Author: BlackMask Financial

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Fed’s Favored Inflation Gauge Cools, Spending Unexpectedly Drops

  • Core PCE price index rose 0.2% in April, smallest gain of year
  • Inflation-adjusted spending fell, restrained by tepid services

The Federal Reserve’s preferred measure of underlying US inflation moderated in April and consumers dialed back their spending, supporting plans for an eventual reduction in interest rates. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.2% from the prior month. That marked the smallest advance of the year, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending unexpectedly fell 0.1%, dragged down by a decrease in outlays for goods and softer services spending. Wage growth, the primary fuel for demand, moderated. The report offers Fed officials some solace about the pathway for inflation after progress on price pressures was interrupted in the first quarter. At the same time, the April spending figures add to evidence that the year is off to a slow start for the economy.

Metric Actual Estimate
PCE price index (MoM) +0.3% +0.3%
Core PCE price index (MoM) +0.2% +0.2%
PCE price index (YoY) +2.7% +2.7%
Core PCE price index (YoY) +2.8% +2.8%
Real consumer spending (MoM) -0.1% +0.1%

Central bankers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric climbed 0.3% after rising 0.4% in March, according to the BEA. Meanwhile household demand, while fueled by steady job and income growth, is showing signs of cooling. The BEA’s report showed inflation-adjusted outlays for services rose 0.1%, the smallest gain since August. Spending on merchandise decreased 0.4% last month .Goods outlays were restrained by declines in gasoline and vehicle purchases. While health care spending supported outlays for services, other categories such as restaurant meals, recreation and transportation decreased during the month. Looking ahead, with household debt hitting a record, consumer confidence generally trending lower and interest rates at a two-decade high, it remains to be seen to what extent consumers will continue powering the economy. A report out Thursday showed the US economy grew at a slower pace in the first quarter than initially reported, in part because consumer spending was marked down on weaker demand for goods — particularly motor vehicles.

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US removes temporary pier offshore Gaza

The United States completely removed its offshore temporary Gaza aid pier, Deputy Pentagon Press Secretary Sabrina Singh announced during a press briefing. “The IDF has fully removed the US-military built pier from the coast of Gaza. The pier sections have been relocated to Ashdod for repair and rebuilding,” Singh added while reiterating that the repairs are expected to take approximately one week. The US had previously suspended its shipments through the Joint Logistics Over-the-Shore initiative after the causeway connecting the pier to the beach was damaged by adverse weather conditions.

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Oil Prices Set for a Weekly Decline….. Oil Futures Market Swings Into Contango

Oil sank despite US data showing the biggest drop in the nation’s stockpiles in five weeks
  • West Texas Intermediate crude for July delivery slumped $1.32, or 1.7%, to close at $77.91 a barrel on the New York Mercantile Exchange.
  • July Brent crude settled at $81.86 a barrel on ICE Futures Europe, down $1.74, or 2.1%.
  • Back on Nymex, June gasoline dropped 2.4% to end at $2.404 a gallon, its lowest close since Feb. 29. June heating oil fell 2.8% to $2.369, its lowest finish since June 12.
  • July natural gas shed 3.5% to close at $2.572 per million British thermal units.
  •  Brent crude has weakened into a contango structure for the first time since January,
  • Spooked traders fear the market is oversupplied.

Oil futures ended lower Thursday, feeling pressure as equities and other assets perceived as risky extended a selloff, and government data showed an unexpected rise in fuel inventories. Investors are also preparing for a Sunday meeting of the Organization of the Petroleum Exporting Countries and its Russia-led allies, which is expected to lead to a rollover of voluntary production cuts otherwise due to expire at the end of June.

Oil has risen this year due to geopolitical conflicts and production curbs by the Organization of the Petroleum Exporting Countries and its allies. The group will likely consider factors including a drop in prices over the past month, a weaker Chinese demand outlook and healthy supplies from the Americas when ministers convene on Sunday.

The OPEC+ alliance is widely expected to prolong output cuts into the second half of 2024, which Brian Kessens, a managing director at Tortoise Capital Advisors LLC said “will add some certainty to the market.”

Through the end of this year, OPEC+ members have agreed to 3.66 million bpd in cuts, plus the 2.2 million bpd in voluntary cuts that are separate and set to end at the close of June. In total, the cuts equal just under 6% of global oil demand, with Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia and the UAE ARE participating in the voluntary cuts. The oil market is likely to remain in a deficit this year if OPEC+ rolls over its voluntary output cuts, prolonging the constructive backdrop for prices. Demand growth has been modest amid soft industrial activity and mild weather (especially in Europe), though a surge in consumption points to undersupply in 2H.

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Oil Falls as Weak Treasury Auction Boosts Dollar

Oil retreated as another weak sale of Treasuries raised concerns about rising yields, stoking a risk-off mood across financial markets.  West Texas Intermediate settled below $80 as equities declined. The drop pared Tuesday’s 2.7% gains, which were driven by renewed geopolitical risks, including ship attacks in the Red Sea and Israel’s advance into the Gazan city of Rafah. US benchmark crude is up about 14% over the past 12 months because of tensions across the Middle East and output cuts by the Organization of the Petroleum Exporting Countries and its allies. Still, the conflict between Israel and Hamas has failed to disrupt flows, and supplies outside of OPEC+ have remained abundant, limiting the gains.

The producers’ group will hold an online meeting Sunday and is projected to extend its curbs into the second half of the year. The expectation has helped both WTI and Brent to break above their 100-day moving averages in recent days. NB: 

OPEC+ faces a darkening demand outlook in China as flagging factory strength and a housing crash reduce consumption of plastics and fuels used in construction. The Asian nation has also curbed some crude purchases from the de-facto leaders of the alliance — Saudi Arabia and Russia. In the US, Federal Reserve Bank of Minneapolis President Neel Kashkari said the central bank’s policy stance is restrictive, but additional interest-rate hikes haven’t been ruled out. Fed policymakers are widely expected to keep rates at a 23-year high when they meet next month in Washington.

Prices:

  • WTI for July delivery fell 0.8% to settle at $79.23 a barrel in New York
  • Brent for July settlement declined 0.7% to $83.60 a barrel.

 

 

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Iran supplied Houthis with Ghadr missiles

Iran provided Yemeni rebel group Houthis with medium-range ballistic missiles known as Ghadr, Tasnim news agency reported on Wednesday. Tasnim noted that these missiles are weapons that can pose “serious challenges” to the United States’ interests, and the country’s ally in the region, “the Zionist regime.” Meanwhile, the US Central Command (CENTCOM) shared that on Tuesday, “Iran-backed Houthis launched five ballistic missiles and five drones into the Red Sea,” damaging a ship.

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Oil Rebounds as Middle East Tensions Rise

Oil rebounded from last week’s selloff as tensions flared in the Middle East, with a vessel attacked in the Red Sea and Israeli tanks reaching the center of Rafah. West Texas Intermediate rose 2.7% to settle above $79 a barrel. The gains followed a drop to three-month lows last week brought futures to oversold territory. The attack on a Greek-managed bulk carrier in the Red Sea and Israel’s advance into the southern Gaza city revived the geopolitical risk premium that had gone missing last week, when signs of ample supplies also weighed on crude. “A confluence of factors suggest some upside sensitivity in oil — from fraught geopolitics to inventory drawdown to OPEC’s assumed preference to maintain curbs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. However, “the Gaza situation is only a warning not to be aggressively short, but not quite the unbridled bullish trigger.” Adding risks to oil markets was the killing of an Egyptian soldier in a clash with Israeli troops at a Gaza border crossing as well as an Israeli strike that killed an estimated 45 Palestinians at a camp for displaced people. Despite the war’s continued escalations, crude flows from the Middle East — which account for a third of global supply — haven’t been hampered. Still, the Houthi attacks in the Red Sea have rerouted some flows. Oil has risen this year on persistent geopolitical risks and OPEC+’s roughly 2 million barrels a day of output cuts, with the group expected to prolong its curbs into the second half of 2024 at a meeting on Sunday. Still, prices have dipped since early April amid signs of lackluster demand, causing Brent’s prompt spread to get closer to a bearish contango structure that indicates supply is plentiful relative to consumption. Investors will also be looking for signs of US fuel demand after the Memorial Day holiday, which traditionally marks the start of the summer driving season.

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Houthis launch missile attack on Red Sea

Iranian-backed Houthis fired five anti-ship ballistic missiles from Yemen into the Red Sea, according to the United States Central Command (CENTCOM). The Greek-owned bulk carrier M/V Laax, flagged under the Marshall Islands, reported being hit by three of these missiles. Despite the strikes, the vessel continued its voyage without injuries to the crew or other ships in the area, CENTCOM said.

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Oil prices up over 1% on geopolitical worries

Crude oil prices for front-month deliveries rose on Tuesday as the latest geopolitical developments spurred market investors’ concerns.

Namely, Spain, Ireland, and Norway officially recognized Palestine as a state, provoking Israel’s strong backlash. Additionally, Al Jazeera reported that the latest Israeli attack on Rafah left at least 21 persons killed and 64 wounded.

West Texas Intermediate (WTI) for July contracts surged 1.40% to $79.77 per barrel at 1:04 pm ET. At the same time, Brent for July deliveries jumped 1.32% to $84.14 per barrel.

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IAEA: Impossible to restart Zaporizhzhia nuclear plant

International Atomic Energy Agency (IAEA) Director-General Rafael Grossi  said on Tuesday that restarting the Zaporizhzhia nuclear power plant is impossible under existing conditions. The largest nuclear facility in Europe is in Ukrainian territory currently occupied by Russia and has been the target of attacks throughout the war. Grossi, who is visiting Russia today, told reporters that he was able to reach an agreement with Russian officials on strengthening the operational safety at the plant. Meanwhile, the general director of Russia’s atomic energy agency Rosatom Alexey Likhachev said that Zaporizhzhia is “absolutely safe” and that additional safety measures are in place, including drone defense and the protection of nuclear waste storage facilities.

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JP Morgan Analysts Look at Worldwide Oil Demand in May

In a research note published late Friday, analysts at J.P. Morgan said their high-frequency demand indicators estimate that worldwide oil consumption averaged 103.4 million barrels per day through May 22. That figure was in line with their published estimates, the analysts highlighted in the note.

“Sequential demand improved markedly in May after underperforming expectations throughout the first four months,” the analysts added.

“As we enter peak demand season next week, we project global oil liquids demand to improve by another 2.7 million barrels per day by the end of August, measured from the end of April,” they continued. In a previous research note  on May 20, analysts at J.P. Morgan revealed that their high-frequency demand indicators estimated that worldwide oil consumption averaged 103.3 million barrels per day in the first half of May. That was 90,000 barrels per day above their published estimates, the analysts highlighted in that report.

“After underperforming our projections by 400,000 barrels per day in the first four months of the year almost entirely due to warm winter, demand improved markedly in May,” the analysts noted in that report.

“Year to date, global oil demand rose by 1.7 million barrels per day compared to the same period last year, in line with our projections from last November,” they added. “On a year over year basis, demand grew by 1.9 million barrels per day, below our expectations of a 2.1 million barrel per day increase,” the analysts noted in the report. According to the U.S. Energy Information Administration’s (EIA) latest short term energy outlook (STEO), which was released earlier this month, world petroleum and other liquid fuels consumption is expected to average 102.41 million barrels per day in the second quarter of this year and 102.84 million barrels per day overall in 2024. It averaged 102.11 million barrels per day in the first quarter of 2024 and 101.92 million barrels per day overall in 2023, the report showed. In its previous STEO, which was released in April, the EIA forecast that international petroleum and other liquids consumption would average 102.73 in the second quarter of 2024 and 102.91 million barrels per day overall this year.

 

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