What happened
Inflation data is once again the market's focus on Tuesday morning, but this time it's pushing the market higher. The U.S. consumer price index (CPI) rose 7.1% from a year ago, but the non-adjusted figure was actually down 0.1% from a month ago; both figures came in below expectations. For now, the market thinks that means inflation is under control.
Energy stocks have been helped as a result of the CPI data, and some big names are making unusual moves higher. Shares of Chevron (CVX 0.26%) were up as much as 2.8%, Kinder Morgan (KMI -0.43%) rose 2.7%, ExxonMobil (XOM -0.47%) increased 2.3%, and Cheniere Energy (LNG 0.91%) was up 2.6% in early trading.
So what
Inflation has been a key metric for markets for a couple of big reasons. One is that rising costs for goods and services can squeeze consumers to cut back in other areas. For energy companies, rising food or consumer staple prices may cause people to do less traveling or purchase a more fuel-efficient vehicle to save money.
High inflation has also been a key reason the Federal Reserve has been raising interest rates in 2022. Higher rates are intended to slow the economy and cut off inflation, which seems to be working. But the downstream effect is a worse economy and higher borrowing costs for companies.
It has helped that oil and natural gas prices jumped in trading today as well. At 11:10 a.m. ET, WTI crude oil was up 2.3% to $74.84, Brent crude was up 2.7% to $80.09, and natural gas was up 6.2% to $6.99 per MMBtu. This is a large move in oil markets and again is driven by hope that the economy won't go into a recession, as feared, in 2023.
Now what
The economic impact of inflation and higher interest rates isn't quite known yet, but I want to focus on the direct impact of rates on energy businesses today. You can see below that these four companies, together, carry over $100 billion of debt on their balance sheets, and their interest costs surpass $3 billion per year. This is largely debt taken out before rates went up, so they could see their interest expenses rise sharply if they have to refinance debt in coming years.
Data by YCharts.
I see the CPI data as generally bullish news for oil and natural gas companies over the next year. It seems that the market overestimated how high the Federal Reserve would have to raise interest rates to combat inflation, and a pause in rate increases may come in the next few months.
That's great news for both the economy and energy demand. To top it off, China's economy seems ready to open up again as the country slowly loosens COVID-19 restrictions. That could be another boost for energy demand globally and give energy stocks a leg up.
