Oil Slides Amid Continued Uncertainty in Demand Outlook

Economic

Commodity

Summary:

Oil prices dropped amid global demand uncertainty, despite the Israel-Hamas conflict adding a risk premium. Israel plans an assault on Rafah, and Houthi attacks in the Red Sea continue, impacting the oil market.

Global oil prices experienced a decline on Tuesday due to uncertainties surrounding the outlook for global demand, despite some risk premium stemming from the Israel-Hamas conflict. Brent futures dropped to $83.34 a barrel, while U.S. West Texas Intermediate (WTI) crude for April delivery fell to $78.20 a barrel. The market reflected a cautious sentiment as concerns about demand overshadowed geopolitical tensions in the Middle East.

The six-month spread for Brent reached its highest level since October, indicating a tighter market. However, the overall sentiment remained subdued, with crude markets experiencing marginal losses amid quiet trading during the Presidents' Day holiday in the U.S. The ongoing conflict between Israel and Hamas in Gaza added a layer of uncertainty, with the potential for escalating tensions to disrupt shipping lanes in the region.

Despite the geopolitical risks, investors were primarily focused on the bearish outlook for global oil demand. The International Energy Agency (IEA) recently revised its 2024 oil demand growth forecast downward, projecting a lower increase compared to OPEC's outlook. While the IEA anticipated a growth of 1.22 million barrels per day (bpd) this year, OPEC's forecast stood at 2.25 million bpd.

The conflicting views between the IEA and OPEC regarding the future of oil demand highlighted the ongoing transition towards renewable and cleaner energy sources. The IEA suggested that oil demand could peak by 2030, while OPEC anticipated a continued rise in oil consumption over the next two decades. This divergence in perspectives underscored the broader shift towards sustainable energy practices and the challenges facing traditional oil producers in adapting to changing market dynamics.

From a technical standpoint, the fluctuations in oil prices and market sentiment underscore the complex interplay between geopolitical events, supply dynamics, and evolving demand patterns. The uncertainty surrounding global economic recovery post-pandemic, coupled with the transition towards cleaner energy sources, has introduced additional volatility into energy markets. Investors and industry stakeholders are closely monitoring developments in key oil-producing regions and assessing the implications for supply chains and pricing mechanisms. Oil Slides Amid Continued Uncertainty in Demand Outlook_1

Oil Slides Amid Continued Uncertainty in Demand Outlook_1

The current landscape of the oil market reflects a delicate balance between geopolitical tensions, demand uncertainties, and the broader transition towards sustainable energy solutions. As stakeholders navigate these challenges, the need for strategic planning, innovation, and collaboration becomes increasingly paramount in ensuring a resilient and adaptive energy sector for the future.

Source: Reuters

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Samantha Luan

Despite dropping its tightening bias at its February gathering, the Bank of England (BoE) maintained a more hawkish stance than the Fed and the ECB, pushing back against interest rate cuts. At the press conference following the latest decision, Governor Bailey said they are not yet at a point where they can lower borrowing costs, adding that policy needs to stay sufficiently restrictive for sufficiently long.

However, this was before last week's barrage of economic data, with the highlight being the preliminary GDP numbers for Q4, which revealed that the economy contracted by more than anticipated, officially entering a technical recession. This weighed on the British pound, which had already been hurt the day before, after the CPI figures suggested that inflation held steady in January, confounding expectations of a small acceleration.

How Does A UK Recession Affect The Pound's Fate?_1

However, the market's BoE implied path was not lowered. In other words, investors did not bring forward their rate cut bets. Currently, they are pricing in around 70bps worth of reductions by the end of the year, with the first quarter-point cut penciled in for August. Even after the notable upward adjustment to its interest rate projections regarding the Fed, the market still holds a more hawkish – or less dovish – view about the BoE. How Does A UK Recession Affect The Pound's Fate?_2

How Does A UK Recession Affect The Pound's Fate?_2

Has the UK economy turned a corner in 2024?

But why is that? One reason may be that, despite the latest slowdown, inflation in the UK remains stickier than other major economies, with the core rate at 5.1%, more than 2.5 times the BoE's objective of 2%. On top of that , wages have slowed by less than expected, with the rate of average weekly earnings excluding bonuses coming in at 6.2% y/y in December, well above the CPI rates. This still presents some upside risks to the inflation outlook for the months to come . Last but not least, retail sales for January accelerated to their fastest pace in nearly three years, which combined with the improvement in the PMIs for the month, adds to hopes that the economy may have started turning the corner.

How Does A UK Recession Affect The Pound's Fate?_3

The confirmation of a recession in the second half of last year seems to be having more political than economic importance, as it's a heavy blow to Rishi Sunak's popularity ahead of an expected general election later this year. Voters appear to have not been convinced that his The plan of cutting taxes is working, shifting their trust of the economy to the Labor Party, according to opinion polls.

Just after the GDP data, finance minister Jeremy Hunt said that there were signs the economy is turning a corner and that they must stick to their plan. This means that at least until the election, the fiscal mentality of the government may continue to work against the BoE's efforts to tackle elevated inflation, thereby prompting the central bank to keep interest rates higher for longer, as officials have been already communicating. Just last Wednesday, BoE Governor Bailey said that he still wanted more evidence that inflation pressures were abating, corroborating the notion that the Bank's focus remains on price data.

Heading into elections, what's next for the pound?

With all that in mind, should upcoming data confirm the narrative that the UK economy is growing again, investors are likely to further push back their rate cut bets, which could prove supportive for the pound. Considering also that due to the UK's twin deficit, the currency has developed a correlation with risk-sentiment, further advances in the equity world could offer an extra help. The opposite may be true if the economy continues to struggle, even with the government abiding by its tax-cut plan.

Having said all that, closer to the elections, which need to be held before January, the uncertainty about the change in fiscal attitude may have a negative impact on sterling. The leading Labor party has been portraying itself as the party of fiscal responsibility and thus , scrapping the Conservative's agenda may prompt the BoE to start loosening monetary policy sooner.

From a technical standpoint, pound/yen has been trading in a steep uptrend since March 2020. Last week, the pair confirmed a higher high, entering territories last tested back in the summer of 2015, suggesting that the bulls may be willing to continue marching north. How Does A UK Recession Affect The Pound's Fate?_4

How Does A UK Recession Affect The Pound's Fate?_4

The pair may correct lower should the Japanese authorities step in to support the yen, but the retreat may remain limited and short-lived if the BoJ keeps pushing against speculation of a rate hike soon and if data continues to suggest that the UK economy has turned the corner. The next area to consider as a potential resistance may be at around 195.00, near the highs of July and August 2015. For the outlook of this pair to change, a dive all the way below 178.50 may be needed.

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Zi Cheng

Traders' Opinions

Economic

Forex

At the onset of the year, Canadian consumer prices experienced a moderation, indicating progress in alleviating underlying pressures. This development is likely to grant the Bank of Canada increased flexibility to consider potential rate cuts in the near future.

According to Statistics Canada's report in Ottawa on Tuesday, the consumer price index climbed by 2.9% in January compared to the previous year, a deceleration from the 3.4% rise registered in the preceding month. This figure fell below the median estimate of 3.3% projected by economists in a Bloomberg survey and marks the first instance since June that the headline rate has fallen within the central bank's target range.

Canada Inflation Rate Cools More Than Forecast_1

On a monthly basis, the index remained unchanged, contrary to expectations of a 0.4% increase, following a 0.3% decline in December.

Both of the Bank of Canada's preferred core inflation measures exhibited a slowdown, averaging 3.35% compared to a downwardly revised 3.6% in the previous month, also lower than the 3.6% pace anticipated by economists. Bloomberg calculations indicate that a three-month moving average of these rates dropped to an annualized pace of 3.22% from 3.63% in December.

The January inflation data reflects further progress in disinflation following a stagnation at the end of the previous year. As the Bank of Canada evaluates the necessity of maintaining its policy rate at restrictive levels, this report is expected to alleviate concerns regarding the persistence of underlying inflation and the sluggish progression towards the 2% inflation target.

During their January discussions, Governor Tiff Macklem and other officials deemed the current monetary policy stance as adequately restrictive to attain the target, emphasizing the need for more time to restore price stability. They anticipate inflation to hover around 3% in the first half of the year before gradually subsiding and aligning with the target by the following year.

This report serves as the sole inflation update preceding the next rate decision scheduled for March 6. Economists widely anticipate officials to maintain policy rates at 5% for a fifth consecutive meeting, with the easing cycle projected to commence around mid-2024.

In January, the primary contributor to the deceleration in headline inflation was the decline in year-over-year gasoline prices by 4%. Excluding gasoline, the index moderated to 3.2% from the previous year, down from 3.5% in December.

The slowdown in grocery inflation, along with reduced airfare and travel tour prices, also contributed to the overall deceleration.

Among the components of the CPI basket, namely food, shelter, health and personal care, alcoholic beverages and tobacco, and cannabis products, four experienced growth rates above 3%, collectively constituting approximately 55% of the basket weights.

Inflation excluding food increased by 2.7%, while excluding food and energy, it rose by 3.1%.

Mortgage interest costs and rent remained the primary drivers of year-over-year price increases, with mortgage interest costs surging by 27.4% and rent rising by 7.9%.

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Ukadike Micheal

Forex

Economic

In January, the Consumer Price Index (CPI) inched up by 2.9% on a year-over-year basis, marking a deceleration from the 3.4% gain observed in December. The primary contributor to this slowdown was the decrease in year-over-year gasoline prices in January (-4.0%), in contrast to the rise recorded in December (+1.4%). Excluding gasoline, the headline CPI moderated to 3.2% year over year in January, down from the 3.5% growth in December. Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_1

Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_1

The decline in the year-over-year price growth for food purchased from stores in January (+3.4%) compared to December's figure (+4.7%) exerted downward pressure on the overall CPI. Additionally, lower prices for airfares and travel tours played a role in the headline deceleration.

On a monthly basis, the CPI remained unchanged in January, following a 0.3% decline in December. However, on a seasonally adjusted monthly basis, the CPI fell 0.1% in January, marking the first decline since May 2020. Gasoline prices experienced a notable 4.0% decrease in January compared to a 1.4% increase in December, primarily due to a base-year effect. This contrast was influenced by refinery closures in the southwestern United States following Winter Storm Elliott in January 2023.

Monthly gasoline prices continued to decrease in January 2024 (-0.9%) for the fifth consecutive month, with lower gas prices in Manitoba (-14.1%) contributing to the national decline after a temporary suspension of the provincial gas tax. While grocery prices remained elevated, their year-over-year growth slowed in January (+3.4%) compared to December's pace (+4.7%).

The deceleration in grocery prices was widespread, with various products such as meat (+2.8%), other food preparations (+4.2%), dairy products (+1.5%), bakery products (+4.0%), and fresh fruit (+1.9%) contributing to the slower year-over-year price growth in January. Conversely, certain food items, including soup (-2.1%), bacon (-8.4%), and shrimps and prawns (-3.4%), experienced year-over-year price declines in January.

Prices for airfares also witnessed a decline in January (-14.3%) compared with December's figure (-9.7%) on a year-over-year basis, typically reflecting the post-holiday season. On a monthly basis, prices fell in January (-23.7%) compared with December's increase (+31.1%).

Moreover, cellular services prices fell by 16.4% in January on a year-over-year basis, following a 26.8% decline in December. Monthly prices rose by 6.7% in January compared with December, as prices returned to earlier levels following promotions offered in November and December. Year over year, prices rose at a slower pace in January compared with December in nine provinces, with Alberta being the only province experiencing faster price growth due in part to higher electricity prices. Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_2

Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_2

In Saskatchewan, the cessation of the carbon levy collection in January 2024 contributed to the province's year-over-year price decline of natural gas (-26.6%).

From a technical viewpoint, the data indicates mixed trends in consumer prices, with certain categories experiencing declines, especially in the context of seasonal patterns and base-year effects. The fluctuations in prices for goods and services highlight the dynamic nature of inflation and its sensitivity to various economic factors. Policymakers and analysts will closely monitor these trends to gauge the potential impact on overall economic conditions and formulate appropriate strategies.

Source: Statistics Canada

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Alex

Commodity

Global Wheat Crisis: War, Weather, And Pandemic's Toll On Food Security_1

As dawn breaks over the golden fields stretching from Oklahoma to Texas, the amber waves of wheat tell a story far beyond their tranquil appearance. This narrative, unfolding amidst the chaos of the Russia-Ukraine conflict, a global pandemic, and extreme weather events, speaks of a commodity essential to our survival: wheat. The repercussions of these crises have sent shockwaves through global food prices, leading to a precarious situation that threatens food security worldwide, particularly in regions like Nigeria, where the stakes are even higher.

The Tumultuous Journey of Wheat Prices

In the wake of COVID-19, wheat prices saw an unprecedented surge, climbing from a modest $4 to a staggering $8, as nations grappled with the pandemic's immediate impacts. The situation intensified with Russia's invasion of Ukraine, propelling prices to soar over $13, reflecting the critical role these two nations play in the global wheat supply. However, recent developments hint at a stabilization, with the 2024 wheat harvest forward contract price in Oklahoma and Texas currently pegged at $5.50. This figure, while below the tumultuous highs, remains significantly above pre-pandemic levels, illustrating the lingering effects of the past years' events on wheat markets.

Global Wheat Dynamics: A Delicate Balance

The conflict between Russia and Ukraine has not only disrupted supply chains but also altered the landscape of global wheat production and exports. Russia has managed to increase its wheat production and exports, while Ukraine struggles with the loss of croplands and shortages of crucial inputs. Despite these challenges, global and U.S. wheat stocks-to-use ratios have remained stable, a testament to the resilience of agricultural systems. Yet, this balance is precarious. The aggressive export strategies adopted by Russia and Ukraine are impacting global prices, contributing to the current state of flux in wheat markets. Coupled with spikes in production input costs, including a notable rise in fertilizer and diesel prices, the agricultural community faces a daunting task.

Implications for Food Security: A Closer Look at Nigeria

The volatility of global wheat prices has far-reaching implications, particularly for countries like Nigeria, where the ripple effects exacerbate existing challenges. Rising inflation, the removal of fuel subsidies, and an increase in agricultural input prices post-COVID and post-conflict have compounded food insecurity. Nigeria, reliant on wheat imports, stands at the frontline of this crisis, grappling with the dual challenge of ensuring affordability and availability of food for its population. The scenario unfolding in Nigeria is a microcosm of the broader trends affecting agricultural communities worldwide, highlighting the interconnectedness of global food systems and the vulnerability of nations to disruptions in commodity markets.

In conclusion, the journey of wheat prices from the fields of Oklahoma and Texas to the global market encapsulates a complex narrative of resilience, uncertainty, and the relentless pursuit of stability in an ever-changing world. The Russia-Ukraine conflict, compounded by the effects of COVID-19 and extreme weather events, has reshaped the global food landscape, underscoring the importance of sustainable agricultural practices and robust food security policies. As the world navigates these turbulent waters, the lessons learned will undoubtedly shape the future of food production and distribution for generations to come.

Source：BNN

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Ukadike Micheal

Economic

Forex

Negotiated pay in the euro zone increased by 4.5% at the close of 2023, as reported by the European Central Bank (ECB), alleviating concerns of sustained inflation due to rising salaries. Despite remaining elevated, the fourth-quarter pay growth decelerated from the euro-area record of 4.7% in the previous quarter, as revealed by the ECB's negotiated wage indicator.

This quarterly gauge, analyzing non-harmonized country data, holds particular significance for policymakers in Frankfurt, who are closely monitoring labor costs to determine the opportune time for interest rate cuts. The modest slowing in wage growth at the end of 2023 provides reassurance that the feared wage-price spiral may not unfold in the euro zone, according to Carsten Brzeski, the global head of macro at ING. However, decisions on rate cuts are expected to hinge on the first-quarter wage growth data for 2024, set to be released in May.

ECB President Christine Lagarde emphasized the significance of salaries as a driving force in inflation dynamics, cautioning against premature policy decisions without assurance of a return to the 2% inflation target. While a forward-looking ECB tracker continues to signal strong wage pressures, agreements in the last quarter of 2023 suggest some leveling off.

In December, the ECB projected a gradual decline in nominal wage growth over time, expecting it to decrease from 5.3% in 2023 to 3.3% in 2026, measured in terms of compensation per employee. The forecast anticipates limited pay increases as firms pass higher costs to consumers at a slower pace. However, differing perspectives exist, with some officials, like Austria's Robert Holzmann, suggesting that companies may not absorb rising wage bills.

ECB Executive Board member Isabel Schnabel highlighted weak productivity as a factor exacerbating the effects of strong nominal wage growth on unit labor costs for firms. This raises concerns about firms passing higher pay costs to consumers, potentially delaying the return of inflation to the 2% target.

For the entirety of 2023, the ECB reported a negotiated wage increase of 4.5%, marking a significant uptick from 2.9% in 2022 and 1.4% in 2021.

From a technical viewpoint, the deceleration in negotiated wage growth may offer a delicate balance for policymakers, allowing for cautious optimism regarding inflationary pressures. However, the nuanced dynamics of wage growth, coupled with differing views on the extent to which firms can absorb increased labor costs, create complexities for the ECB's monetary policy decisions. As the market awaits further wage data in the coming quarters, the trajectory of negotiated pay will continue to play a pivotal role in shaping the central bank's approach to interest rates and overall economic stability.

The nuanced picture of negotiated pay growth in the euro zone presents both reassurance and complexities for policymakers, offering insight into the delicate balance between inflation concerns and the need for economic stimulus. The coming quarters will undoubtedly be critical in determining the trajectory of wage dynamics and their implications for the broader economic landscape.

Source: Bloomberg

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Samantha Luan

Economic

The Chinese returned from their Lunar New Year holiday having traveled and spent more this year than before the pandemic. The early trading hours were cheery, but enthusiasm left its place to doom and gloom quickly as the Chinese equities found it hard to extend gains on the back of looming Chinese problems, like deflation, aging population, a deepening property crisis and lost investors’ confidence. As such, yesterday’s 1% advance in CSI 300 couldn’t gain momentum today, even though China cut its 5-year LPR rate – which is the reference rate for mortgages – by most on record to prop up demand for its tumbling property market and hoping to stop the downturn. In vain, the equity markets didn’t react much. Nasdaq’s China real estate index continues its race to the bottom.

Equities in Europe however extended gains to a fresh ytd high, and the Stoxx 600 index continues to trade at a spitting distance from an ATH even though France lowered its growth forecast for 2024 to 1% and Germany announced a 0.3% contraction lately. The energy crisis and higher rates are eating into the old continent and the European Central Bank (ECB) is not sure it would start cutting the rates soon enough, given that inflation risks remain tilted to the upside. Rising shipping costs, upside pressure in oil prices and the softening Federal Reserve (Fed) cut expectations threaten the price stability and some European policymakers think that it’s safer to wait for more evidence that inflation is easing sustainably than acting prematurely and looking foolish.

This is certainly what keeps the US dollar appetite contained, and the other currencies somehow supported: the fear that a delay in Fed rate cut would translate into a stronger dollar, a stronger dollar would send a fresh wave of high inflation across the globe and the latter would delay other central banks’ rate cut plans as well. But the latter reasoning will be just enough to contain the buying pressure in the dollar, and not to reverse the greenback’s positive trend. The dollar index saw support near its 100-DMA yesterday and the EURUSD failed to clear its own 100-DMA to the upside. The diverging fortunes between the US – where growth remains strong – and the euro area – where growth is nowhere to be found – justifies an earlier ECB cut compared to the Fed, but the ECB will cut only and if only inflation remains on a falling path.

Anyway, back to the European stocks, the Stoxx 600 performed surprisingly well this year despite the sputtering euro area economies and no guarantee that the ECB will start cutting rates before summer. Some think that the European valuations are just below their long-term average which makes them much cheaper and somehow appetizing. But AI makes the American stocks shine brighter than the European diamonds. Nvidia, for example, is worth more than the entire German DAX index today and the AI premium is justified by massive, concrete AI investments and the tech companies’ high ROI. Therefore, even if the European stock valuations are more reasonable than the tech-heavy US peers, the upside potential that the US tech giants offer is incomparable to the European counterparts.

Across the Channel, the energy and finance-heavy British FTSE 100 refused to return to last year’s negative trend and rallied 3% since last week, Cable remains under pressure as the Bank of England (BoE) doves stand up against Bailey’s cautious stance regarding premature cuts. The Bank’s former economist said that ‘it’s one thing to have missed inflation on the way up, it’s quite another to then have crushed the economy on the way down’. Premature easing, however, is not a risk that the central bankers are willing to take. The latest Reserve Bank of Australia (RBA) meeting minutes revealed that the policymakers considered to hold rates steady or a case for a 25 bp hike (scary!). And the latest FOMC minutes due Wednesday will give more clarity on if and how the Fed members reacted to last year’s skyrocketing rate cut expectations. From what they publicly say, they think that the expectations went well ahead of themselves. There will hardly be a rate cut announced from a major central bank before June.

Today, Walmart and Home Depot earnings will serve as amuse-bouche before Nvidia’s much-expected results due after the bell tomorrow.

In energy, nat gas futures took another dive yesterday while American crude cleared the 100 and 200-DMA offers last week and is testing a major Fibonacci resistance to the upside. Trend and momentum indicators remain supportive of a further rise toward the $80pb level as tensions in the Middle East, the Chinese stimulus, and OPEC’s efforts to restrict supply are supportive factors for the bulls. On the opposite camp, the rising supply from countries outside OPEC, China’s inability to boost growth and slowing demand growth for fossil fuel are arguments that will make the bulls’ life harder above the $80pb mark.