Tags: oil | prices | inflation | investors

Plunging Oil Prices Will Also Take Momentum Out of Inflation

hourglass and dollars squeezing through.
(Maksym Yemelyanov/Dreamstime)

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Wednesday, 14 November 2018 10:18 AM Current | Bio | Archive

The Slippery Slope of Oil Prices

Crude oil prices plunged seven percent Tuesday as volatility jolted the energy market. There is no doubt that we can expect a reaction from OPEC when they meet on December 6.

In my opinion, there is still more downside risk for oil prices, at least until the OPEC meeting (where “fundamentals” like for example balancing supply and demand over the median term) will be on top of the discussion list.

Nevertheless, daily price moves for crude oil like what we have seen yesterday are not particularly common outside of the cryptocurrency bubble.

That said, and unlike the cryptocurrency bubble, there are economic consequences from moves like that in oil markets.

Investors could do well keeping in mind that lower oil prices will reduce headline and core inflation rates, particularly in the United States.

That may matter in the U.S. as now is the time of year when a lot of companies are making their wage and price decisions and there could be some second-round effects from this therefore.

The move may also weaken the dollar. A lower oil price, led by oil market fundamentals, weakens the demand for dollars with which to buy oil.

The increase of U.S. deficits has increased the need for dollars buyers, but if the oil price decline were to persist, that might tilt the balance of foreign exchange markets.

However, with the global economy still strong and some consumers giving upside surprises to the demand for oil, the risk is that the oil price rebounds somewhat.

Consumer Price Inflation (CPI) Increases in October

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in October on a seasonally adjusted basis after rising 0.1 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

Of course, these inflation rates do not reflect the most recent oil price moves.

A reading of 2.5 percent inflation confirms the Fed’s current policy path.

Brexit Saga: At the End of the Beginning?

In the interminably tedious process of divorcing the UK from the EU something stirs. The UK Cabinet is meeting today to disagree about a “draft” agreement.

Is this “light at the end of the tunnel”?

Let’s not get carried away with the heady enthusiasm we saw. Cabinet may reject the agreement. Parliament may reject the agreement. Former Foreign Secretary Boris Johnson, who has not yet seen the agreement, gave a comment that crowned a lot of rather basic historical ignorance into a couple of minutes, but basically can be summed up as “whatever the agreement says, I will vote against it.”

The British pound did move up a bit on the news of the agreement.

But there remains a lot more politics to wade through. It would be unwise to consider this “the end,” it is even not “the beginning of the end”, but it “might” be “the end of the beginning.”

Germany Third Quarter GDP Shrinks

The German economy shrank 0.2 percent during the third quarter after growing 0.5 percent during the second quarter, a preliminary estimate showed. This was expected because of problems in the auto sector. The evidence from industry data is that this problem will be quickly resolved and therefore a bounce back is expected in the fourth quarter.

This was the first quarterly contraction since the first quarter of 2015 due to declines in both exports and household consumption.

Eurozone Third Quarter GDP Growth Slows

The Eurozone third quarter GDP growth rate estimate came in at +0.2 percent on the quarter, which was down from a 0.4 percent expansion in the second quarter. It was the weakest growth rate since the second quarter of 2014, and as the German economy contracted for the first time in three-and-a-half years and Italy's GDP showed “zero” growth.

The euro is currently trading under the $1.13 handle.

China Value-Added Industrial Output Better than Expected

Chinese economic activity was stronger than expected, albeit just a bit. China's industrial production increased by 5.9 percent year-on-year (y/y) in October, after a 5.8 percent gain in September. Production growth for manufacturing output came in at 6.1 percent vs 5.7 percent. Considering the first ten months of 2018, industrial output increased 6.4 percent y/y.

There is no evidence of trade problems hitting the industrial sector of the economy to date.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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Investors could do well keeping in mind that lower oil prices will reduce headline and core inflation rates, particularly in the United States.
oil, prices, inflation, investors
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2018-18-14
Wednesday, 14 November 2018 10:18 AM
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