◊ OPEC and Oil Prices News ◊
The coronavirus outbreak has interrupted economic activity in China with entire cities on lockdown and travel restrictions putting a huge dent in demand for oil. Quite how much this will hit crude demand is unclear — but Chinese energy executives have said oil consumption in the country in February could be 25 per cent lower than a year earlier. That is the equivalent of a 3 per cent drop in global consumption.
As uncertainty lingers about when the transmission of the virus will peak, oil prices have tumbled more than 15 per cent since the beginning of the year to trade around $55 a barrel, a level at which many smaller producers struggle to remain profitable.
The demand shock and resulting price plunge is jolting Opec nations led by Saudi Arabia and ally producers including Russia into action to support prices. The group’s advisory body has recommended that they deepen their existing supply cuts by 600,000 barrels a day to a total of 2.7m b/d for the first half of 2020.
The question for oil traders is whether this will be enough to steady the oil market and push prices higher. Optimism in the market is hard to find. “It may prove to be a damp squib,” said Stephen Brennock of PVM, a broker. “After all, a hefty supply imbalance prevailed even before the outbreak of the coronavirus. There is therefore no guarantee that the proposed cuts will rid the oil market of its current malaise.” Moscow is also sceptical about supporting the cuts until there is more clarity.
The suggestion of Opec’s advisory body that the extra 600,000 b/d of cuts last through the second quarter of 2020 reflects some optimism about how quickly the impact of the virus outbreak will be contained. But it risks underwhelming the market even if it can be agreed. Harry Dempsey
Will China’s central bank step up measures to offset the coronavirus impact?
As China battles to contain its health crisis, many economists are pencilling in a substantial hit to the economy in the first quarter. This has increased speculation that the country’s central bank could ease monetary policy more to soften the blow.
But with consumer inflation still near a seven-year high, it has limited room to cut interest rates further. On Monday investors will get their first hint at the answer when Beijing releases January readings for its consumer and producer price indices.
Serious easing would entail the People’s Bank of China trying to guide the country’s new, more market-driven lending benchmark lower. But at 4.15 per cent, the so-called loan prime rate is already below December’s consumer price index reading of 4.5 per cent. If consumer inflation does pick up, it could leave China grappling with negative real interest rates should the central bank decide to ease.
Last week, the PBoC announced it would pump extra cash into China’s financial system as part of a package of emergency measures to shield the economy from the effects of the coronavirus outbreak. It said it would provide Rmb1.2tn ($173bn) in additional liquidity to money markets.
But as the death toll continues to mount and the economic impact deepens, analysts are predicting even stronger action from the central bank.
Beijing is likely to “step up” its policy easing when there are signs that the outbreak is proving a headwind to economic growth, Prashant Bhayani, BNP Paribas Wealth Management’s Asia chief investment officer, said in a note. Hudson Lockett
Will cost of living data increase US inflation fears?
The US will receive its own inflation reading on Thursday, with the release of the consumer price index (CPI), which tracks common goods such as food, housing and fuel.
The cost of living as measured by CPI has increased in the past year, with price rises at 2.3 per cent year on year as of December. Yet, despite this uptick, officials at the Federal Reserve remain profoundly concerned about the low level of inflation in the US.
On a separate measure — the Fed’s preferred — the problem looks much more pronounced. The personal consumption expenditures (PCE) price index, at 1.6 per cent year-on-year, remains well below the central bank’s target of 2 per cent.
Jay Powell, Fed chairman, stressed this issue at his first post-meeting press conference of 2020, stating that the central bank was not comfortable with inflation running so persistently below its 2 per cent target.
Moreover, he resolved to act to ensure the US evades the low-inflation trap that has ensnared the likes of Europe and Japan. “We have seen this dynamic play out in other economies around the world, and we are determined to avoid it here in the United States,” he said.
One solution that has gained traction is a so-called “make-up strategy”, in which the central bank commits to raising its inflation target after periods of undershooting in order to make up for lost inflation.
The Fed is nearing the end of a once-in-a-decade review of its monetary policy toolkit, and such a change could be announced when that is released.
Stock Market – Top 5 Things to Watch This Week
Coronavirus headlines could hang over the market in the coming week, as China reported an additional 89 deaths on Sunday, bringing the total number of deaths in the mainland to 811.
The global death toll from the new coronavirus is now at 813, higher than that of SARS.
There will also be important testimony from Federal Reserve Chair Jerome Powell, who appears Tuesday and Wednesday before congressional panels on the economy and monetary policy.
Meanwhile, on the data front, market players will pay attention to this week’s U.S. consumer price data, which should give clearer signs on the pace of inflation.
There are also U.S. retail sales figures for January, which investors will be eyeing for further signs on the strength of the American consumer.
In earnings, there are 68 S&P 500 companies reporting results in the week ahead, as the earnings season on Wall Street starts to wind down.
1. Coronavirus Headlines
China reported an additional 89 deaths on Sunday, bringing the total number of people killed by the fast-spreading coronavirus to 811 in the mainland. The global death toll for the new coronavirus currently stands at 813, including one death in the Philippines and another in Hong Kong.
That number exceeds the global number of deaths from SARS, which killed at least 774 people and infected 8,096 people worldwide in 2002 and 2003, according to data from the World Health Organization.
The National Health Commission said on its website that 2,656 new cases were confirmed as of end Saturday. This brings the total number to 37,198 in mainland China.
Hubei province, the epicenter of the outbreak, accounts for most of the deaths and cases around the world.
The cumulative number of deaths in the province reached 780 after an additional 81 deaths were recorded as of end Saturday. The Hubei Provincial Health Committee said there was an additional 2,147 new cases, bringing the total of confirmed cases to 27,100.
The Chinese economy will sputter towards normal on Monday after the coronavirus outbreak forced an extended holiday, although numerous stores and factories will remain shut and many white-collar employees will continue working from home.
The toll on China’s already-slowing economy has been heavy, with Goldman Sachs (NYSE:GS) cutting its first quarter GDP target to 4% from 5.6% previously and saying an even deeper hit is possible.
2. Fed Chair Powell Testifies
Federal Reserve Chair Jerome Powell is set to deliver his semi-annual monetary policy testimony on the economy before Senate and House committees in Washington DC.
Powell is scheduled to testify before the House Financial Services Committee at 10:00AM ET (1500GMT) Tuesday. On Wednesday, he will appear in front the Senate Banking Committee, also at 10AM ET.
Text of the testimony will be released 90 minutes before he starts speaking.
The Fed chair is expected to reinforce the signal that policy is on hold given the labor market continues to tighten and private consumption growth remains solid.
3. U.S. Inflation
The Commerce Department will publish January inflation figures at 8:30AM ET (1330GMT) Thursday.
Consumer prices are expected to have risen 0.2% last month, according to estimates, matching the increase seen for December. On a yearly base, CPI is projected to climb 2.5%, up from 2.3% a month earlier.
Excluding the cost of food and fuel, core inflation prices are forecast to have gained 0.2% last month and 2.2% over the prior year.
Rising inflation would be a catalyst to push the Fed toward raising interest rates at a faster pace than currently expected. Weakening inflation will likely add to expectations that the U.S. central bank will need to slow its pace of rate hikes.
4. U.S. Retail Sales
The Commerce Department will release data on retail sales for January at 8:30AM ET (1330GMT) Friday.
The consensus forecast is that the report will show retail sales rose 0.3% last month, after rising at the same pace in December. Excluding the automobile sector, sales are also expected to increase 0.3%.
Rising retail sales over time correlate with stronger economic growth, while weaker sales signal a declining economy. Consumer spending accounts for as much as 70% of U.S. economic growth.
5. Earnings Season Starts to Wind Down
Earnings season on Wall Street moves into its final stretch.
Results from Restaurant Brands International, Allergan (NYSE:AGN), and Loews (NYSE:L) will capture the market’s attention on Monday.
Lyft (NASDAQ:LYFT), UnderArmour, AutoNation (NYSE:AN), Hilton, Hasbro (NASDAQ:HAS), Dominion Energy, and Lattice Semiconductor are on the agenda for Tuesday.
CVS Health (NYSE:CVS), Shopify, Cisco (NASDAQ:CSCO), Applied Materials (NASDAQ:AMAT), CyberArk, CME Group (NASDAQ:CME), Barrick Gold, Teva Pharma, and MGM Resorts report results on Wednesday.
Thursday sees Alibaba (NYSE:BABA), Nvidia, Pepsico (NASDAQ:PEP), Kraft Heinz (NASDAQ:KHC), Roku, AIG (NYSE:AIG), Expedia (NASDAQ:EXPE), Mattel (NASDAQ:MAT), Wyndham Hotels, and post earnings.
Finally, Canopy Growth, and Newell Brands are among the few reporting on Friday.