Sunday, December 14, 2014

Week Ahead Magazine: The Factors Behind The Decline In Oil Prices

I suspect oil price movements will continue to garner many of the headlines during the coming week. During the past week, most of the economic reports were either positive or neutral.
  • retail sales came in better than expected along with a spike higher in consumer sentiment.
  • the release of the Fed's Labor Market Conditions Index for November was the lowest since January 2014 which suggests a softening labor market.
  • the Job Openings and Labor Turnover report was essentially unchanged for October (December report).
  • inflation continues to remain in check at the producer level as the producer price index ex food and energy was flat for November. When food and energy is included, the headline PPI declined .2%.
  • import prices continue to decline by dropping 1.5% in November. This decline in import prices has been a trend in place since the beginning of the year.
From The Blog of HORAN Capital Advisors

This leads to expectations for the week ahead. One significant report for the week will be the FOMC meeting announcement on Wednesday. The market is expecting the Fed to remove/change the language in its statement regarding the timing of the next Fed rate increase. The current language indicates the hike will not occur for an "extended time." The market expects some change in this part of the Fed statement. As last week's reports on PPI, import prices and labor market conditions, it seems apparent inflation and the job market are not heating up. Given this information, and including the collapse in oil prices, a rate hike would seem to occur no sooner than mid year 2015. Other reports for the week that might be most impactful to the market are:
  • industrial production (M)
  • housing starts and flash manufacturing PMI (T)
  • consumer price index and FOMC meeting announcement (W)
  • jobless claims, Philadelphia Fed Survey and Leading Indicators (Th)
A number of articles in this week's magazine look at the factors behind the fall in oil prices. As we have noted in several posts over the course of the past few weeks, we believe supply is only one factor driving prices lower. An article or two in the magazine note the impact that lower demand is having on oil prices as well. Broadly, this lower demand has implications for the strength of the global economy. For sure economic activity outside the U.S. has been slowing in many countries. For the moment the U.S. economy seems to have disconnected from the slowdown impacting the euro-zone and China, to name a few regions. A question then arise about the reality on what has once been a global synchronized growth story, if a globally connected world can truly operate on opposing economic cycles. Broadly, this is what the market may be trying to figure out, especially if one believes oil demand, or lack thereof, is also a cause for the drop in a price of oil. Below is the link to this week's magazine.

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