Posts tagged ‘oil’

Deal Or No Deal?

It was obvious at the start of this year that the behaviour of the oil price would be one of the key economic variables of 2016. We saw sharp falls early on, with lows below $30 repeatedly tested. (Had these persisted the disinflationary impact of cheaper energy would have continued into the winter.) Then there was a convincing recovery, along with risk assets, into the spring. And over the past few months the price has stabilised convincingly for the first time since the initial fall in 2014, holding a range of about $45-50 since the middle of April.

This week’s OPEC meeting might be expected to reinforce that stability. The decision was announced on Wednesday to reduce the cartel’s crude output by about 0.25m-0.75m barrels per day. (Details of individual production quotas are to be agreed at the next meeting in two months’ time.) There are the usual question marks over the credibility of the OPEC system – diplomatic tensions between its members, doubts as to their adherence to quotas in the first place and so on. Crude has fallen back a bit today on profit taking and on fears that the deal, modest as it is, might yet fall through.

But the announcement was significant. It is the first cut agreed since 2008. Should November’s meeting prove fruitful the group’s quotas will have changed for the first time in five years. It has encouraged Russia to start talking about a production freeze again. It hints, in short, at the firming of the bottom end of the range we have seen oil prices occupy over the last five months.

This is doubly true when we look at recent changes in the balance between crude supply and demand. Over the course of 2014, the six-monthly average global production level increased by 2.8m bpd as against a 1.1m bpd increase in demand. Albeit on a much lesser scale the reverse has happened since: six-monthly average global demand has risen by 2.3m bpd versus a 2.0m bpd increase in supply. In fact the production surplus as of August, again using the six-monthly average, had fallen to 443k bpd down from a high of over 1.5m bpd in mid-2015. So the OPEC cut, especially if accompanied by a Russian cap on output, would bring supply consistently below the level of aggregate demand for the first time in over two years.

Looking at this from the other end, rising prices would come under pressure from increased production from other sources, notably US shale. Cost efficiencies have already seen the oil rig count rise by 32% from the low it reached back in May – and it remains way off the mid-2014 highs. The current range for crude, then, would appear to be secure both from persistent falls and persistent increases. It could be a case of 2012-2013 all over again, just at the $50ish per barrel mark rather than $110.

There we must add a note of caution. For some producers, $50 per barrel is too low. OPEC granddaddy Saudi Arabia has just had to funnel billions of dollars worth of state support into its banking system. Its reserve assets peaked at $731bn back in 2014 (about 100% of GDP – quite a cushion). Since then they have fallen by almost a quarter to $553bn. That’s a sharper fall than Russia has seen over the same period (-15%. Indeed, Russian reserves have been climbing steadily for more than a year). At the extreme end of the spectrum, there is the bitter human tragedy unfolding amid the ruin of Venezuela. The fall in crude has not killed off shale, but it has put several economies under varying degrees of strain. If there is a real challenge to the OPEC deal this blog suspects that it will come about from economic imperatives rather than political disagreement.

Deal or no deal, oil seems to have found its level more securely than ever now. Regular readers will know what this means for inflation, and, depending on the reaction function of the central banks concerned, monetary policy in due course.

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30/09/2016 at 4:31 pm

A Matter Of Timing

We are now more than half way through 2016. As the year dawned this blog identified monetary policy and the oil price as two of the key things to watch. This week it was the turn of the Bank of England to set tongues wagging on the monetary front; in the meantime the oil price, which has done some central banks such a favour in recent years, has stabilized in the $45-50 range following its strongest quarterly rise for seven years.

The Bank had been expected to cut policy yesterday (from 0.5% to 0.25%). A Brexit loosening to buoy confidence had been the thinking behind this consensus. The MPC, however, held steady. Admittedly the consensus was not especially strong: of the 54 estimates collated by Bloomberg 25 had been for a 25bp cut, 6 for larger cuts and the remaining 23 (who won the bet) for no change. Nor was the defeat especially hard. The MPC announced that “most members of the Committee expect monetary policy to be loosened in August”, further noting that the “precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.”

If, in the words of one senior figure on Threadneedle Street, the British economy needs a post-referendum “sledgehammer” (not an obvious choice of metaphor for a stimulus but one catches his drift), then why delay? If the Bank is to bolster confidence why didn’t it just get on with it? What sort of doctor decides that his patient, suffering some obvious ailment, could really do with a shot in the arm – but then decide to wait another month before administering it?

On the other hand, as that senior figure – MPC member Andy Haldane, the Bank’s chief economist – further put it, while there is some evidence of weakness in hiring and investment: “There is no sense of slash and burn. But there is a strong sense of trim and singe.”

In any event the point is that we do not yet know what the impact of the Brexit vote has been. There is anecdotal evidence from the property market, for instance. But it won’t be until at least early August that we have much actual data to look at.

There is an irregular exception which we ought to deal with quickly. GfK, who produce the UK consumer confidence series, undertook a one-off bonus survey in the aftermath of the referendum. (Their regular end-June number was based on surveys conducted during the first two weeks of the month.) Published last Friday this showed a fall in the index from -1 to -9, the biggest monthly decline since December 1994. On the other hand, the index has averaged precisely -9 over the last 30 years, peaked at only +7 in mid-2015 and went as low as -39 at the nadir of the Great Recession.

One thing we do know for a fact, however, is that the pound is 7% weaker, trade weighted, than it was when the last Inflation Report was published in May. It is down 11.5% in 2016 to date and has fallen 13% since its peak just under one year ago. Currency weakness is itself a form of monetary loosening which translates into imported inflation, higher exports and (not allowing for Brexit fears) greater inward investment. Is a cut of 25bp on the base rate really required as well? Particularly as the urgency of such a move is clearly not great enough to obviate the delay associated with data releases as well as the elegance of wanting to time MPC action to coincide with the publication of the Bank’s own detailed economic and monetary analysis?

And so back to oil. This is now back at exactly the level it settled at for a few months from last August. Very soon, then, the deflationary effect it has over the previous year will reduce to about zero. In February the Bank put the contribution of cheap oil to annual CPI at -0.4% through direct effects alone. That is quite a lot of disinflation to be giving up. The next RPI and CPI prints come out on Monday, with figures for July only arriving until after the next MPC meeting. So they may not be sufficient to challenge what will doubtless be a 100% consensus, backed by the MPC’s own words, for a 25bp cut next time. But the direction of travel is clear.

There is also the labour market to consider: 186,000 jobs were created during the first quarter of this year, and the ILO unemployment rate at 5% is only 0.3% off its 2004 low. Brexit risks may argue for a rate cut (though again, on that basis: why wait?) But the pound, the oil price and the labour market argue at least for staying put in August too.

The complication for investors here is that markets were already mildly disappointed with the Bank’s failure to cut yesterday. Put it off again, or postpone it indefinitely, and their disappointment may lose that mildness.

There is another possibility to consider: that Brexit fears might recede in coming months. What then for prices? And for monetary policy? And for bond markets, with the UK base rate not priced to rise above its current level until the end of 2020?

As so often our central bank finds itself in a bit of a spot. Nervousness pushes its hand one way; known fundamentals to date, at least, another. If the data which comes out between now and the next MPC meeting is unhelpful to the consensus the Bank can either act inappropriately or spook the market. If the data is poor, and so helps the post-referendum blues argument, then that is bad news for the economy.

Whatever the longer-term consequences of Brexit for the UK the shorter term prognosis for assets of certain types does not look rosy.

 

15/07/2016 at 4:10 pm

Great Expectations

A speech to the G20 summit in Shanghai from the Governor of the Bank of England has drawn some media interest today. Mark Carney’s words of caution to his fellow central bankers on the subject of negative interest rates centred on the “zero sum game” of seeking export-led recovery. He noted, quite rightly, that “beggar-thy-neighbour” policies at the country level would do nothing to address the sluggishness of global demand. And only on Tuesday he told the Treasury Select Committee that Britain’s policy rate would not go negative.

He did, however, say that it might be cut.

Sterling hit a new trade-weighted low on Wednesday and has now fallen by more than 10% from its August peak to a level last seen two years ago. Now the downward trend started back in November and has also received a helping hand from David Cameron’s successful reform of the European Union last Friday. But Governor Carney’s words, and those of his colleagues on the MPC this week, do undermine the credibility of his Chinese lecture at least a little.

This is especially the case since the pound’s impact on inflation has long been singled out in the Bank’s quarterly reports on the subject. A bout of moderate currency weakness could give a nice boost to CPI, if only on a forecast basis, bringing it closer to the target rate of 2% per annum without the MPC having to resort to any further loosening of policy over the coming months. And the side effect of a positive impact on British exports is just something the Bank would, regrettably of course, have to live with.

Look at the last Inflation Report and the underlying data, however, and even sterling is a side-show. As so often over the past 18 months the big news is oil.

This blog wrote about the impact of energy prices on the Bank’s assumptions for inflation back in November. Since then the effect has grown. Oil price assumptions for this year and next are down by 34% and 29% respectively; forecasts for gas prices down by 24% and 21%. On the MPC’s arithmetic this is in the process of translating into added deflationary pressure in 2016 of 0.4% p.a. by way of petrol prices and gas bills alone, with additional effects via the pass through of lower production costs (this being more difficult to time as well as to quantify).

It is, then, unsurprising that it has been oil, not sterling, which has exerted the more powerful pressure on interest rate expectations. These were already very benign, with UK rates only expected to rise late this year or some time into next. Look at futures markets today, however, and they are not pricing in any chance of policy tightening until the second half of 2018, with the base rate remaining under 1% until at least the end of the following year. As with the pound this change has been quite rapid. The 3-month LIBOR future for December 2019, which now prices at 1.02%, was priced at 2% on New Year’s Eve.

While the press looks to the pound, therefore, the rates market has been looking at the oil price.

And yet even the February Inflation Report is rightly cautious on this subject. It notes that the drag from lower energy prices will unwind over time, and that its CPI forecast on a three year view is broadly unchanged. Elsewhere it further notes that the labour market has strengthened more rapidly than expected back in the autumn: in fact it now forecasts UK unemployment of 4.8% both this year and next, revised down from 5.2% and 5.0% respectively. This is nothing less than a prediction of full employment, if the history of the last forty years is any guide. And at the same time the ratio of vacancies to the total labour force has risen again. This measure averaged 1.5x over the period 2010-12, when the UK labour market stagnated around an 8% level. Then it rose to 1.7x in 2013 and 2.0x in 2014, a time of rapid jobs growth which saw unemployment reduce to 5.7%. For 2015 the ratio hit 2.3x and unemployment already stood as low as 5.1% come December.

Under normal circumstances this would ignite at least an amber warning of cost pressures by way of wage increases. At present, however, this pressure is contained by the current low level of headline CPI, as the Bank also notes. (What the Bank doesn’t note but is nonetheless equally material is that low inflation has a direct impact on wage settlements in the public sector – about one in every six jobs in Britain – together with pensions and other welfare payments.)

The UK is close to full employment, the deflationary impact of a strong pound has fallen away in short order and price pressures are being contained only by the continued weakness of a commodity whose average annual price change in either direction over the last ten calendar years has been 30%. Interest rate markets are expecting this happy circumstance to persist for at least the next two to three years. From some perspectives – that of the property market, for instance – it would be lovely if they were right. But the more prudent thing to do, surely, is to think about what might happen if they are not.

Let us leave the last word to the Bank of England:

“At its meeting ending on 3 February, the MPC judged it appropriate to leave the stance of monetary policy unchanged . . . All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.

This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.

26/02/2016 at 4:04 pm

The Year Ahead

As years draw to a close it is customary for market observers to make early Christmas presents of their thematic predictions. Here are this blog’s thoughts on some major considerations for 2016.

Starting with the obvious: monetary policy will enter what has become very unfamiliar territory for some economies, including those of Britain and the US. Expectations are that the Fed will tighten policy by 25bp next week; as we have seen, the Bank of England is not expected to follow until well into next year. But market expectations are for the gentlest upward path for rates in recent history on both sides of the Atlantic. Anything more than this will come as a major surprise.

On a connected point, oil made much of the market and macro running this year. The key futures were making new sub-$40 lows just this afternoon. But the key point is that the average price over the last 12 months is $55 as against around $100 for 2014. For cheap energy to mimic the disinflationary pattern established this year would require oil futures to trade down to $30 and settle there throughout 2016. That is a real possibility. On the other hand, a change in OPEC / Saudi Arabian policy on supply could see the price start to climb again. Even if it manages to hold its 2015 range of about $40-60, that will still be significant as the “base effects” of cheap energy on inflation will fade away. In other words the oil price is set to remain a key metric for the world next year – and is entirely unpredictable.

Talking of unpredictable, the election of the next American President is already making headlines almost a year before the event. It will inevitably hog the political limelight in 2016. But elections and electoral arithmetic in Europe are much more interesting from an investment perspective. In several countries, “right-wing populist” or far right parties are riding high in the polls and they tend to be Eurosceptic. We will see how the National Front fares in French regional elections this weekend but there are national elections brewing elsewhere. In Holland, where an election must be held by March 2017 and if history is any guide will take place earlier, the Party for Freedom is polling in the high thirties. In the meantime the Dutch will be voting in an “advisory referendum” come April on the EU’s dealings with Ukraine. There is room for some mild upset on that front and transformational political change at the European level from Holland come the general election. During 2016 the British referendum on EU membership will also be drawing nearer.

Major equity markets showed degrees of volatility this year not witnessed since the crash and panic of 2011. Several currencies had a turbulent time of things too. With the other themes in mind it appears likely that volatility will again feature in 2016.

This list is not exhaustive but will provide us with plenty to chew on over the coming months. In the immortal words of Louis Pasteur: chance favours the prepared mind!

11/12/2015 at 5:40 pm

Best (And Worst) Of British

Economically speaking there has been little drama or excitement in the UK over recent months. While markets agonized over Greece, and then China, and subsequently the Fed, the British economy quietly kept on going. There have been no growth surprises in either direction; no change to the Bank of England’s guidance or rhetoric on interest rates; no unexpected outcomes in the labour market, or price indices, or activity indicators. The PMI survey for September showed a bit of weakening in output. And Mark Carney did have some diverting things to say about topics other than monetary policy (climate change for instance). But all in all, it has been an uneventful time.

Nonetheless the UK markets are of key importance to British investors and do not always reflect goings on in the economy, to say the least. So while the economy might not invite too much scrutiny just at the moment, here is a summary of conditions across the major UK asset classes.

Starting with property, the residential market rally that took off in 2013-14 continued into this year but has abated somewhat. Government data showed a 5% increase in house prices in the twelve months to August, down from a 12% annual rate in the early autumn of last year. Valuations are mixed: the simple average earnings to average house price measure suggests the market is red hot but on this measure that has been true since 2004. Using a measure of mortgage affordability (which takes account of interest rates) the market is priced fairly: the ratio of average mortgage payments to average earnings is almost exactly in line with the average since 1976.

The commercial property market has been having a jollier time of things, with the Investment Property Databank All Property total return index up 15% over the twelve months to September. Again, the valuation picture is mixed. Rental yields have fallen sharply over the last couple of years and are about as low as they were at the peak of the late 1980s boom (though still a little way off the lows seen before the Great Recession). On the other hand, the rate of capital growth has not been as aggressive as in previous rallies and there is some distance before the market surpasses its 2007 peak.

Staying at the riskier end of the spectrum the equity market has been picking up nicely in recent days. The FTSE 100 has risen by 5% so far this month and is now 8% above the low it marked towards the end of August – though remains 10% below the record set back in April. There has been pressure on earnings from currency and commodity effects this year so the improvement in valuation since then has actually been rather muted: the forward p/e ratio has risen from 14x to 16x, which looks toppy against a ten year average of 12x. At the same time, however, the dividend yield has risen from 3.5% at the end of last year to 3.9% today (the ten year average is 3.6%).

Talking of yields, the gilt market has barely shifted from where it began the year. All the key maturities – two year, five year, ten year, thirty year – as well as the ultra longs are within 10bp of where they ended 2014. There is one exception: the ultra long end of the index-linked market has rallied, with the yield on the 0 3/8% 2068 linker down 16bp to an uncompelling -0.8% in real terms. The ten year conventional gilt yield stands at 1.8%.

Corporate bonds have similarly had a dull time of things, at least in the investment grade arena where widening spreads have seen total returns of about 0.5% according to the Bank of America Merrill Lynch family of indices. High yield has done better: spreads are about where they were at the start of 2015 so there has been relatively little capital impact on income return (the total return on the sterling high yield index stands at 4% for the year to date). In valuation terms credit spreads are much higher than they were in the years preceding the 2007 crunch but not very compelling against average levels given the scale of the collapse at that time. Using the Markit iTraxx Europe index as a benchmark the price of investment grade credit is just over 80bp today, up from a pre-crisis low of 20bp but somewhat below a ten year average of 90bp.

There is nothing much to say about cash with base rate stuck at 0.5% for the last six and a half years, though the worst performing assets of all are to be found in the commodity space. The near Brent crude oil future has rallied from the new bottom it reached in August (by some 14% in fact), but is still worth less than half what it was before the crash last year. The economic and market consensus is for very limited improvement over the coming months and with supply still materially stronger than demand there seems little reason to argue with this. There would also appear to be the will in some important quarters for oil to stay cheap: Saudi Arabia alone increased daily production by just over one million barrels during the first seven months of this year.

Precious metals have had a better time of things too lately and both gold and silver are trading very near the levels at which they began the year. Still, gold at $1183 an ounce remains expensive relative to inflation-adjusted 30 and 40 year averages of $793 and $825, even though that price is almost 40% below the $1900 reached at the peak of the bubble.

At this point we have departed from strictly British assets of course but that, at least, is all the key bases covered!

It has not been the easiest of years for UK investors and readers will have noted that this blog sees continued volatility ahead. But there are always opportunities amid uncertainty. Time will tell if we are able to find them out.

16/10/2015 at 4:49 pm

Summer Reading

Well, here is August. Traditionally, though not always a quiet month, we shall be two thirds of the way through 2015 once it ends. So far the summer period has seen pockets of notable activity in markets rather than outbreaks either of optimism or of panic. For the moment things feel pretty calm – so let us have a look at some areas which have drawn attention over the past month or two as we approach the more active autumn period.

China has preoccupied minds for much of the last few weeks. The stock market is down by about 28% from its peak in June, meeting the technical definition of a crash. A Shanghai-based CIO captured the consensus well when he said a month ago: “The market is now falling on the assumption that both China’s economy and financial markets face systemic risk.”

China’s economic growth has certainly disappointed but despite much commentary the supposed systemic issues are not so clear cut. What is clear is that manufacturing activity has cooled materially since the middle of last year and that export growth has fallen away.

It has attracted little comment that since the bottom 15 months ago the yuan has appreciated by 22% against the euro – very slightly more than what the dollar has done over the same period. Consider at the same time that it is Europe which has seen positive growth surprises over the period and the US where GDP has been sluggish.

We know that there are policy moves afoot in China to reform the economy and that the property market has again hit a bout of serious weakness. But it is also likely that more mundane currency factors, of exactly the kind which have been hobbling reported EPS for the S&P 500, have been playing their part. Chinese exports to Europe have fallen by an average of 16% on the year for the most recent three months where data is available (March to May). That’s the fastest drop since 2009 – and stands against a modest rise in exports to the US.

Elsewhere rate hikes have been attracting attention. (The Bank of England vote on the subject split only yesterday of course.) There has however been very little movement in market expectations for central bank action in the UK and US over the last few months – or to put it another way, continued expectations of a very benign tightening cycle whenever the time finally comes.

This is consistent with the behaviour of oil over the last few weeks. The key Brent and West Texas crude contracts fell during July by 18% and 21% respectively, the sharpest monthly decline in the latter case recorded since October 2008. If prices remain at their current lows it will not be until early 2016 that the base effects of cheaper energy on inflation fall away completely. Through the prism of the short term that looks bullish for rates. But from another perspective it could present markets with more of a shock once the effect finally does unwind.

(As a brief aside let us look at the effects of bargain-barrel crude on oil producers. At one end of the scale it has seen Saudi Arabia return to the debt market for the first time since 2007; at the other, life for 30m Venezuelans gets ever more horrific with farming nationalized and starving people rioting over food. OPEC has raised output by about 2m barrels per day since mid-2014. One begins to wonder whether this whole cheap oil policy was really such a clever idea.)

Back to Britain! While not as dramatic as the oil price the strength of sterling has been a noteworthy feature of the landscape for UK investors, and a seasonable boon for those going abroad. On a trade weighted basis the pound is over 7% stronger so far this year and carries its highest value for more than seven years. On a PPP basis it looks expensive to almost everything except the Swiss franc (though not always significantly so). Nonetheless, this will be causing some creative tension in Threadneedle Street – and it also offers an opportunity for anyone looking to diversify away from sterling.

Finally there was a fascinating story about a possible cyber attack a month ago. On 8 July computer problems grounded all flights at United Airlines, stopped trading at the New York Stock Exchange and knocked over servers at the Wall Street Journal. One theory held that this was the work of Chinese hackers. The logic was that the bankruptcy and euro-exit of Greece, then a live possibility, would open the country up to control by China and / or Russia. Fearful of this, the west used cyber tactics to exacerbate the crash in the Chinese stock market.

This blog would ordinarily have dismissed this as conspiracy prattle – but it was then officially denied. There could not have been a cyber attack, apparently, because United suffered a computer problem whereas NYSE closed because of a technical issue. And at the WSJ it was simply an overload. As CNN summed up:

What ties together all three failures? The companies involved are all business operations that rely on massive computer systems. Automated software is complex, sometimes involving millions of lines of computer code. All it takes is a single error — even misplaced text — to grind it to a halt.

Then there was this wonderful quotation from cybersecurity expert Joshua Corman, who must do contract work for the Department of Administrative Affairs:

“Increased dependence on undependable things allows for cascading failures.”

That offers no explanation whatsoever for what happened on 8 July, but it does underscore the vulnerability of modern society to attacks of this kind. Why only a month earlier the payment systems at RBS collapsed, leaving wages and state benefits for hundreds of thousands of people unpaid. This was attributed to “creaking IT systems” by the British Bankers’ Association, which may well be the case; but what would happen if those creaking systems were to get a concerted external push? We already know that significant black swan events, such as major terror attacks, can occur without state support. Geopolitical conspiracies aside: would it be possible for a real cyber attack against key targets to be perpetrated by non-state actors? And what is implied for the next conflict between developed states?

At this point holiday reading begins to take over from financial analysis so let us leave things there for now.

Markets might have been calm, then, but there has been much of interest to observe. Some of this speaks to future surprises, and some to one or two of the themes identified by this blog at the start of the year. All we can do, as always, is to keep our eyes open and decisions clear as we approach its closing months.

07/08/2015 at 11:25 am

Under Pressure

The FTSE 100 index hit a new high only a few days ago, closing above 7100 for the first time on Monday. Risk assets have generally had a strong year. There has not even been any visible excitement over the prospect of a secessionist wipeout in Scotland or any of the other shocks which have been postulated by Westminster pundits in the run up to the election next week. But tensions rose yesterday when the US GDP print for Q1 came out almost flat against expectations for a lacklustre but positive +1%. Markets took the number badly. Was it a sign that the global economic motor is slowing – yet again? Has the pricing of risk got ahead of itself?

There have undeniably been signs of pressure on the US. One agent of the weak growth number was a decline in net exports: by the end of March the dollar had strengthened by more than 20% on a trade weighted basis over a period of nine months. Currency strength was expected to weigh on corporate earnings too. As earnings season opened earlier in the month forecasts were for a 6% drop in EPS for the S&P 500 index relative to Q1 2014. And it is not just the US of course. China has come under scrutiny for growth outcomes well below the 9% averaged by the economy over the past 20 years. Towards the middle of the month data for retail sales and industrial production disappointed the market consensus, and there are signs that the manufacturing sector has fallen back into slight contraction.

After the run markets have had so far and the experience of most of the last few years it is perhaps natural to expect a period of retrenchment, if not a modest sell off, over the next little while. If the economy is indeed under pressure then this could catalyse such an event as well as justifying it. The picture is more mixed than it might appear, however. From the US we had stronger than anticipated employment data out only this afternoon, with initial jobless claims down to 262,000 – within reach of the previous low of 259,000 recorded in April 2000. And corporate earnings have not collapsed as feared: with two thirds of the index’s members now having reported, S&P 500 EPS are up by 3% over the previous year and the forecast for the whole index this season has come up to -1%. In China too, foreign investment growth has continued its solid run, service sector activity has accelerated and some progress has been made on structural reform (an area which is often overlooked).

Furthermore, the world’s glass is half full as well as half empty. Given the size of its markets, power of its central bank and global economic influence it is inevitable that the US should occupy much of our thoughts. While the titan across the Atlantic has been struggling a little, however, the weary colossus of Europe has begun to show improving signs of life. Similarly, while the growth rate of the world’s most populous country has fallen back it has been overtaken by stronger than expected economic expansion in the second most populous: India, where GDP growth for 2015 was projected to reach 5.5% at the beginning of the year is now forecast to see 7.4% (using Bloomberg consensus data). This speaks to the continued variability of outcomes identified as a market theme by this blog for the current calendar year, and it should also make us wary of interpreting particular data as evidence of general gloom.

Before leaving the subject of growth behind it is worth looking at the behaviour of the oil price over recent weeks. The collapse in crude was the most significant market event of the last few months of 2014. It generated pronounced volatility in equity markets and its disinflationary impact thrust bond markets higher – especially in Europe, where yields have reached record lows. The price stabilized over Q1 (a cornerstone of the rallies we have seen). Indeed it now appears to have bottomed, with both the Brent and West Texas Intermediate futures contracts up over 20% this month.  This has had effects which few might have predicted back in December, such as helping the Russian stock market become one of the world’s top performers over the year to date.

It also means a bottom for oil-driven disinflation, though it is likely to be a few months before this washes through to annual CPI numbers. At the same time, that US labour market data reminds us that underlying pricing pressures will have been gathering strength. Only this morning the Employment Cost Index rose by its highest annual rate – 2.6% – since 2008. Looking forward, it is perhaps here that we might find genuine reason for concern on the macro front, and another source of variability between markets as the year plays out.

30/04/2015 at 5:27 pm

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