Sunday 18 August 2019

Daily Market Update: Oil supply glut pushes price lower


Richard Ramsey

Given the dearth of economic data releases yesterday the focus of attention was on central bankers. There were no fewer than six Fed officials speaking yesterday and offering a range of views on the Fed’s interest rate hiking intentions.

However, most of yesterday’s speakers appear to be lining up in the December rate hike camp. New York Fed President William Dudley (voter) said the risk of waiting too long was now roughly in balance with the risk of moving too soon to normalize rates after seven years near zero. Fed Vice Chairman Stanley Fischer (voter) said a strong dollar is restraining US inflation and exports and has already delayed the Federal Reserve’s first interest-rate increase, but the US economy is riding out the effects fairly well and it “may be appropriate” for the Fed to begin raising rates next month. Richmond Fed President Jeffrey Lacker (voter) appears to have more conviction for a December move. According to Lacker there's a chance the Fed is getting behind the curve when it comes to policy. He added that if the Fed does get behind the curve, it could have to move faster to increase short-term interest rates. The Fed would not want to do that. St. Louis Fed President James Bullard (non-voter) said that the U.S. central bank should raise interest rates from near zero because emergency policies are not needed with the labor market and inflation near to the central bank’s goals.

Yesterday’s outlier was the Chicago Fed President. According to Evans the Federal Reserve policymakers risk a mistake should they raise interest rates without "true" evidence of stronger inflationary pressures. He added that regardless of when it begins raising rates, the Federal Reserve must be clear that the pace of future increases will be gradual. Cleveland Fed President Loretta Mester (non-voter) is scheduled to speak today and she is likely to offer a cautious message about a December rate hike. Overall, however, the message is that a December rate hike looks more likely than the 66% probability assigned by financial markets. Should a rate hike materialize this gives further scope for dollar strength in the weeks ahead.

The commodity markets have seen considerable price action in recent days with the oil price continuing to fall. Oil stockpiles have increased to a record of almost 3 billion barrels due to strong production in OPEC and elsewhere. The build-up of inventories is due to production exceeding global demand. The price of a barrel of Brent crude oil has fallen by 3% over the last 24 hours and by almost 6% since the start of the week. Brent crude oil is currently trading at $44.6 per barrel. On the currency markets, EUR/USD is little changed over the last 24 hours and is changing hands at $1.075. EURGBP is also broadly unchanged at 70.7p having briefly breached 71p last night. Cable is broadly unchanged at $1.522.

Looking at today’s calendar we have a number of economic releases due in the US ranging from retail sales to consumer confidence. In the Eurozone we have third quarter GDP. The French and German figures have already been confirmed at 0.3% q/q. Higher rates of growth in the smaller Eurozone economies are expected to pull the Eurozone GDP growth figure up to 0.4%.

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