Last week’s decision (or indecision) by OPEC to maintain current production rates for oil may just have been the alarm clock needed for many oil producing economies… OPEC’s inability to come to a decision meant that the supply of oil hitting the market would remain unchanged; leaving supply well in excess of demand.
Several emerging market economies calculate oil production in their fiscal budget. The rate with which they add revenue is very dependent on their price projections of oil. Many countries flirt dangerously close to fiscal imbalance by over projecting oil prices. The health of their economies, and corporate profits derived from those nations (on Wall Street) could suffer if oil does not maintain a certain level of pricing.
In general for the U.S. economy if oil prices fall it is a positive. Consumer spending increases due to elevated discretionary income and headline consumer price index (CPI, a proxy for inflation) flattens. The latter occurs because falling fuel costs make inflation more subdued. So for Main Street, falling oil prices are a plus. On Wall Street where many corporations are global in operation, domestic consumption is not their only concern.
Just as falling oil prices have an impact on U.S. inflation, this is also the case on the global economy. For two key areas, Japan and the Eurozone, falling inflation is the last thing they want to see. Both are entrenched in a battle against deflation; falling oil prices have only further accentuated the issue.
The moral to the story is that while falling oil prices may have a positive impact on inflation and consumer spending domestically, it may not have too positive of an impact on the global economy in the long run. Hopefully action will come soon from OPEC to reduce supply and give oil prices a floor.
US DATA
Much of last week’s data was received positively by Wall Street[1]:
- ISM Manufacturing PMI (Nov) 58.7 vs 57.9 expectation
- ISM Non-manufacturing PMI (Nov) 59.3 vs 57.1 expectation
- Initial Jobless claims were below 300K at 297K
- Hourly earnings (Nov) increased .4% vs .2% expectation
- Unemployment rate (Nov) steady at 5.8%
PMI data in excess of 50 indicates expansionary. Earnings increases can be an indication of coming inflation as more money would be in workers pockets.
While there was plenty to celebrate, it is never all good news[2]:
- Service PMI (Nov) 56.2 vs 56.3 expectation
- Factory Orders (Oct) -.7% vs -.2% expectation
- ADP Non-farm employment (Nov) 208K vs 223K expectation
While missing expectations, Service PMI is very expansionary and ADP employment was still in excess of 200K.
International Data
The European Central Bank (ECB) took no additional stimulus action in 2014. Rather, deciding to allow time to see the impact of existing stimulus measures. This was not something looked favorably upon by markets. It extends the current economic conditions in Europe and many expected additional measures were going to be taken last week. The ECB did however leave the door open to sovereign bond purchases in 2015.
Japan’s decision to delay its tax hike has called into question its ability to meet their debt obligations. The decision came as a result of their economy being unable to withstand an additional austerity hit as they battle deflation. As a result Moody’s cut Japans credit rating, causing rates to fall dramatically as expectations have increased for further easing.
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[1] www.investing.com – economic calendar
[2] www.investing.com – economic calendar