Intraday Market Thoughts

Oil Upends Inflation Outlook

by Adam Button
Nov 21, 2018 10:34

That thing about indices is found below. Eyes are shifting back to central bankers as the rout in oil and equity markets continues. The US dollar was the top performer Tuesday while the Australian dollar lagged. Wednesday's US durable goods report will be a welcome dose of hard data. A new Index Premium long was entered in the final hours of NY trade. The Premium video is found here below with OPEN ACCESS to everyone this time. 

A further 7% fall in oil prices brings the decline to 31% since October and crude prices are now lower year-over-year. The U-turn in oil may prove to be more important than the rout in equities when it comes to central banking.

The drop will put negative pressure on headline inflation in the months ahead and that could give central bankers an excuse to shift to a less-hawkish stance. Even though most central bankers watch core inflation, the drop in headline feeds into inflation expectations, which are likely to slide. So far that paradigm hasn't entered into the central bank discourse aside from doves like Kashkari repeating long-held calls for a pause.

A broader shift may still be premature but it's worth pondering. The two central banks to watch are the BOC and Fed. In comments this week top officials (Wilkins and Williams) gave no indication of any shift. For the BOC, the blackout now looms for the December 5 meeting. The odds of a hike there have dwindled to just 10% and the BOC has already given itself considerable latitude to wait-and-see at any point.

Something about US Indices

Ashraf emailed me last night to remind me that the Dow Jones Industrials index and S&P500 have not fallen by more than 2% in three consecutive sessions since that fateful August day in 2015. Both indices have shown back-to-back declines of 2% or more in mid October, March and February, but not three days in a row. What about declines of 1% or more? The last time the Dow30 fell by more than 1% in three straight sessions was in late February. Since then, every time the index had back-to-back declines of 1% or more went on to rise 1.5% or 2.0%. Yesterday, the Dow30 fell 2.20% (-551 pts) and on Tuesday it fell 1.56% (-396 pts). If the pattern holds, then this could mean a rally of 1.5% or 2.0% today or Friday is highly plausible, i.e. DOW30 could close up more than 350 pts to near 24800s. Bear in mind US markets will be closed on Thursday for Thanksgiving and shall reopen on Friday. 

With the US holiday looming, the Fed schedule is quiet for the remainder of the week but Powell speaks next Wednesday in what will be a closely-watched event. The next Fed decision is Dec 19 and hike odds are at 71% from 83% a month ago.

In the interim, expect an escalating focus on economic data. This week's home builder sentiment report was the first sign of a sudden slowdown. On Wednesday, the October durable goods report is due out. It's another forward-looking indicator but it has a spotty record as an economic forecaster because it's volatile. Capital goods orders non-defense ex-air are forecast to rise 0.2%.


Latest IMTs