Thursday 19 July 2018

Daily Market Update: Oil price slips as glut set to continue

Richard Ramsey

Yesterday’s incoming economic news from the US was broadly weaker than expected.

While the US nonfarm payrolls figures for 2016 have been encouraging, the Federal Reserve’s wider gauge of labour market conditions has been deteriorating in Q1. The Fed’s Labour Market Conditions Index incorporates 19 individual indicators and while analysts predicted an improvement in conditions last month a further deterioration occurred. New orders for US factory goods fell in February in line with consensus. However, there was a downward revision to January’s increase. Overall, the longer-term trend is downward with orders falling in fourteen of the last nineteen months. Meanwhile the latest durable orders surprised to the downside. The measure excluding the volatile defence and aircraft components fell by 3% m/m in February. While these surveys are disappointing, it should be noted that some of the more timely indicators of manufacturing activity (e.g. ISM manufacturing survey) have signalled a return to growth in March. This afternoon’s ISM Non-manufacturing PMI, due this afternoon, is expected to see a modest acceleration in its growth rate in March.

One of the Fed’s FOMC members yesterday delivered an upbeat message regarding interest rate hikes. Boston Fed President Eric Rosengren, who is normally quite dovish, said that the US central bank was likely to raise rates ahead of market expectations given that economic risks had faded. Rosengren said that the threat of overspills to the US economy from a global slowdown has declined. In light of this, it is somewhat “surprising” that the US interest rate futures markets imply just one further interest rate hike this year. According to Rosengren this prediction could prove “too pessimistic”.

Yesterday’s Eurozone producer prices fell by more than expected in February. Indeed the annual rate of decline increased from 3% in January to 4.2% in February. Meanwhile the Eurozone unemployment rate for the same month edged lower to 10.3%. The services PMIs and retail sales are the key releases in the Eurozone today. Already we have seen strong service sector PMIs for the Ireland (60.7) and Spain (55.3). Both of these economies recorded an improvement last month relative to February. The incoming German factory orders, released earlier this morning, will put a slight dampener on things. Factory orders fell in February by 1.2% m/m. This compared with an expected gain of 0.3%.

UK construction activity remained at a 10-month low in March according to yesterday’s construction PMI. However, the headline rate of activity concealed diverging performance at the sub-sector level. The rate of growth in house building has practically ground to a halt. Last month’s reading (50.3) was the weakest reading since January 2013. Conversely, civil engineering and commercial activity reported a pick-up in activity in March. This morning’s UK services PMI completes the trio of surveys this week. The economy’s largest sector started the year with a robust rate of growth of 55.6 in January. However, February’s 52.7 reading represented a significant downside surprise. The consensus opinion amongst analysts is for a modest pick-up in service sector activity in March. The latest Bloomberg survey of analysts has 53.5 pencilled in. The Bank of England also publishes the record of its Financial Policy Committee meeting that took place on the 23rd March.

On the FX markets, the main currency pairs continued to trade within tight ranges. EUR/USD is down slightly from yesterday’s open $1.1388 and is currently changing hands at $1.136. GBP/USD is unchanged over the same time period at $1.422. EUR/GBP continues to hover around the 80p mark and is currently just below that level as I write. There has been more price action on the oil front as US crude stockpiles are signalling that the glut in oil is continuing. The price of a barrel of Brent crude has fallen by 2.4% over the past 24 hours and is currently trading at $37.4pb.

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