U.S Producer Prices Rise in January

U.S. producer prices accelerated in January, boosted by strong gains in the cost of gasoline and healthcare, offering more evidence that inflation pressures were building up.

The report came on the heels of data on Wednesday showing a broad increase in consumer prices in January. The Labor Department said on Thursday its producer price index for final demand rose 0.4 percent last month after being unchanged in December.

In the 12 months through January, the PPI rose 2.7 percent after advancing 2.6 percent in December. A key gauge of underlying producer price pressures that excludes food, energy and trade services jumped 0.4 percent last month. The so-called core PPI edged up 0.1 percent in December.

It rose 2.5 percent in the 12 months through January, the largest increase since August 2014. The core PPI increased 2.3 percent in the 12 months through December.

The PPI report bolsters expectations that inflation will gain steam this year even though its correlation with consumer prices has weakened.

Economists believe that a tightening labor market, weak dollar and fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending will lift inflation toward the Federal Reserve’s 2 percent target this year.

The U.S. central bank’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot its target since May 2012.

U.S. financial markets were little moved by the data.

The Fed has forecast three interest rate increases this year, with the first hike expected in March. Most economists are, however, forecasting four rate increases this year because of rising inflation pressures.

FOOD PRICES FALL

Last month, the cost of hospital outpatient care surged 1.0 percent, the largest increase since August 2014, after gaining 0.1 percent in December.

Hospital inpatient care rose 0.3 percent. Overall, the cost of healthcare services shot up 0.7 percent in January. Those costs feed into the core PCE price index.

Wholesale goods prices increased 0.7 percent last month, after nudging up 0.1 percent in December. Gasoline prices, which rose 7.1 percent, accounted for nearly half of the increase in the cost of goods last month.

Wholesale food prices fell for a second straight month, with prices for prepared poultry posting their biggest drop in 14 years and chicken eggs declining by the most since December 2015. Core goods prices rose 0.2 percent for the second consecutive month.

Reuters

US weekly jobless claims rebound from near 45-year lows

The number of Americans filing for unemployment benefits rebounded from a nearly 45-year low last week, but remained below a level that is associated with a tightening labor market.

Initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 230,000 for the week ended Feb. 10, the Labor Department said on Thursday. Claims for the prior week were revised to show 2,000 more applications received than previously reported.

Claims fell to 216,000 in mid-January, which was the lowest level since January 1973. Economists polled by Reuters had forecast claims rising to 230,000 in the latest week.

Last week marked the 154th straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was much smaller.

The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. The tighter labor market is starting to exert upward pressure on wage growth, which will over time add to inflation pressures.

The Labor Department said claims for Maine were estimated last week. It also said claims-taking procedures in Puerto Rico and the Virgin Islands had still not returned to normal, months after the territories were slammed by Hurricanes Irma and Maria.

Last week, the four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 3,500 to 228,500.

The claims report also showed the number of people receiving benefits after an initial week of aid increased 15,000 to 1.94 million in the week ended Feb. 3. The four-week moving average of the so-called continuing claims fell 5,750 to 1.94 million.

CNBC.com

Ramaphosa elected president of South Africa

Cyril Ramaphosa was elected as South Africa’s president in a parliamentary vote on Thursday after scandal-ridden Jacob Zuma reluctantly resigned on orders from the ruling African National Congress.

South Africa’s main stock market index jumped nearly 4 percent, putting it on track for its biggest one-day gain in more than two years as investors welcomed Zuma’s resignation after nine years in office plagued by corruption allegations.

Reuters

Dollar Dives on Confidence, No Support from Fundamentals

Thursday February 15: Five things the markets are talking about

U.S bond yields have backed after an unexpected rise in U.S consumer inflation to its fastest pace in a year – the core’s +1.8% y/y print yesterday was higher than expected, but still below the Fed’s +2% target – making it more likely the Fed will raise interest rates three or more times this year. But, higher U.S rates have not been able to make the U.S dollar more attractive.

The dollar remains under pressure, building on yesterday’s slide in the Euro session, as the market seems to be losing confidence in the long-run state of the U.S economy.

The Dollar Index is down -0.5% and poised to log another three-year low if the decline persists as we head to U.S session open.

Without any new positive U.S demand or supply shocks that could change the landscape for the country’s economy, it’s easy to see the weak dollar story persisting.

For the dollar to rise with Treasury yields, which it has not been doing this year, there needs to be a return in relative confidence over the medium-term U.S.

Also yesterday, January retail sales fell unexpectedly in their biggest drop in 11- months, declining -0.3%, raising new concerns about the U.S economy as a weaker sale print will lead to lower expectations for Q1 GDP growth.

1. Stocks edge higher

The global stock rally is marching ahead as investors take in stride a jump in sovereign yields.

In Japan, the Nikkei posted a solid rise despite a stronger yen (¥106.31). The index ended up +1.5% overnight, after tumbling to a four-month low on Wednesday. The broader Topix advanced +1.0%.

Down-under, Australia’s S&P/ASX 200 rebounded +1.2% as the stock index’s energy component rallied +2.4% to reverse some of this month’s decline.

In a shortened session ahead of the Lunar New Year holiday, Hong Kong’s Hang Seng Index jumped +2%. Its rise of +5.4% this week has erased +50% of last week’s decline, its biggest fall in a decade.

Note: China, South Korea, Taiwan, Vietnam markets were all closed.

In Europe, regional indices continue their ascent higher, tracking another positive session in Asia and on Wall Street yesterday. The French CAC is +1% higher following earnings from a host of Index components. The Swiss SMI is underperforming after Nestle reported mixed results.

U.S stocks are set to open in the ‘black’ (+0.8%).

Indices: Stoxx600 +0.9% at 378.0, FTSE +0.7% at 7264, DAX +0.9% at 12455, CAC-40 +1.6% at 5248, IBEX-35 +1.3% at 9808, FTSE MIB +1.1% at 22687, SMI +0.2% at 8924, S&P 500 Futures +0.8%

2. Oil rises on Saudi commitment to withhold output, gold higher

Oil prices have rallied +1% overnight to extend their gains from yesterday’s session, lifted by a weak dollar and Saudi comments that it would rather see an undersupplied market than end a deal with OPEC.

Brent crude futures are at +$64.99 a barrel, up +63c, or +1%, extending Wednesday’s +2.6% climb. U.S West Texas Intermediate (WTI) crude futures are up +83c, or +1.4%, from Wednesday’s close at +$61.43 a barrel, adding to its +2.4% gain.

Oil markets have got a push from comments by Saudi Arabia, voicing support for output cuts backed by OPEC and other producers including Russia since 2017 in an effort to tighten the market and prop up prices.

OPEC Secretary General Barkindo said that preliminary data for January points to high compliance of cuts by producers.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar weakens and investors’ bank on the precious metal as a hedge against inflation. Spot gold is up +0.3% at +$1,354.34 an ounce and is heading for a fourth consecutive session of gains.

3. Sovereign yields rise

The yield on U.S 10-year Treasuries is nudging closer to +3%, continuing its steady advance from last year’s low of +2.01% in September.

Following this weeks U.S inflation data, and the potential implications that it has for the pace of Fed rate increases this year, the market will be closely scrutinize speeches later today by ECB policy makers to see whether the recent market turmoil will convince them to ease off plans to taper their bond purchases.

Note: Fed-fund futures show a +21% chance of at least four interest-rate increases by year-end, compared with +17% earlier this week.

In Germany, the 10-year Bund yield has gained +1 bps to +0.77%, the highest in more than two years on the biggest gain in a week.

4. Dollar dives again

The USD remains on the defensive despite higher U.S yields –the currency is usually highly correlated to short-term rates. Market seems to be reacting to concerns over weak U.S policies and/or diverging central bank policies as both the BoJ and ECB could begin tightening monetary policy.

The EUR/USD (€1.2467) probed the upper end this week’s and year range as the pair re-tested the €1.25 handle. Sterling (£1.4042) is a tad higher initially aided by reports that the E.U Commission was looking to ease the Brexit transition conditions. However, the E.U later refuted the reports. The pound is also finding support not only from the dollar’s weakness, but also a perceived higher probability that the current U.K government will serve its full five-year term.

USD/JPY (¥106.69) continues to trade atop of its 15-month lows as the pair probed below ¥106.20 overnight. Japan’s Finance Minister Aso comments that the yen’s strength is not abrupt enough to require intervention supported the yen’s rally.

In cryptocurrencies, bitcoin (BTC) is moving back toward $10,000, up +6% on the day at +$9,840 – the price had slumped some -70% in the past six weeks.

5. Crisis in the Northern Ireland

U.K PM Theresa May is facing a political crisis in Northern Ireland as the DUP, who are part of the government’s coalition, have stated there was “no prospect” of a power sharing deal and suggested a return to direct rule.

This crisis threatens to throw the Good Friday agreement into jeopardy and would be a significant blow to P.M May’s authority as she attempts to agree to a crucial Brexit deal over the Irish border.

Forex heatmap

Oil Rises After Smaller Buildup in Inventories and Soft USD

U.S. crude stocks rose less then expected last week, while gasoline stocks rose by more than analysts had forecast as refineries cut output, data from the Energy Information Administration showed on Wednesday.

Crude inventories rose by 1.8 million barrels in the week to Feb. 9, short of analysts’ expectations for an increase of 2.8 million barrels.


West Texas Intermediate graph

“With a big drop in refining activity as we descend deeper into maintenance season, we have seen a third consecutive build to crude stocks,” said Matt Smith, director of commodity research at ClipperData in Louisville, Kentucky.

U.S. crude futures rose on the news, with West Texas Intermediate up 42 cents to $59.61 a barrel as of 10:45 a.m. EST (1545 GMT). Brent gained 44 cents to $63.16 a barrel.

Gasoline stocks rose by 3.6 million barrels, more than double the 1.2 million-barrel gain forecast by analysts polled by Reuters.

via Reuters

U.S. CPI Rises More Than Forecast on Apparel Costs

U.S. consumer prices rose by more than projected in January as apparel costs jumped the most in nearly three decades, adding to signs of an inflation pickup that have roiled financial markets this month.

The consumer price index rose 0.5 percent from the previous month, above the median estimate of economists for a 0.3 percent increase, a Labor Department report showed Wednesday. Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent. It was up 1.8 percent from a year earlier, higher than the 1.7 percent estimate.

The figures may renew investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated, after wage figures earlier this month sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years. The 1.7 percent monthly gain in apparel prices, which account for about 3 percent of the CPI, was the biggest since 1990.

Other items contributing to the gain in CPI included rents and owners’ equivalent rent, which both rose 0.3 percent from December; medical care, up 0.4 percent; and motor vehicle insurance, which advanced 1.3 percent, the most since 2001.

The increase in the core CPI brought the three-month annualized gain to 2.9 percent, the fastest since 2011, according to data compiled by Bloomberg.

Retail Sales

A separate report showed U.S. retail sales unexpectedly fell in January and December figures were revised downward, suggesting consumer spending is on a slower track in the first quarter.

Including all items, the main CPI gauge rose 2.1 percent from a year earlier, the same pace as in December and exceeding forecasts for a 1.9 percent increase.

The report follows the Labor Department’s annual revisions to CPI last week that took the December monthly increase in the core index down to 0.2 percent, from an initially reported 0.3 percent. The December gain in the main index was revised upward to 0.2 percent from 0.1 percent.

Policy makers look at the core index to better gauge underlying inflation because food and energy prices tend to be volatile. The latest report showed energy prices rose 3 percent from the previous month and food costs advanced 0.2 percent.

The two main U.S. stock indexes endured wild swings last week on concerns that inflation would spur higher interest rates more quickly, boosting borrowing costs for companies. Even so, equities have recovered some ground, advancing for three trading sessions in a row through Tuesday.

Fed Outlook

While economists and investors have seen a Fed interest-rate hike in March as a near-certainty, the details of the latest CPI report could play a role in the timing and number of rate increases throughout 2018.

The central bank’s preferred gauge of inflation — a separate figure based on consumer purchases and issued by the Commerce Department — has mostly missed its 2 percent goal in the past five years. The measure excluding food and energy is also below the Fed’s target. January data are due for release on March 1.

Fed policy makers will also have February CPI data in hand before they next meet March 20-21 in Jerome Powell’s first gathering as chairman. Powell, speaking Tuesday at his ceremonial swearing-in, suggested that the central bank would push ahead with gradual interest-rate increases, and that officials “remain alert to any developing risks to financial stability.”

Retail sales fell 0.3 percent in January from the previous month, the most since February 2017, according to the Commerce Department, compared with the median estimate of economists for a 0.2 percent increase. December’s figures were revised to show little change, after an initially reported gain of 0.4 percent.

Other Details

  • Wireless-phone service prices fell 0.2 percent
  • Used-vehicle prices posted a 0.4 percent increase last month; the index for new vehicle costs fell 0.1 percent
  • The price of airfares fell 0.6 percent, the third straight drop
  • Cost of lodging away from home fell 2 percent
  • Average hourly earnings, adjusted for inflation, rose 0.8 percent from a year earlier, according to separate report Wednesday from Labor Department
  • The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services; about 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents

    Bloomberg

    Will it be a Valentines Day Massacre for the Dollar?

    Wednesday February 14: Five things the markets are talking about

    Are financial markets justified going from a growth story to an inflation narrative?

    Today’s U.S consumer price index (08:30 am) is being touted as one of the most significant economic releases in a number of years as capital markets seek to understand the recent plunges in global equities and sovereign bonds.

    With investors already on edge, they are expected to renew this months convulsion on any sign that U.S inflation is exceeding expectations at a rate that may entice the Fed to quicken its plans for tightening monetary policy.

    Already this month, after a stronger U.S non-farm payroll (NFP) print and wage numbers, investors have sent U.S Treasury yields aggressively higher and instigated a rout in equities that pushed them into the first correction in 18-months.

    Note: Market expectations are looking for the core-CPI (ex-food and energy) to rise +1.7% in January y/y compared with the +1.8% increase in December. U.S retail sales are also out this morning and are expected to have increased for a fifth consecutive month.

    A higher CPI will give the USD strength, lead to higher yields and lower equity prices, but a tepid headline print could cause more of a problem, especially with record short U.S 10-year treasury position and a market focusing on President Trump’s proposed budget and the rise in U.S twin deficits.

    Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

    1. Stocks mixed reaction

    In Japan, the Nikkei share average dropped to a fresh four-month low overnight as investor sentiment was again sapped by worries about U.S inflation data due this morning. The Nikkei ended -0.4% lower, its lowest closing since early October. The broader Topix fell -0.8%.

    Down-under, the Aussie S&P/ASX 200 index fell -0.3%, following a +0.6% rise on Tuesday. In S. Korea the Kospi closed out the overnight session up +1.1%, helped by a +3% jump in Samsung.

    In Hong Kong, shares rebound sharply ahead of Lunar New Year holiday. Trading will resume on Feb 20. At close of trade, the Hang Seng index was up +2.27%, while the Hang Seng China Enterprises index rose +2.14%.

    In China, stocks rebounded overnight, but volumes were thin, as many traders had already left for the weeklong Lunar New Year holiday. Chinese markets will reopen on Feb. 22. At the close, the Shanghai Composite index was up + 0.46%, while the blue-chip CSI300 index was up +0.8%.

    In Europe, regional indices trade higher across the board following a rebound in Wall Street yesterday and strength in U.S futures this morning.

    U.S stocks are set to open in the black (+0.4%).

    Indices: Stoxx600 +0.7% at 373.2, FTSE +0.7% at 7216, DAX +0.7% at 12286, CAC-40 +0.6% at 5139, IBEX-35 +0.5% at 9693, FTSE MIB +0.2% at 22071, SMI +0.9% at 8832, S&P 500 Futures -+0.4%

    2. Oil dips on looming oversupply and weak U.S dollar, gold higher

    Oil prices have dipped overnight, pressured by lingering oversupply including rising U.S inventories. However, the prospect of Saudi output dropping next month, economic growth hopes and a weaker U.S dollar all combined to limit losses.

    Brent crude futures are at +$62.68 per barrel, down -4c. Brent was above +$70 a barrel earlier this month. U.S West Texas Intermediate crude futures are at +$59.06 a barrel, down -13c from yesterday’s close. WTI was trading above +$65 in early February.

    On Wednesday, the Saudi energy ministry said that Saudi Aramco’s crude output in March would be -100k bpd below this month’s level while exports would be kept below +7m bpd.

    Stateside, yesterday’s API report showed that U.S crude inventories rose by +3.9m barrels in the week to Feb. 9, to +422.4m.

    Note: That is due to soaring U.S crude production, which has jumped by over +20% since mid-2016 to more than +10m bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

    Oil traders will take their cue from today’s EIA print (10:30 am EDT) and U.S inflation release.

    Ahead of the U.S open, gold prices have rallied for a third consecutive session overnight to hit a one-week high, buoyed by a weaker U.S dollar, while the market awaits U.S inflation data for clues on the pace of future Fed rate increases. Spot gold is up +0.3% at +$1,332 an ounce.

    3. Sovereign yields little changed

    Earlier this morning, Sweden’s Central Bank (Riksbank) kept their repo rate unchanged at -0.5%. Deputy governor Henry Ohlsson voted to raise rates, but the central bank’s signals on inflation were more downbeat. The inflation forecast for this year was downgraded to +1.8% from +2%. The statement indicated that policy makers would start raising the rate in H2 of 2018. Policy makers stressed that was important not to raise the rate too early and was committed to stimulus to prevent inflation setbacks.

    Elsewhere, fixed income seeks guidance from today’s U.S CPI release. The yield on U.S 10-year Treasuries fell less than -1 bps to +2.83%. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, while in the U.K, the 10-year Gilt yield dipped -1 bps to +1.618%. In Japan, the 10-year JGB yield decreased -1 bps to +0.07%, the lowest in more than five weeks.

    4. Dollar on soft footing

    The USD remains on soft footing ahead of key Jan CPI data for the U.S.

    The EUR/USD is steady, trading atop of the €1.2350 area after various European GDP data highlighted better economic growth prospects (see below).

    USD/JPY tested ¥106.85 overnight for 15-month lows. The pair came off its worst level to approach 107.50 just ahead of the N.Y session after Japanese officials reiterated that they had no comments on forex levels.

    In S. Africa, political optimism that President Zuma would resign has sent the ZAR currency to its best level in nearly two-years outright. The South African Democratic Alliance (DA) leader Maimane (opposition) has stated that its motion to dissolve parliament was processed by Speaker. USD/ZAR is at $11.85 ahead of the open stateside.

    The Swedish krona has been volatile after the Riksbank interest rate decision. The krona briefly rose soon after the announcement, but has since pared those gains EUR/SEK last trades flat on the day at €9.9163, compared with €9.8952 before the decision.

    5. Euro-zone economy ends 2017 on a high note

    Note: There were a number of European GDP releases in the Euro session highlighting better economic growth prospects – Germany mixed; Netherlands beat and Italy a miss.

    Industry helped drive the euro-zone’s +0.6% expansion in Q4. This morning’s ‘flash’ estimate of Q4 GDP is the second release and confirms that quarterly growth slowed a tad from Q3’s +0.7% to +0.6%.

    There is no breakdown until the next release; however, expenditure evidence would suggest that weaker consumer spending growth was the main driver of the slowdown, while investment expanded after Q3’s contraction and net trade again made a positive contribution to growth.

    Digging deeper, industry appears to have made a stronger contribution to GDP growth than in Q3. Following the consensus-beating +0.4% monthly rise in IP in December.

    Forex heatmap

    US Dollar Rout Continues With Inflation Data in the Horizon

    Safe haven flows after the stock market collapse favour JPY and CHF

    The US dollar is once again on the back foot on Tuesday. The currency is softer against major pairs ahead of key US inflation data for January. The U.S. Federal Reserve along with traders will be looking at the consumer price figures for signs of higher inflation and further validations of their plans to keep raising US interest rates in 2018. The U.S. non farm payrolls (NFP) report earlier in the month boosted the USD with a positive wage growth signal at 0.3 percent monthly gain. The market will be watching the core CPI released on Wednesday, February 14 at 8:30 am EST looking for confirmation.

    • US January inflation expected to underperform
    • US Oil producers putting downward pressure on prices
    • US inflation trend to continue on Thursday with the release of the PPI



    The EUR/USD gained 0.52 percent on Tuesday. The single currency is trading at 1.2355 ahead of the release of monthly inflation and retail sales data in the US. The U.S. Federal Reserve is expected to lift rates 3 or more times this year, but to do so it would need inflation in the US to pick up, as this was the biggest debate within the central bank last year. Doves within the Federal Open Market Committee (FOMC) are pushing for more patience, until inflation rises, while the hawks who lost Chair Yellen as their biggest supporter would rather raise rates sooner rather than later. The core consumer price index, the Fed pays more attention to this data point that excludes food and energy, is expected to come in at 0.2 percent. Retail sales are forecasted to have gained 0.2 percent in January, but the core reading to have advanced by 0.5 percent by removing auto sales.

    The tumble in stocks prices has had a negative effect on the confidence in the US economy. The employment report released on February 2 posted higher than forecasted number of jobs and more importantly hourly wages rose by 0.3 percent. Several dollar rallies that started with a strong employment report have been cut short by disappointing inflation and retail sales data. This time around the USD has not been able to find solid footing in 2018. With a stock market correction and bond yields at four year highs inflation takes a more important role as it could solidify the case of Fed hawks and make way for a 4 rate hike scenario. The USD has been impacted by improving growth around the globe and other central banks have hiked or signalled and end to low rates cutting the lead of the U.S. Federal Reserve and reducing the attractiveness of the dollar. A higher than expected inflation figure could trigger a US currency recovery alongside a drop in the stock market as higher rates would be forthcoming. Vice versa a lower than expected consumer price gain could sink the dollar even lower as the market is already pricing in 3 rate hikes and could start reevaluating that position with weak inflationary pressures.

    European politics have reached some stability with the German coalition now in place but with the upcoming Italian elections in March the boat is sure to rock. Economic fundamentals have been strong in the eurozone with Germany leading the way as usual. The gap between the U.S. Federal Reserve and the European Central Bank (ECB) is closing with regarding monetary policy. The ECB is expected to end its QE program and could even lift interest rates later this year. The week will bring minor indicator releases in Europe with the German central bank chief Jens Weidmann speaking in Frankfurt on Wednesday, February 14 at 3:00 am EST. Earlier that day the GDP figures for Germany will be released with a 0.6 percent growth expected.



    The USD/JPY lost 0.84 percent in the last 24 hours. The currency pair is trading at 107.73 as the JPY has benefited from risk aversion and risk appetite moves. Usually the USD is the main beneficiary of a risk aversion move, but given some of the global uncertainty is happening in Washington and Wall Street the greenback is not the sturdiest safe haven for investors. The USD is soft ahead of inflation and retail sales data with both having to overcome concerns.

    The Japanese Prime Minister Shinzo Abe is expected to reappoint Haruhiko Kuroda as the head of the Bank of Japan (BOJ) for his second term and that in itself could be a sign the central bank is ready to start dealing back some of its massive stimulus program.

    Market events to watch this week:

    Wednesday, February 14
    8:30am USD CPI m/m
    8:30am USD Core CPI m/m
    8:30am USD Core Retail Sales m/m
    8:30am USD Retail Sales m/m
    10:30am USD Crude Oil Inventories
    7:30pm AUD Employment Change
    Thursday, February 15
    8:30am USD PPI m/m
    Friday, February 16
    4:30am GBP Retail Sales m/m
    8:30am USD Building Permits

    *All times EDT
    For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

    US Shale Producers Could Wreck OPEC Led Oil Price Stability

    Big oil producing nations have nearly achieved their goal of draining a prolonged oil glut after taking some bitter medicine: cutting the crude production that funds their governments.

    But with victory in sight, U.S. drillers are poised to spoil OPEC’s plans for the second time in three years.


    West Texas Intermediate graph

    On Tuesday, the International Energy Agency warned that surging U.S. production could delay OPEC’s bid to balance the long-oversupplied oil market. It’s another sign that the 14-member cartel will have to adjust to a market whose ups and downs are increasingly influenced by U.S. shale oil.

    The IEA’s warning came in the latest monthly report from the Paris-based adviser to energy producers — the first it has issued since U.S. government data showed America’s oil output topped 10 million barrels a day in November, roughly matching the all-time record set in 1970.

    via CNBC

    USD Under Pressure as Traders eye U.S Inflation

    Tuesday February 13: Five things the markets are talking about

    Euro equities are trading steady despite a late down swing in Asia, as investors wrestle to find direction after this month’s early collapse.

    The dollar has weakened against G10 currency pairs while Treasuries have edged a tad higher along with gold. Crude is heading for its first advance in eight sessions.

    Investors are looking to tomorrow’s U.S. consumer-price data for some clues on direction, given that pressure on stocks have been stemming from the outlook for inflation.

    The market is expecting U.S consumer-price index to probably increase at a moderate pace last month along with U.S retail sales – both due out tomorrow.

    Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

    1. Stocks mixed review

    In Japan, the Nikkei share average closed at a four-month low overnight as investors turned somewhat risk averse as the yen rallies outright. The Nikkei ended -0.7% lower, its lowest closing level in four months.

    Down-under, Aussie shares tracked Wall St into positive territory. The S&P/ASX 200 index rose +0.6% at the close of trade, after a -0.3% yesterday. In S. Korea, the Kospi climbed +0.35%.

    In Hong Kong, stocks rose overnight, tracking a global rebound, on bargain hunting. At close of trade, the Hang Seng index was up +1.29%, while the Hang Seng China Enterprises index rallied +0.88%.

    In China, stocks rebounded, supported by investor sentiment aided by signs of government support and record bank lending last month. At the close, the Shanghai Composite index was up +1%, while the blue-chip CSI300 index was up +1.19%.

    In Europe, regional indices trade mostly lower taking the lead from weaker U.S futures. The FTSE trades little changed following a slightly hotter CPI reading, as Gilt yields pare declines.

    U.S stocks are set to open in the ‘red (-0.6%).

    Indices: Stoxx600 -0.1% at 372.7, FTSE flat at 7173, DAX -0.1% at 12266, CAC-40 -0.1% at 5133, IBEX-35 -0.6% at 9708, FTSE MIB -0.5% at 22215, SMI -0.3% at 8799, S&P 500 Futures -0.6%

    2. Oil prices firm on weaker dollar, gold higher

    Oil prices are better bid, supported by a rebound in global equities, as well as by a weaker dollar, which potentially supports more fuel consumption.

    Brent crude futures are at +$62.97 per barrel, up +38c, or +0.6% from Monday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$59.60 a barrel, up +31c or +0.5% from yesterday’s settlement.

    The stronger prices came after crude registered its biggest loss in two years last week as global stock markets slumped.

    Nonetheless, rising U.S production continues to undermine the efforts led by the OPEC and Russia to tighten markets and prop up prices.

    Note: U.S oil production has rallied above +10m bpd, overtaking top exporter Saudi Arabia and coming within reach of top producer Russia.

    There are also strong signals the output will rally further. Data last Friday showed that U.S energy companies added 26 oilrigs looking for new production, boosting the count to +791, the highest since April 2015.

    Gold prices have hit a one-week high overnight, aided by a weaker dollar and as the market awaits for tomorrow’s U.S inflation data for clues on the pace of interest rate hikes. Spot gold is up +0.4% at +$1,327.81 an ounce.

    Note: Yesterday, the yellow metal rose +0.5%, its biggest single-day percentage gain in more than one week.

    4. Sovereign yields fall

    G7 sovereign bond yields look attractive across the curve after yields rallied on a recovering global economy and on expectations central banks will tighten policy faster than previously thought.

    With the lack of economic market news the fixed income market looks attractive and reason why yields fell in the overnight session.

    The yield on U.S 10-year Treasuries fell -3 bps to +2.83%, the biggest drop in more than a week. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, the lowest in a week, while in the U.K the 10-year Gilt yield has dipped -1 bps to +1.601% despite the higher inflation print (see below).

    4. Sterling reaction muted

    The pound (£1.3896) has edged a tad higher after U.K January annual inflation unexpectedly remained at +3% (see below) as worries about the U.K. getting a transitional deal after breaking up from the E.U persist. EUR/GBP trades down -0.1% at €0.8868. Although the high inflation number will add to expectations for another BoE hike, futures prices would suggest that the market has priced in two rate increases for the next 12-months.

    Note: PM Theresa May’s government will aim to address the Brexit transition in a series of six speeches by the prime minister and other senior ministers in the next few weeks, which her office dubbed “The Road to Brexit.” May’s first speech is to be delivered at a conference in Munich next Saturday, while Foreign minister Boris Johnson will begin the series with a speech tomorrow.

    Elsewhere, the USD is modestly lower as President Trump’s proposed budget brings into focus the U.S twin deficits. The EUR/USD (€1.2337) is higher by +0.2%, while USD/JPY (¥107.55) is lower by -0.9% as fixed income dealers ponder the limits of an expansionary BoJ policy.

    5. U.K inflation above target in January

    Data this morning showed that U.K consumer prices rose +3% y/y in January. This headline print suggests that the Bank of England (BoE) case for higher borrowing costs is somewhat justified to bring borrowing costs back to its +2% annual goal.

    The ONS said that the price gains were driven by clothing, footwear and recreational goods and services, especially tickets for zoos and gardens.

    Note: Market consensus was expecting annual inflation in January to slow to +2.9%, from +3% m/m.

    U.K Inflation has been above the BoE’s +2% annual target for 12-consecutive months. Last week the BoE said that they expected to raise interest rates at a swifter pace than they anticipated last year to contain growth in prices.

    Note: The BoE raised its benchmark rate for the first time in a decade in November, to +0.5%. Futures prices suggest that the central bank will lift it again as soon as May.

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