World Week Ahead: Seeking Signs of Economic Fallout from Oil’s Losses

December 8, 2014 Posted by admin

WRAP: With oil futures now down 39% from late June, investors are watching that market with rapt attention. The question now is how much these declines are impacting the real economy. Oil is likely to be a factor this week in inflation data from China to France to the U.S., showing up, in those cases, as a generally welcome, cost-driven disinflationary force. But we’ll also see how oil’s plunge is playing havoc with Russia’s central bank reserves and whether it’s affecting policy at Norway’s central bank. Canada’s top central banker may also weigh in on how his country’s increasingly important oil sector will be negatively affected and what that means for the broader Canadian economy. What’s more, three government and international agencies — the U.S. Energy Information Administration, the Paris-based International Energy Agency and the Vienna-based Secretariat of the Organization of the Petroleum-Exporting Countries — will deliver monthly analyses of the state of global demand and supply for crude oil, offering vital signals for traders of the commodity.


U.S.: 12:30 p.m. EST. Federal Reserve Bank of Atlanta President Dennis Lockhart speech at Council for Quality Growth Annual Meeting.

Mr. Lockhart is the first Federal Open Market Committee member to speak after Friday’s blockbuster jobs report. He is considered a moderate, neither excessively hawkish nor excessively dovish. So if he is moved to talk of new data bringing greater pressure for an expedited rate hike it could be a signal that the Committee as a whole is shifting toward a more hawkish stance.


U.S.: 7:30 a.m. EST. National Federation of Independent Business November Index of Small Business Optimism. [Previously up 0.8 to 96.1.]

Finally, it seems, this indicator of small business confidence is catching up to other economic indicators. The NFIB index has for some time been a symbol of the divisions in the U.S. economy during the lackluster recovery of the past six years. Whereas big businesses benefited from a low borrowing rate in corporate bonds, smaller firms were squeezed by increasingly stingy banks and sub-par demand. Now, there seems to finally be an improvement underway.

U.S.: 12 p.m. EST. U.S. Energy Information Administration’s short-term energy outlook.

This is the first of three reports this week that are eagerly anticipated by an oil market that has been roiled by persistent declines. The EIA’s assessment of the near-term outlook will be looked to by traders to fill in the gaps in their analysis of how much further we have to go in a demand-supply imbalance that has shifted oil futures down 39% in less than six months to $65 a barrel. In an extremely edgy market, though, they’ll want to wait on more internationally focused assessments from the International Energy Agency and from the Organization of the Petroleum-Exporting Countries later in the week before placing any long-term bets.

U.S.: 12:15 p.m. EST. European Central Bank Executive Board Member Peter Praet speaks at Peter G. Peterson Institute for International Economics in Washington.

How unified is the ECB behind President Mario Draghi, who is pushing for a special quantitative easing program of sovereign bond purchases in the New Year against the resistance of various ECB governing council members, especially its German members? Two German newspapers reported last week that three members of the six-person executive board to which Mr. Praet belongs voted against the statement that Mr. Draghi read after last Thursday’s policy-setting meeting. (Presumably the President had wider support from the much larger governing council, which includes national central bank governors). It’s clear that there are tensions within the ECB. If Mr. Praet can shed any light on that it will provide useful information to investors looking to gauge how much political capital Mr. Draghi has to carry through with his monetary easing plans to attack the eurozone’s ugly economic situation.

CHINA: 8:30 p.m. EST. (9:30 a.m., Beijing)

–November producer price index. [PPI expected -2.4% on-year vs. -2.2% in October.]
–November consumer price index. [CPI expected +1.6%, unchanged from October.]

The producer price deflation of recent months reflects the plunge in commodity prices that China itself has brought about with its own slowdown. The fact that this hasn’t fed through to consumer prices in part reflects inefficiencies and monopoly powers in the Chinese economy, with state-owned enterprises pocketing the higher margin from lower input costs while failing to lower prices to clear excess inventory. In other words, the producer price index, which is more prone to international forces that arise outside of China’s command economy, is likely a more accurate gauge of the slack in the domestic economy. And unless there is a rebound in the former, the consumer price index will eventually also get dragged lower. China is not immune from the deflationary pressures coursing through much of the global economy.


U.K.: 4:30 a.m. EST. (9:30 a.m., London). October trade. [In September, adjusted trade deficit was £9.8 billion.]

Exports were supposed to be the engine to pull the U.K. out of its crisis. They never materialized, and continue to sag, due to the poor state of demand among Britain’s trading partners. Growth instead has been generated by domestic demand, which is why imports continue to grow faster than exports and the trade deficit continues to widen. Whether that external imbalance poses a problem is yet to be determined. For now, the U.K. is lucky to have a comparatively healthier domestic demand base than that of the eurozone.

OPEC: Time N/A. The Organization of the Petroleum-Exporting Countries issues its monthly oil market report.

This where we get to learn how out of touch OPEC’s policymaking body was with its own analysis of the state of the global oil market when it failed to reach production cut agreements late last month and sent crude prices plummeting.

NEW ZEALAND: 3 p.m. EST. (9 a.m., Wellington.) Reserve Bank of New Zealand monetary policy statement.

After the RBNZ instituted a series of rate hikes earlier this year, raising its cash rate to 3.5% and becoming the first developed economy to do so after the crisis, a slowdown in exports and softness in domestic demand has put that monetary tightening campaign on hold. Many believe the New Zealand dollar is still too high, even as it has fallen in response to the halt in rate hikes and weak economic conditions in the Asian region. To ensuring the kiwi stays on a softening path, the central bank is likely to stick with its comparatively dovish posture — though any signs of a reversal of the rate hikes are unlikely.

JAPAN: 6:50 p.m. EST. (8:50 a.m. Thursday, Tokyo) October machinery orders received. [Core Machinery Orders expected -2.1% on-month vs. +2.9% in September.]

After four straight months of gains, this closely watched data readout is expected to have pulled back in October. The extent to which it does so will be an important gauge of how well the economy is rebounding from a second quarterly contraction in the third quarter. Machinery orders are considered a valuable early indicator of future capital expenditures, and so their solid recent performance has fueled hope of a fourth quarter rebound.

SOUTH KOREA: 8 p.m. EST. (10 a.m. Thursday, Seoul) Bank of Korea Monetary Policy Committee meeting decision.

Surely it’s time for the Bank of Korea to cut rates again. The latest signals of deflationary pressures in consumer price data, coupled with a contraction in its manufacturing base, suggest Korea is in need of yet more monetary stimulus if it is to offset the slowdown in China and other drags on growth. But the BOK has been somewhat conservative in its response to this downturn. Will it continue to resist?


INDONESIA: 1:30 a.m. EST. (1:30 p.m, Jakarta) Bank Indonesia Board of Governors meeting decision.

Late last month, the Indonesian central bank instituted a surprise rate hike during an interim, extraordinary meeting, doing so in response to the government’s move to scrap subsidies on fuel products, a policy change that was bound to induce inflation. The problem is that in combination, the rate increase and the fuel price increase will work as a heavy tax on business activity and consumption. With anger brewing over the end to subsidies, Bank Indonesia might want to send calming messages that there will be relief to come in the future so long as the energy price increase doesn’t morph into a more widespread inflationary trend.

FRANCE: 2:45 a.m. EST. (8:45 a.m., Paris) November consumer price index. [Expected CPI -0.1% on-month vs. +0% in October; expected +0.4% on-year vs. +0.5% in October.]

The relentless grinding contraction in the French economy is pushing it ever closer to outright deflation. France offers a clear case for more aggressive monetary stimulus from the ECB.

SWITZERLAND: 3:30 a`.m. EST. (9:30 a.m., Zurich) Swiss National Bank monetary policy assessment.
The Swiss National Bank has no doubt been emboldened by its success in dissuading the population from voting in favor of a referendum that would have forced it to lock up a large chunk of its reserves in gold. It ensures that rates will stay at zero and that the SNB will continue to impose its cap on the Swiss franc’s value versus the euro.

NORWAY: 4 a.m. EST. (10 a.m., Oslo) Norges Bank monetary policy decision and presentation of Monetary Policy Report.
Norway is another country for which the falling price of oil will have a negative economic impact. Will it be enough to push the Norges Bank into another monetary easing?


–5:30 a.m. EST. (1:30 p.m, Moscow). Central Bank of Russia Board of Directors meeting on monetary policy issues.
–Time N/A. Central Bank of the Russia weekly international reserves. [Previous week gold, forex reserves, $420.5 billion.]

Russia is in the midst of a crisis. With the falling oil price combining with the crippling effect of sanctions, the ruble has been in a freefall. The central bank is at loss. It abandoned its targeted exchange rate but then felt compelled to intervene to support the currency, but the force of selling proved too big for it last week. The reserves data will still reveal a large stockpile but the government will need that if strategically important companies start having trouble paying their dollar debts.

CANADA: 8 a.m. EST. Bank of Canada Governor Stephen Poloz speech at the Economic Club of New York.
Does the decline in oil prices put a big enough dent in the revenues of Canada’s increasingly important energy sector that it pushes the BOC to delay rate hikes even after the Fed goes through with its increase? It’s a key question for Mr. Poloz.

U.S: 8:30 a.m. EST.
–November retail sales. [Expected +0.4% on-month vs. +0.3% in October; ex-autos expected +0.1% vs. +0.3%.]
–Unemployment Insurance Weekly Claims Report – Initial Claims. [Expected 297,000, unchanged from prior week.]

A disappointing Black Friday sales result at the end of the month could hold back a retail sales number that is otherwise likely to be boosted by booming auto sales. And overall, the continued expected strength in the labor market, likely to be reconfirmed with a sub-300,000 initial claims readout, bodes well for stronger retail sales as holiday shopping continues into December.


CHINA: 12:30 a.m. (1:30 p.m., Beijing)

–November industrial output. [In October, industrial output was +0.52% on-month, +7.7% on-year,.]
–November retail sales. [In October, retail sales were +0.98 on-month, +11.5% on-year.]

As manufacturing and heavy industry slow, China needs consumption to pick up the baton of growth. And although retail sales are growing at a healthy double-digit clip, it’s not clear that Chinese consumers can buy enough stuff to close an output gap that’s pushing the economy into a slower growth scenario.

WORLD: 4 a.m. EST. (10 a.m., Paris) International Energy Agency issues its monthly oil market report.
The third of three key reports on the state of the oil market. By now jittery oil traders will have had a wealth of data with which to determine whether crude prices are finally reaching a bottom after weeks of sharp declines.

U.S.: 8:30 a.m. EST. November producer price index. [Expected PPI -0.1% on-month vs. +0.2% in October; core PPI expected +0.1%0 on-month vs. +0.4%.]

The big factor here is the fall in oil and gasoline prices, which inevitably will drag down the headline PPI number. There may also be evidence that lower energy prices are by now bleeding into the overall index and imposing broader disinflationary effects. That trend will continue to give the Fed wiggle room and allow it to take its time in pushing rates higher.

U.S.: 10 a.m. EST. Thomson Reuters / University of Michigan December mid-month November consumer sentiment index. [Expected 90.1 vs. 88.8 end-October.]

The stars are aligned for continued improvement in consumer sentiment: gasoline prices are much lower, stocks are hitting records, the job market is improving.

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