Oil needs to be monitored, US inflation disappoints

Macro Highlights - 6/22/2017

In short
  • Oil needs to be monitored, US inflation disappoints
  • Monetary policy focus : New era for monetary policies?

Key Takeaways of the week with Sophie Casanova, Economist, Central Banks, Lisa Turk, Economist, United States and François Léonet, Economist, Emerging Markets

Oil needs to be monitored, US inflation disappoints

  • Since the start of 2017, commodity prices have contracted, reflecting the impact of the drop in energy prices and particularly crude oil
  • A marked contraction in oil prices would likely reduce corporate investment by oil firms in the US and bring an end to the accommodative monetary cycle in Russia and Brazil
  • In the US, while the drop in commodity prices is one of the reasons why inflation cooled to 1.9% in May, the downturn in healthcare prices and rents was also a factor

This first part of 2017 has seen differing trends within commodities (see left-hand chart). According to the S&P GSCI indices, commodities overall are down nearly 10% since the start of the year, primarily affected by the contraction in energy prices. The crude oil Brent price is USD 47.5 per barrel, down 16% from USD 57 at the start of January. The current level is therefore in line with the prices from November 2016, when the OPEC managed to reach an agreement to reduce production volumes by 1.8 million barrels per day in order to support oil prices.

The performance for the other commodities segments is in positive territory, with the exception of agricultural commodities, for which prices are unchanged globally. Precious metals have appreciated by nearly 10%, driven by the progress made by gold since the start of the year.

The downturn in oil since the end of May needs to be monitored closely due to its potential consequences in terms of trends for investment by US businesses and exports from certain emerging economies. If crude oil was to remain below USD 50 per barrel – average profitability threshold for North American shale oil production – for some time, the acceleration in investment growth among US oil firms could be slower than forecast.

Falling oil prices are likely to have a negative impact on terms of trade for emerging commodity exporters. This is particularly true for Russia, whose exports of oil and its gas derivatives make up 44% of total goods exports.[...] 

François Léonet, Economist, Emerging Markets, and Lisa Turk, Economist, United States.



New era for monetary policies?

  • The Fed has just announced that it intends to start reducing the size of its balance later this year, which represents the third and final stage in the exit from its accommodative monetary policy

  • Our analysis shows that the strategies applied by other central banks are not necessarily expected to be identical to the Fed’s position, in terms of their timing or sequences

  • As a result, changes in yield curves could vary quite significantly between the major regions over the coming quarters

2017 is without a doubt a pivotal year for monetary policies: for the first time since the 2008 financial crisis, the major central banks are no longer expected to consider further monetary support measures. More than this, the normalisation of these policies is expected to become a growing possibility over the coming quarters.

However, the major central banks are not all in the same position within the monetary cycle and their balance sheet structures are very different. As a result, their strategies are not necessarily expected to be identical in terms of their timing or sequences.

Our analysis shows that as a result of this, the changes in yield curves could vary considerably between the major regions:

  1. We still expect the US yield curve to flatten, even though the Fed looks set to start scaling back its balance sheet soon. In the eurozone, yield curves are expected to steepen over the coming quarters, even if the ECB remains accommodative.
  2. In Japan and the UK, the central banks face an impasse because they have very limited leeway for conducting their monetary policies in line with the fundamentals. We expect the Japanese curve to stabilise, while there is still a high risk of steepening in the UK.
  3. In Switzerland, the yield curve looks set to follow a similar path to the eurozone.[...]


Sophie Casanova, Economist, Central Banks