[Fed] Powell's Press Conference Speech

Asia's imports of crude oil slipped slightly in April from March, as increased arrivals in China failed to offset lower purchases elsewhere in the world's top-importing region.

April imports were 26.89 million barrels per day (bpd), down from 27.33 million bpd in March and roughly in line with February's 26.68 million bpd, according to data compiled by LSEG Oil Research.

For the first four months of the year Asia's crude imports were about 27.03 million bpd, only 300,000 bpd higher than for the same period in 2023, the LSEG data showed.

This means that crude oil arrivals in Asia are growing at a pace that is so far well short of the forecast by groups such as the Organization of the Petroleum Exporting Countries (OPEC).

OPEC's April oil market outlook forecast that global oil demand will rise by 2.25 million bpd in 2024 from the previous year, with 1.24 million bpd of that coming from non-OECD countries in Asia.

China, the world's largest crude importer, is expected by OPEC to see demand increase by 680,000 bpd in 2024.

However, using official customs data for the first quarter and LSEG's estimate for April imports, China's crude arrivals for the January-April period were about 11.17 million bpd, which is 290,000 bpd higher than the customs data for the same period last year.

It should be noted that there is a difference between crude oil imports and demand growth, as the total demand figure can be met from more than just imports such as domestic production and changes in inventories.

Nonetheless, the slower pace of imports in China and the rest of Asia suggest that demand growth is so far nowhere near as strong as the OPEC forecast indicates.

It should also be noted that OPEC, and other analysts, expect demand growth to accelerate over the northern summer months and extend into the second half of 2024, largely on the view that China's economy is recovering growth momentum and the rest of the world is emerging from its inflation-linked slowdown.

The International Energy Agency (IEA) has a more modest target for global oil demand growth, with its April report estimating 1.2 million bpd for 2024.

The IEA's forecast for China's oil demand growth is 500,000 bpd for 2024, meaning it is also significantly above the current growth rate in China's imports.

The question then becomes are China's crude imports likely to increase in coming months, and the answer likely depends on movements in crude prices as much as it may on China's improving economy.

China's recent pattern of crude imports has been that they increase when oil prices soften and ease back when they increase, allowing for a lag of around two months to account for when cargoes are arranged and physically delivered.

This means that much of the oil that was offloaded in the first four months of the year was bought when crude prices were still soft.

Global benchmark Brent futures hit a six-month low of $72.29 on Dec. 13, and then recovered to trade in a range around $80 for much of the first quarter.

Rising geopolitical tensions and extended output cuts by the OPEC+ group, which includes OPEC and allies such as Russia, led Brent higher from mid-March onwards, with the contract peaking at $92.18 on April 12.

This means the impact of the price spike from mid-March onwards has yet to show up in China's import figures, and it will likely only be a factor from May onwards.

What happens to China's imports in May, June and July will go some way towards answering the question as to whether China's economic recovery is strong enough to ameliorate the impact of higher oil prices.

The US is not suffering from “stagflation” and is growing well despite stubborn inflation, Federal Reserve chairman Jerome Powell has said.

Mr Powell on Wednesday night dismissed suggestions that the US was close to an economic trap of stagnant growth and rampant inflation, saying the economy was among the best in the world and the rate of price rises was on track to fall to the Fed’s 2pc target.

The central bank chief added that it was “unlikely” the Fed would need to raise interest rates any higher to combat inflation, in comments that raised hopes borrowing costs have peaked and will soon be on the way down.

Stock markets rallied after Mr Powell’s statements, which took investors by surprise. Most had expected him to signal that the Fed was still willing to put up borrowing costs if necessary after a recent run of strong economic data.

The S&P 500, the Dow and the tech-heavy Nasdaq indexes all jumped by more than 1pc on Wall Street following Mr Powell’s press conference comments.

Josh Jamner, a strategist at ClearBridge Investments in New York, said: “Many investors were positioned for, and fearful of, a more hawkish bent after a string of hot inflation prints so far this year.”

Mr Powell’s rosier-than-expected assessment of the US economy will raise hopes that interest rates will soon begin falling around the world. The Bank of England’s Monetary Policy Committee meets next week, with division on the nine-person board over when to lower rates.

The Bank’s panel of rate-setters is expected to hold borrowing costs at 5.25pc, even as many analysts believe inflation will have fallen below 2pc in April.

The Fed on Wednesday held US interest rates at a 23-year-high range of 5.25pc to 5.5pc.

Mr Powell said it was still too early to declare victory against inflation after “a lack of further progress”. US inflation rose for the second month in a row in March to reach 3.5pc and Mr Powell said it was “likely to take longer for us to gain confidence that we are on a sustainable path” towards 2pc inflation.

He added that other central banks around the world were likely to cut interest rates before the US, given weaker growth rates elsewhere, but said this was unlikely to create economic problems as it has in the past.

Asked about concerns that the US economy was at risk of “stagflation”, the Fed chief told reporters in Washington: “Right now we have 3pc growth, which is pretty solid I would say by any measure, and we have inflation running under 3pc. I do not see the ‘stag’ or the ‘flation’.”

Market commentators last week raised fears of “stagflation” following weaker-than-expected growth in the first three months of the year coupled with surprisingly strong core inflation.

However, new figures on Wednesday showed that job openings fell to a three-year low in March, a sign that inflationary pressures from a tight labour market are easing.

Oil prices are also dropping rapidly, which should ease pressure on fuel prices around the world. Brent crude, the international benchmark, has fallen 6.6pc to $83.51 a barrel over the last three days, amid hopes of a ceasefire in the Israel-Gaza conflict.

While the US economy is performing well, fresh data on Wednesday raised concerns about the strength of Britain’s economic recovery from the recession suffered at the end of last year.

Manufacturing businesses reported a fall in activity in April, according to S&P Global’s influential purchasing managers’ index survey.

Output had risen in March for the first time in more than a year but the latest figures suggest factories are struggling to create momentum.

Companies are also facing the sharpest rise in costs since February of 2023, the survey found, and they are attempting to pass this on to customers, with prices charged to clients also accelerating.

Bitcoin is now trading below the average purchase price paid by short-term holders, potentially causing “panic” due to unrealized losses, according to an on-chain analyst.

“These recent buyers are statistically the most likely to panic,” analyst James Check, known as “Checkmatey,” said in a May 1 report.

“What a nuke we have on our hands to open the month of May,” Check added, referring to Bitcoin briefly plummeting 8% below a key support level to $56,814 on May 1, according to CoinMarketCap data.

The recent price drop saw Bitcoin hit its lowest level since February, which is significant for short-term Bitcoin holders — those who have held for under 155 days — as they paid an average price of $59,600 per Bitcoin.

Even though the price has slightly recovered to $57,631 at the time of publication, short-term holders still hold an average 3% unrealized loss.

Bitcoin’s price at the time of writing represents a decline of 4% in the past 24 hours. The sharp downturn led to the liquidation of $100.27 million in long positions over that time, according to CoinGlass data.

Its price decline was driven by a crypto sell-off as market participants awaited the United States Federal Reserve’s interest rate decision, which kept the current high interest rates unchanged, as analysts expected.

Check suggested that while holding an unrealized loss is not ideal, short-term Bitcoin holders have experienced this before.

“Most importantly, breaking the [short-term holder] cost basis isn’t the end of the world, nor the end of the bull market. It doesn’t help…but it is and has been recoverable,” he wrote.

The short-term holder cost basis typically acts as support during bull periods and resistance during bear periods, explained crypto trading resource On-Chain College in a May 1 X post.

However, it pointed to a few potential events that will not signal “the bull market is over.”

A “quick move” to $59,600, roughly 2.2% above Bitcoin’s current price, would be “bullish,” the On-Chain College claimed.

This is based on a similar pattern in June 2023, when the price dropped below cost basis and quickly rebounded before a significant upswing.

On-Chain College also noted that when Bitcoin’s price pulled back a few months later, in August 2023, it stayed volatile below the short-term cost basis for some time.

This suggests that a “sustained period” below the cost basis could also signal a bullish trend, according to On-chain College.

The Reserve Bank of Australia is no stranger to policy flip-flops and the May decision may just add to the tally. Having dropped their tightening bias as recently as the last meeting in March, policymakers are staring at an unpleasant inflation picture.

The monthly CPI reading ticked up to 3.5% y/y in March, while two closely watched underlying measures came in hotter than expected in the first quarter. Moreover, despite the labour market having somewhat cooled over the past year, wage growth has kept on accelerating, reaching 4.2% y/y in the fourth quarter of 2023.

The Q1 figure for wage costs isn't due until May 15 and the next CPI report will be released even later on May 29. Both pieces of data could be crucial to deciding whether the latest setback in the fight against inflation is just a blip or a warning that monetary policy is not restrictive enough.

Without the additional data, however, the RBA will probably maintain a neutral stance in May, keeping the cash rate at 4.35%. But the Bank will also publish its quarterly Monetary Policy Statement containing updated economic projections. In the previous report, the Bank did not see inflation falling within its 2-3% target band before the end of 2025.

It's unlikely that Governor Michelle Bullock would tolerate any further delay to meeting the inflation goal so the new forecasts may well provide a vital clue to future policy even if there's little modification to the statement.

Looking at the economy more broadly, recent indicators support a wait-and-see approach by the RBA. Employment unexpectedly fell in March while the jobless rate crept up slightly. Retail sales also defied forecasts of an increase, suggesting consumers remain cautious about spending.

But there's been a marked improvement in the services PMI since December and the housing market is booming again. More importantly perhaps for Australian exporters, China's economy seems to be on a steady path to recovery.

Yet, none of the above pose an outsize danger to inflation, so the main debate for board members will more likely be about how comfortable they are to let CPI run above the target for a prolonged duration rather than how to contain a resurgence.

If there is a hawkish tilt and the RBA reinstates its tightening bias, the aussie could recover above its moving averages and challenge the descending trendline around $0.6590. A step higher would bring the April peak of $0.6644 into range before attention shifts to the $0.6700 level.

In the scenario that the RBA overlooks the latest signs of price stickiness, the aussie could head back towards the April trough of $0.6360 before revisiting the October low of $0.6268.

With sticky inflation in the US also proving problematic for the Fed, there's already been a sharp repricing of rate cut expectations for the major central banks. For the RBA, investors have gone a step further and priced in around a 40% probability of a 25-basis-point rate increase by year end. Hence, a hawkish tone alone might not necessarily spur a significant reaction in the markets on Tuesday.

However, it is worth considering Governor Bullock's greater urgency in beating inflation compared to her predecessor. So a surprise rate hike cannot be completely ruled out, particularly as policymakers have the option of a smaller increase of 15 bps at their disposal.

U.S. oil and gas production rebounded sharply in February after extensive disruption the previous month caused by freezing wells and other outages stemming from Winter Storm Heather in the middle of January.

Nationwide crude and condensates output jumped by 0.6 million barrels per day (b/d) in February reversing a decline of 0.7 million b/d in January, according to data from the U.S. Energy Information Administration (EIA).

For 10 days between Jan. 13 and Jan. 23, centred around the winter storm, temperatures across the Lower 48 states were significantly colder than average for the time of year.

The storm had a relatively large impact on the country's top producing area in the Permian Basin in Texas and New Mexico with frozen equipment and crews unable to reach well sites.

But as the storm passed and normal operations were restored, output bounced back, causing a large jump in reported daily flows ("Petroleum supply monthly", EIA, April 30).

Production from the Lower 48 states excluding federal waters in the Gulf of Mexico surged by 0.5 million b/d in February after declining 0.6 million b/d the month before.

There are tentative signs that U.S. oil production is stabilising after the sharp fall in prices between the middle of 2022 and the middle of 2023.

Lower 48 production was up by almost 0.7 million b/d in February compared with the same month a year earlier but there had been little or no growth in the last six months.

Front-month U.S. crude futures prices have averaged around $73-84 per barrel for the last six months, close to the long-run average since the start of the century, after adjusting for inflation.

Front-month futures prices have retreated from an average of more than $123 in June 2022, in the 82nd percentile for all months since 2000, four months after Russia's invasion of Ukraine.

In a delayed response to lower prices, the number of rigs drilling for oil has averaged 500-510 per month since September 2023 down from an average of 623 in December 2022.

Storm-related distortions will make identifying a change in trend difficult for another month or two, but there are signs the industry has found a new equilibrium after the shock caused by Russia's invasion.

Dry gas production rebounded by 2.3 billion cubic feet per day (bcf/d) in February after declining by 3.1 bcf/d in January owing to the storm ("Natural gas monthly", EIA, April 30).

Production in February had increased by 3.7 bcf/d or 3.7% compared with the same month a year earlier, even after adjusting for the extra day of output owing to the leap year.

But there had been essentially no growth in daily output since November, which could signal output is stabilising in gas too after an even more severe fall in prices.

Front-month futures prices have averaged less than $2 per million British thermal units since the start of 2024, the lowest in real terms since the futures contract began trading in 1990.

The number of rigs drilling primarily for gas averaged between 115 and 120 each month between September 2023 and February 2024, down from a post-invasion peak of 162 in September 2022.

So far, gas inventories have remained far above normal because of the exceptionally warm winter in 2023/24, which more than offset the impact of ultra-low prices and record gas consumption by power generators.

Inventories were almost 680 bcf (+39% or +1.46 standard deviations) above the prior 10-year seasonal average in late April 2024, according to weekly gas storage data from the EIA.

The surplus had swelled almost continuously from just 64 bcf (+2% or +0.24 standard deviations) at the start of winter on Oct. 1, narrowing only briefly during the winter storm in January.

In late February, however, several of the largest gas producers announced cuts to drilling programmes and/or output in an effort to reduce excess inventories and lift prices.

The number of rigs drilling for gas declined even further to an average of just 108 in April, the lowest since the pandemic and its aftermath in 2020/21 and before that the last gas glut in 2016.

Fewer rigs and increased consumption by power generators should eventually eliminated excess inventories, but the adjustment would be accelerated if there is a heatwave this summer boosting airconditioning.

As was widely expected, the FOMC left the fed funds target range unchanged at 5.25%-5.50% at the conclusion of its May meeting. It was evident, however, that the Committee believes inflation's return to its 2% objective likely has a somewhat longer and uncertain journey ahead. In the post-meeting statement, the Committee noted that "in recent months, there has been a lack of further progress" toward its 2% inflation goal. This setback in obtaining confidence that inflation is on a sustainable path back to 2% reinforces our view that any reduction to the fed funds rate remains at least a couple of meetings away.

The Committee announced that it will slow the pace of quantitative tightening (QT) starting on June 1. The monthly cap for Treasury security redemptions was reduced from $60 billion to $25 billion, while the monthly redemption cap for mortgage-backed securities (MBS) was left unchanged at $35 billion. The slow-but-don't-stop approach to balance sheet runoff is an attempt to keep normalizing the size of the Fed's balance sheet without creating money market stresses like the ones that occurred in September 2019. The move to a slower pace of QT was well-telegraphed by the Committee, and the outlook for the federal funds rate will be far more critical to determining the level and shape of the yield curve in the months ahead, in our view.

As universally expected, the Federal Open Market Committee (FOMC) voted unanimously at its meeting today to leave the target range for the federal funds rate unchanged at 5.25%-5.50%, where it has been maintained since last July (Figure 1). As is typical for the April/May FOMC meeting, the Committee did not release a Summary of Economic Projections, which contains the so-called "dot plot," at the conclusion of this meeting. Therefore, market participants need to infer the FOMC's intentions from its post-meeting statement and from the Q&A session in Chair Powell's press conference. In our view, these data points suggest the Committee is not in any rush to cut rates, a message that was delivered by numerous Fed officials in the weeks leading up to today's meeting (see our recent "Flashlight" report for further discussion.)

In that regard, the FOMC continues to have an upbeat assessment of the real economy. The post-meeting statement noted once again that "economic activity has continued to expand at a solid pace," that "job gains have remained strong" and that "the unemployment rate has remained low." Furthermore, the Committee continues to acknowledge that "inflation has eased over the past year," although the statement noted for the first time that "there has been a lack of further progress toward the Committee's 2 percent inflation objective." As shown in Figure 2, the year-over-year rate of core PCE inflation, which the FOMC considers to be the best measure of the underlying rate of consumer price inflation, has receded from more than 5% in 2022 to 2.8% in March. However, core PCE prices have shot up at an annualized rate of 4.4% over the past three months. To paraphrase recent Fed speakers, the FOMC will need greater "confidence" that inflation is returning to 2% on a sustained basis before it feels comfortable cutting its target range for the federal funds rate. In our view, the Committee will not have that confidence until the September 18 FOMC meeting, at the earliest.

In Chair Powell's post-meeting press conference, he noted that it likely will take longer than originally thought to get that confidence. Notably, he backed off any reference to the potential timing of a rate reduction in his prepared remarks, no longer stating that "it will likely be appropriate to begin dialing back policy restraint at some point this year" (emphasis ours). Yet he also noted that he believes it is "unlikely" that the FOMC will need to hike again and that policy remains restrictive. On balance, the recent data appear to have pushed the FOMC away from the precipice of rate cuts but still very comfortable with a wait and see approach.

Although the Committee kept its primary policy tool, the federal funds rate, unchanged at today's meeting, the FOMC did announce some changes to its balance sheet runoff program. The Committee announced that it intends to slow the decline in its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The monthly redemption cap for mortgage-backed securities (MBS) was left unchanged at $35 billion. The new caps will be effective starting June 1.

The logic for slowing runoff is fairly straightforward: the ultimate "equilibrium" size of the Fed's balance sheet is uncertain, and a prudent risk management policy calls for a slow-but-don't-stop approach as the Fed feels out the optimal size for its balance sheet. The minutes from the last FOMC meeting noted that "slower runoff would give the Committee more time to assess market conditions as the balance sheet continues to shrink." Powell reiterated in his press conference that slowing the pace of runoff will help ensure a "smooth transition" and "reduce the possibility that money markets experience stress." We think the new pace of runoff will continue through at least year-end 2024.