U.S. UNEMPLOYMENT insurance claims are starting to rise in a sign the labour market is weakening in response to persistent inflation, rising interest rates and slowing business and consumer spending. The number of people filing for unemployment insurance benefits for the first time has climbed to an average of almost 230,000 per week in the last 13 weeks up from a recent low of 200,000 in the 13 weeks between mid-August and mid-November 2022:
U.S. INTEREST RATE traders had not changed their expectations much by the start of May compared with the start of April. The central bank is expected to raise its federal funds target one more time to 5.00-5.25% by the end of its meeting on June 13-14 up from 4.75-5.00% at present as it combats persistent inflation. Rates are expected to start falling from the fourth quarter onwards as inflation subsides and the business cycle weakens:
CHINA’s currency is trading close to its lowest level against the dollar since 2008 as U.S. interest rates rise while China’s economy struggles to end the cycle of coronavirus lockdowns:
CHINA’s manufacturers reported a slight increase in business activity this month after declines in the two prior months. The purchasing managers’ index rose to 50.1 (24th percentile for all months since 2011) in September from 49.4 (7th percentile) in August and 49.0 (2nd percentile) in July. The economy appears to have stabilised but is not growing significantly as a result of repeated city-level lockdowns and travel restrictions:
U.S INITIAL UNEMPLOYMENT claims fell to 193,000 last week, implying the labour market remains very tight, which will likely keep upward pressure on interest rates:
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U.S. PETROLEUM inventories including the strategic petroleum reserve rose +3 million bbl to 1,712 million bbl last week. Inventories have risen by a total of almost +5 million bbl in the two most recent weeks after declining by -81 million bbl over the previous twelve weeks:
U.S. DISTILLATE stocks fell by almost -3 million bbl to just 111 million bbl, the lowest for the time of year since 2008:
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Global distillate inventories remain low but have shown some signs of stabilising as the business cycle slows in response to inflation, coronavirus outbreaks and increased uncertainty following Russia’s invasion of Ukraine.
In the United States, distillate fuel oil inventories fell by 3 million barrels to 111 million in the week to April 8, according to high-frequency data from the Energy Information Administration.
Distillate stocks are 28 million barrels (20%) below the pre-pandemic five-year seasonal average and at the lowest level for the time of year since 2008 (“Weekly petroleum status report”, EIA, April 13).
Based on stock movements in previous years, inventories are expected to fall as low as 105 million barrels before the end of June, with the forecast minimum ranging from 97-111 million barrels.
Stocks have been tight since the start of the year but the situation has stabilised since early March with some of the more extreme downside inventory scenarios receding.
High prices for all petroleum products but especially middle distillates such as diesel, heating oil, jet fuel and gas oil are blunting consumption growth.
More importantly, there are signs consumer and business spending has started to decelerate under pressure from inflation, increased uncertainty and supply chain disruptions.
As the pandemic has receded, consumer pending has also begun to rotate from distillate-intensive manufactured products to less distillate-intensive services.
In Europe, too, distillate stocks are low but have stabilised since the start of March in response to high prices and slowing consumption.
Europe’s distillate inventories amounted to just 392 million barrels at the end of March, the lowest for the time of year since 2015, according to estimates compiled by Euroilstock.
But inventories had risen by more than 12 million barrels compared with the end of February, the largest seasonal increase for more than two decades.
The last time stocks rose this rapidly between February and March was in 2008, when surging crude and diesel prices and diminishing economic activity also caused stocks to start rising from a very low level.
In Singapore, stocks have fallen to just 7.6 million barrels, the lowest seasonal level since 2008, and the storage hub is the tightest of all the regions.
Distillates are the most cyclically sensitive of the major petroleum products and a slowdown in consumption growth is normally associated with a mid-cycle slowdown or an end-of-cycle recession.
There are some early signs inventory depletion has slowed or even stopped altogether, with stocks broadly stable since the middle of March, but it will take a few more weeks before any turning point is confirmed.
U.S CONSUMER PRICES are increasing between two and four times faster than the central bank’s target of a little over 2%. Core prices for items other than food and energy have increased at a compound annual rate of 4.0% over the last two years and were advancing at an annualised rate of 5.8% in the three months from December to March. Services prices, which are normally more stable but also more labour-intensive, increased at a compound rate of 3.4% over the last two years and were rising at an annualised rate 7.1% between December and March. The rapidly rising cost of energy, raw materials, manufactured products, freight and labour is becoming more deeply entrenched in the rest of the economy:
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Australia’s domestic gas industry and higher prices
China port congestion worsens amid lockdowns ($BBG)
U.S. PETROLEUM inventories outside the strategic petroleum reserve fell last week by another -7 million bbl to 1,137 million bbl. Commercial stocks have declined in 65 of the last 90 weeks by a total of 325 million bbl since the start of July 2020. Inventories are at the lowest level for the time of year since 2014:
U.S. SHALE firms cite pressure from investors to return cash to shareholders as the main reason for not increasing output, with almost 30% of respondents to the Dallas Fed survey saying they would not increase output faster at any price:
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Most global financial indicators are characterised by a lack of obvious stress at the moment
Markets are sanguine about the economic and financial impact of Russia’s invasion of Ukraine and the Fed’s planned cycle of interest rate increases
U.S. central bank is expected to engineer a soft-landing rather than hard one, leading to a mild mid-cycle slowdown rather than a deep recession
Markets expect businesses, households and borrowers to absorb more than 200 basis points of U.S. interest rate increases without difficulty
If there is a cyclical slowdown, it is expected to be conventional downturn in growth, jobs and inflation rather than accompanied by a financial crisis
Russia’s invasion of Ukraine and sanctions imposed in response have not so far resulted in a significant change to the outlook embodied in asset markets
* The Fed’s aggressive rate rises in 1994 helped create a government debt funding crisis in Mexico forcing a devaluation of the peso at the end of the year (the “tequila crisis”). The U.S. central bank was caught unaware (see Fed minutes from an emergency conference call held on Dec. 30, 1994). Rapid interest rate rises in the United States tend to induce extreme stress in the more peripheral and obscure parts of the international system. In 1994, it was the Mexican government’s increasingly heavy reliance on funding its operations with short-duration dollar-linked bills known as “tesobonos” that had to be constantly rolled forward. The causes of the peso crisis was my first semi-serious piece of research when I had to write a 15,000-word thesis on it for my university finals in 1996.
BRENT spot prices and calendar spreads are ratcheting higher again as traders anticipate a prolonged conflict in Ukraine and therefore a prolonged disruption of Russia’s petroleum exports, coupled with the lack of spare capacity in the global oil supply system, leaving it increasingly vulnerable to any more shocks:
U.S. GASOLINE prices have started to converge with Brent after the supply chain was shocked by Russia’s invasion of Ukraine. But retail prices are still rising at one of the fastest rates for 30 years, increasing by around 20% over the last four weeks, which is in the 99th percentile for all four-week periods since 1993:
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