SCOREBOARD: Oil slip

Crude prices have dropped after the US talked up the chances of a reserve release while commodities and equities took a hit.

More talk that the US might release oil from their reserves, in conjunction with a report from the US Energy Department showing crude inventories at a 20-month high, aided a pretty decent drop in crude prices overnight. WTI was off 1.7 per cent ($105.5) and Brent fell 1.1 per cent ($124.2) after the French Industry Minister said the US was actively considering it. The US stated, as they have in the past, that no decision had been reached. As I’ve mentioned previously though, there is a strategy at play here and a coordinated one at that. Comments from the UK the US, Saudi Arabia and now France have all been directed at talking prices down.

More generally, there was a turn in sentiment also hitting commodities and prices across the board were weaker. Gold for instance was down $17 to $1662, silver fell 2.4 per cent and copper was 1.3 per cent lower. A little bit of US dollar buying probably helped with that, but we’re not talking big moves. So the US dollar index was up 0.4 per cent at the higher and has come off since then (flattish from 1630 AEDT).

The Australian dollar for its part got caught up in rising risk aversion, falling 56 pips from 1630 to be at 1.0395 as I write. Euro in contrast ended only a tad lower (10 pips to 1.3323), while sterling was off 60 pips to 1.5895 and yen was little changed at 82.83.

Lower commodity prices smacked US equities and at the low, the S&P500 was down 1.1 per cent led by energy and basic materials. A bid developed into the close and in the end we saw the index off 0.5 per cent (1405) with most sectors off, but basic materials, energy and industrial hardest hit. Financials were about the only sector in the black. Otherwise the Dow fell 71 points to 13126, the Nasdaq was 0.5 per cent lower (2104), while the SPI was off 0.4 per cent (4336). I have to confess to being a bit surprised by the extent of those moves given the lift in US durable goods orders. They were weaker than expected (3 per cent), instead rising 2.2 per cent, while core orders rose 1.2 per cent versus a forecast for 1.5 per cent. Core shipments in contrast were stronger than expected (1.4 per cent versus 0.9 per cent) – so it wasn’t a bad report and annually orders are over 17 per cent higher.

In any case, US treasuries did little with the 10-year yield up 2 basis points from 1630 AEDT to 2.2 per cent, the 5-year was also 2 basis points higher at 1.035 per cent, while the 2-year sits at 0.344 per cent – a bit over 2 basis points higher. Closer to home, Aussie debt futures rallied, outperforming US treasuries on a Terry McCrann article suggesting that next week’s RBA decision is line ball, or 50:50 in his words. The market (Futures and and OIS) are pricing in a 34 per cent chance of a cut at this meeting and no economists are forecasting a cut. For mine, and clearly the market agrees, I wouldn’t have thought the decision would even be remotely close on the data that we’ve seen. Yet McCrann’s article is the latest in a number of reports I’ve seen talking up the prospect of a cut.

Whether this is just speculation in an otherwise quiet data week or someone on the board out and about trying to rally support, I’m unsure. Certainly there have been a number of industry types demanding lower rates and the problem is that we’ve been here so many times before, that you can’t rule out the politics. They all hang out at the same clubs and secret societies after all. The RBA board itself acknowledged late last year that on a pure read of the data, it was difficult to make a clear case to cut rates. Yet we got those cuts. Fast forward a few months and Europe didn’t implode and the US economy is accelerating, despite what Bernanke might think. Those desperate for rate cuts point to the fourth quarter GDP numbers as proof the economy is sub-trend. I think this is a fairly dire misinterpretation of the data and the economic state of play. Not the first time and it won’t be the last in this politically charged environment. GDP, it’s fair to say, is below trend, but GDP is soft largely because imports are so strong (and the floods) and strong imports do not point to a sub-trend economy.

Domestic demand, which excludes imports, exports and inventories, is running at an annual pace of 4.4 per cent or 4.8 per cent annualised in the second half of the financial year – well above trend. And it is predominantly domestic demand that is affected by changes in the case rate. Cutting the cash rate won’t lower import growth – quite the opposite and as such is unlikely to lift GDP much. Imports need to slow down for that. Then there is the unemployment rate at 5.2 per cent and the RBA’s view that the risks to inflation are evenly balanced. None of this has changed. If we do get a cut, that’s politics trumping economics again.

There were a few interesting bits otherwise. German CPI came in as expected rising 0.4 per cent in March after a 0.9 per cent increase, to be 2.1 per cent higher annually (from 2.3 per cent). Momentum seems considerably stronger than that however, with the six months annualised pace at 3.2 per cent. Then in the US, mortgage applications fell 2.2 per cent in the week to March 23, largely as refis fell 4.6 per cent. New purchase applications rose 3.3 per cent. Finally for the major data, UK fourth quarter GDP was revised lower (-0.3 per cent from -0.2 per cent).

Looking at the day ahead, the only Aussie data out is the ABS Job Vacancies series at 1130 AEDT. The data is for February and the lag makes it a fairly minor indicator. In New Zealand, the NBNZ release their business report (1100 AEDT) and that’s it really. Tonight it’s worth looking out for German employment numbers (March data) and the EC business climate indicator. US data includes initial jobless claims, the Kansas City Fed manufacturing index and a few Fed speakers (Bernanke, Lockhart, who is a voter, and Plosser).

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

Follow @AdamCarrEcon on Twitter.

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