Weekly Market Insight

Transcription

1 Economics Weekly Market Insight January 29, 206 Economic Update By Benjamin Tal The recent improvement in the price of oil is on shaky ground, given that it s based largely on rumors regarding a potential agreement to cut oil production, with Russia playing a significant role here. But of course, the wild card is Iran. And chances are that they will not compromise regarding any future cuts. As a result, we might see some volatility in oil prices in the coming few days. But beyond that volatility, the bigger picture is that the fundamental story regarding oil is turning a bit better. From a demand vs. supply perspective, one can easily paint a reasonable scenario in which the crude market will reach zero surplus by the end of the year. Yes, Iran might increase production by 500,000 bpd but that would be totally offset by a prediction of a 500,000 bpd decline in shale oil production. Note that shale oil production was up by 900,000 bpd in 205 despite a significant cut in the rig count. But that productivity improvement (largely due to an increase in the frack count, reduced labour and improved data-gathering techniques) is probably reaching its peak. Any additional cut by OPEC will be a bonus here and will work to accelerate the march toward equilibrium. The reason that Saudi Arabia is even entertaining the notion of a production cut might be the fact that the risk of oil falling to say $20 per barrel represents more pain than gain. If the Saudis want to recapture market share and reduce appetite for investment in alternative energy, they can achieve that goal at $30 or $40 per barrel. Accordingly, the dynamics and durability of a drop from $60 to $40 per barrel are very different than those from $40 to $20 per barrel. In the US, can we still count on domestic demand to save the day? The short answer is yes. Even if the pace of job creation slows to below 200K a month, three factors will work to keep real consumer spending at around 3% this year. The first factor is consumer credit. Not only is it rising by 7% on a yearover-year basis, but the composition of that growth is improving. The pace of growth in student loans is decelerating and is currently at a 2-year low while credit card debt is rising at the fastest pace since Unemployment Rate vs. Wage Increase This means that more credit is being translated directly into consumption. The second factor is lower gasoline prices. Growth in real income in the US was a full percentage point faster Theory 2% 0% Reality than the pace seen in 204, in large part due to the 8% impact of lower gasoline prices. But this money was mostly saved with the savings rate rising to 5.5%, 6% half a percentage point higher than seen in early 4% 205. If history is a guide, US consumers will be 0 spending a good portion of that saved money in 206. The third factor is wages. With the 0 unemployment rate falling, one should expect 2% 0% wages to accelerate. But as illustrated in the chart, 0 0% % 2% 3% 4% 5% Wage 0 increase Wage increase that was not the case. The reason here is the fact that the unemployment rate is not a good measure Source: Statistic Canada, CIBC of real labour market conditions and is a bad Unemployment rate Unemployment rate

2 barometer of potential price pressure. A better barometer the employment-to-population ratio which captures the theoretical relationship between labour and wages, suggests that we should see some wage acceleration in the coming few quarters. Weekly Market Insight 2

3 Market Snapshot US Current* yesterday* a week ago* a month ago* a year ago* TED SPREAD (bps) Y - 2Y SPREAD (bps) Y SWAP SPREAD (bps) M T-Bill (%) LIBOR MONTH (%) LIBOR 3 MONTH (%) YR BOND (%) YR BOND (%) YR BOND (%) A Rated - 0Y TREASURY (bps) B Rated - 0Y TREASURY (bps) BB Rated - 0Y TREASURY (bps) CANADA PRIME - BA SPREAD (bps) CDOR 3 MONTH (%) CDOR 3 MONTH - 3M T-BILL SPREAD (bps) Y - 2Y SPREAD (bps) YR BOND (%) YR BOND (%) YR BOND (%) A Rated - 0Y TREASURY (bps) BBB Rated - 0Y TREASURY (bps) CAN Sovereign Agency - 0Y TREASURY (bps) COMMODITIES WTI CRUDE FUTURE (US$ / bbl.) NATURAL GAS (US$ / MMBtu) SILVER (US$ /t oz.) GOLD (US$ / t oz.) WHEAT (US / bu.) SOYBEANS (US / bu.) SUGAR (US / lb.) CORN (US / bu.) FX C$ / US$ US$ / EURO C$/ EURO YEN / US$ US$ / BRITISH POUND SWISS FRANCS / US$ EQUITY MARKETS S&P/TSX COMPOSITE S&P NASDAQ DOW JONES RUSSELL DAX FTSE NIKKEI * As of ~:00 a.m. Toronto time Note: Data is for reference only. Weekly Market Insight 3

4 International Stock Indexes Thursday, January 28, 206 DAILY 52 WEEK Index (Regiona/Country) % Chg YTD 3-yr Close Chg High Low % Chg High Low - + % chg % chg Global The Global Dow (World) The Global Dow Euro (World) DJ Global Index (World) DJ Global ex U.S. (World) Asia Pacific DJ Asia-Pacific TSM (Asia-Pacific) All Ordinaries (Australia) S & P/ASX 200 (Australia) Dow Jones China 88 (China) Shanghai Composite (China) Hang Seng (Hong Kong) S & P BSE Sensex (India) Jakarta Composite (Indonesia) Nikkei 300 (Japan) Nikkei Stock Avg (Japan) Topix Index (Japan) Kuala Lumpur Composite (Malaysia) S & P/NZX 50 (New Zealand) KSE 00 (Pakistan) PSEi (Philippines) Straits Times (Singapore) Kospi (South Korea) Colombo Stock Exchange (Sri Lanka) Weighted (Taiwan) SET (Thailand) Europe Stoxx Europe 600 (Europe) Stoxx Europe 50 (Europe) Euro Stoxx 50 (Euro zone) Euro Stoxx (Euro zone) ATX (Austria) Bel-20 (Belgium) PX 50 (Czech Republic) OMX Copenhagen (Denmark) OMX Helsinki (Finland) CAC 40 (France) DAX (Germany) BUX (Hungary) FTSE MIB (Italy) AEX (Netherlands) All-Shares (Norway) WIG (Poland) PSI 20 (Portugal) RTS Index (Russia) IBEX 35 (Spain) SX All Share (Sweden) Swiss Market (Switzerland) BIST 00 (Turkey) FTSE 00 (U.K.) FTSE 250 (U.K.) Americas DJ Americas (Americas) Merval (Argentina) Sao Paulo Bovespa (Brazil) S & P/TSX Comp (Canada) Santiago IPSA (Chile) IPC All-Share (Mexico) Caracas General (Venezuela) Other Countries CASE 30 (Egypt) Tel Aviv (Israel) Johannesburg All Share (South Africa) *Europe, Australia, Far East; U.S.-dollar terms. Three year percent change is annualized. Sources: SIX Financial Information; Thomson Reuters, WSJ Market Data Group Weekly Market Insight 4

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