SCOREBOARD: Boiling oil

The big news overnight was crude hitting $US120 on Brent, up 1.9 per cent to its highest level since August 2008. Now the peak was at $147.5 in 2008 so we've still got another 23 per cent (30 per cent in Australian dollar prices) or so to go before we hit new records, but having increased about 30 per cent over the last few months alone, we are well on our way. No shortage of catalysts – an accelerating US economy, the global economy more generally even, violence in the Middle East and of course exceptionally low interest rates.
 
As I've mentioned before, with record high company profits – and apparently S&P predict that earnings per share will be at a new record come August – surging consumer savings and dirt cheap credit, I doubt high oil prices will act as a drag on the economy over the short to medium term. For the consumer, petrol prices take up about 3 to 5 per cent of total spending and the higher oil prices go the higher the expenditure and with that savings buffer, consumers won't even have to cut back spending in other areas. In the end it's not a big enough piece of the pie to derail an economy or throw advanced economies into a recession or anything.
 
It is inflationary though and last night we found out that euro zone producer prices surged 0.8 per cent in February to be 6.6 per cent higher annually – the peak in 2008 was 8.8 per cent. You can see why the ECB is worried. Upstream price pressures are rising rapidly – food, energy, copper, cotton, and so on.
 
Price action was subdued then in the equity space, in part because of rising oil prices but also because there wasn't much in the way of hard hitting data out. The major indices on both sides of the Atlantic were barely above zero (FTSE 0.1 per cent, STXE600 0.1 per cent) and in some cases just below (Dax -0.06 per cent). On Wall Street, the S&P500 managed to close up 0.03 per cent (1332) with basic materials, healthcare and consumer goods leading the index higher, although tech, utilities and energy stocks weighed – lots of takeover talks helping to keep the major indexes just above zero. The Dow was up 23 points to 12400, the Nasdaq fell 0.01 per cent (2789) while the SPI was 0.2 per cent higher at 4919.
 
In fixed income land, treasuries rallied but volumes weren't fantastic (running about 10 per cent below average through BrokerTec). It seems the market is focussing on Fed commentary; but not so much the hawkish stuff from Plosser, Lacker et al but more on the dovish commentary from Dudley and then again from Lockhart last night (he said that while the recovery is increasingly well established, the economy still faces headwinds). So yields on the major coupons were down 2-4bps with the 2-year at 0.76 per cent, the 5-year at 2.19 per cent and the 10-year at 3.42 per cent. Aussie futures were about 3 ticks higher with the 3s at 94.93 and the 10s at 94.47.
 
We didn't see much in the forex space. The Australian dollar was off 24 pips to 1.0363, the euro was unchanged at 1.4222, while the British pound is 30 pips lower (1.6132). Yen did zip and sits at 84.04. Otherwise, in commodities, gold rose smalls ($1433) and copper was 0.1 per cent weaker.
 
That's it really. The only other noteworthy data came out of the UK. The construction PMI was stronger than expected in March at 56.4 (54.8 expected) but down slightly from February (56.5). we also saw fourth quarter housing equity withdrawal and the BoE suggest consumers paid down a further 7 billion in debt.
 
Looking at the day ahead we get trade data at 1130 AEST and I think it's worth watching out for coal exports in particular. People who are all beared up on first quarter growth are relying on at least a 50 per cent fall in coal exports for the quarter – as a minimum. So we'll see what happens. At 1430 AEST of course, the RBA puts out its interest rate decision. No one is looking for a rate hike at this meeting and indeed the market is pricing in a 5 per cent chance of a cut. As for the statement, I doubt we'll get too many changes. The global economy is looking better and some of the downside risks have abated, but the domestic data hasn't really changed that much and is largely flood distorted. At the end of the day I think the RBA is waiting for upcoming employment and CPI data, and that if it's strong they'll hike and if it's not they won't.
 
Prior to the Aussie data we see the NZIER survey of business opinion (0845 AEST) then at 0915 AEST Bernanke gives a speech. Tonight we get the FOMC minutes, speeches from the Fed's Kocherlakota, Posser and Lockhart and also the non-manufacturing ISM.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.