artificial intelligence.

Analysts’ base case assumes one more 25-basis-point, or 0.25-percentage-point, rate increase by the end of 2026. After the release of the minutes from the September meeting, the market still put the probability of an October hike at about 20%. Thus, expectations of a pause at the next meeting coexist with the risk of tightening later. 

Inflation expectations add pressure

In addition, experts note that Americans’ inflation expectations in September rose to their highest level since May 2023. According to a survey by the Federal Reserve Bank of New York published on October 7, the median forecast for price growth over the next 12 months increased from 3.6% to 3.9%. 

At the same time, the average rate on a 30-year fixed-rate mortgage reached 7.49%—the highest in nearly three years. According to data from the Mortgage Bankers Association, for the week ending October 2, the volume of mortgage applications fell 4.2% versus the prior week.

Bond demand will be a benchmark for equities

On October 8, investors are also awaiting a $22 billion auction of 30-year Treasury bonds. Freedom Broker warns that weak placement results could push their yield above 5.7%, a new multi-year high.

In analysts’ view, this would limit the potential for valuation multiple expansion—ratios that indicate how much investors are willing to pay for earnings and other company financial metrics. The small-cap segment could be particularly sensitive. For the upcoming session, Freedom Broker expects moderate volatility. Experts cite 7,760 as the nearest support level for the S&P 500.

The market partially recovered into the close the day before

At the close of trading on October 7, the S&P 500 fell 0.22%, the Nasdaq-100 slipped 0.21%, the Dow Jones declined 0.66%, and the Russell 2000 dropped 1.31%. During the session, the S&P 500 was down about 0.7%, but later recouped part of the decline. Support came from strong demand at the auction of 10-year Treasuries and a decline in WTI. A renewed rise in oil prices on the morning of October 8 again heightened concerns about inflation and further Fed policy moves.

Not an individual investment recommendation.