Oil above $100 pushed Europe down | Weekend Intelligence #29

The week started on Tuesday and had a lot going on. The European Central Bank tightened again, US producer price data reminded that the inflation theme is far from over, and oil stayed uncomfortably high. On top of that, two software companies, Oracle and Adobe, which the market sent in opposite directions after results, and Apple with its first foldable phone - and a price that surprised on the downside.

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ECB raised rates to 2.50% and US producer prices to 5.4%: the shock is moving into 2027

On Thursday, September 10, the ECB raised rates by 25 basis points - the deposit rate is at 2.50%, the main refinancing rate at 2.65%. This is the second increase since the February outbreak of the conflict with Iran. The same day, the US producer price index showed a year-over-year pace of 5.4% for August. The dollar reacted with its best day in two weeks, and oil rose along with it.

The producer price index does not measure what households pay, but the price at the start of the distribution chain. Companies have two options: pass it on, and then the figure appears in consumer inflation with a delay of several weeks, or absorb it into margins. Both variants work against equity valuations - one through the discount rate, the other through earnings per share.

The ECB projections are most revealing. The inflation estimate for 2026 remained at 3.0%, but the outlook for 2027 was raised to 2.5% and for 2028 to 2.1%. The central bank is therefore not assuming that the energy shock will disappear on its own with the base effect; it admits that it has seeped into price-setting even into years when it should have long been absorbed.

The alibi of weak demand has disappeared. The ECB raised its eurozone growth estimate to 0.9% for this year and 1.4% for next due to the economy's higher-than-expected resilience. On the US side, August employment beat expectations and gains were broad across sectors, not concentrated in two or three industries.

The market entered the year betting on easing and is now pricing that out: the combination of producer prices and oil shifted expectations toward the Fed raising rates this year. A stronger dollar is the price paid by the other side - exporters billing in dollars, issuers of dollar debt outside the US, and American companies with most of their revenue in euros.

Since 2022, the starting point is different. Back then, central banks started from zero and could tighten quickly without the risk of overshooting; today the ECB continues from 2.50% and after a July pause, about which the meeting minutes explicitly said should not be read as the end of the cycle. The room for error in both directions is considerably smaller.

The first signal will come from consumer inflation: if the August 5.4% from producer prices does not spill over into it, it will be a margin story, not inflation, and bets on a Fed rate hike will dissolve again. If it does, the most unpleasant combination will come into play - a restrictive Fed, an ECB with an unfinished cycle, and bond yields that stop working as portfolio insurance.

Oracle +7% and weak Adobe guidance: cloud for $90bn in capex versus software under pressure

On the same day, September 10, the market ruled on two software companies in completely opposite ways. Oracle reported record revenue of $19.3 billion, up 30%, and the stock added 7%. Adobe beat estimates with revenue of $6.76 billion (+13%) and non-GAAP EPS of $6.13 - and still came under pressure due to the current quarter guidance.