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U.S. Economy Expands to 0.5% Pace, Weakest in Two Years

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US economy

The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.

Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.

Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost seven years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.

“The fact that personal consumption is a bit on the soft side is a disappointment, especially in light of the low gasoline prices,” said Thomas Costerg, senior economist at Standard Chartered Bank in New York, who correctly projected first-quarter growth. “Consumption seems to be stuck in a low gear.”

Economists’ projections for GDP, the value of all goods and services produced in the U.S., ranged from gains of 0.1 percent to a 1.5 percent. This is the government’s first of three estimates for the quarter before annual revisions in July.

Consumer Spending

Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.

Spending, while slightly better than the 1.7 percent median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.

“The first quarter is going to be the worst quarter for consumption for all of 2016,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York. “With financial markets calming down and retracing all of their losses, the fundamental factors that have driven consumption will continue to do so.”

Jobless Claims

Americans have more job security. A separate report from the Labor Department showed filings for unemployment benefits held last week around four-decade lows. Jobless claims rose to 257,000 from the prior week’s revised 248,000 that were the fewest since 1973.

The GDP report showed disposable income adjusted for inflation climbed 2.9 percent in the first quarter, an improvement from the 2.3 percent gain in final three months of 2015. The saving rate ticked up to 5.2 percent from 5 percent.

The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9 percent annualized pace, the biggest decline since the second quarter of 2009.

Last year’s slump in oil prices that extended into early 2016 led to an 86 percent annualized plunge in capital spending on wells and shafts, the most in records back to 1958.

Investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases.

Customers in the U.S. also limited orders as companies trim stockpiles to bring them more in line with sales. Inventories subtracted 0.33 percentage point from growth after a 0.22 percentage-point drag in the three months ended in December.

Progress in trimming inventories, along with receding headwinds from abroad and a comeback in the prices of oil and other commodities, may keep investment from deteriorating further.

A dearth of eager overseas customers led to a drop in exports in the first quarter. Trade subtracted 0.34 percentage point from overall growth, the most in a year.

Final Sales

Stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a 1.2 percent rate, the weakest advance since the third quarter of 2012.

Government spending rose at a 1.2 percent pace, led by states and municipalities.

If the past two years are any guide, the economy will shake off the first-quarter softness. In 2015, GDP rose 0.6 percent before rebounding to a 3.9 percent pace in the second quarter. A year earlier, the economy shrank at a 0.9 percent rate and then advanced 4.6 percent in the April-June period.

Fed policy makers, after skipping an interest-rate hike for a third straight meeting on Wednesday, suggested they remain upbeat about the underpinnings of U.S. growth. Central bankers also said they will continue to “closely monitor” inflation.

The GDP price index rose 0.7 percent in the first quarter. A measure of inflation tied to personal spending and excluding volatile food and fuel costs climbed 2.1 percent, the most in four years and in line with policy makers’ target.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Markets

Markets Today – Inflation, Jobless Claims, Boris Blunder, Oil, Gold, Bitcoin

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outlook

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a rollercoaster start to the year and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing but it’s made far more complicated by omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders were perhaps fearing the worst and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatile price action for the foreseeable future.

Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. The fourth quarter is expected to have been another strong quarter, although the emergence of omicron will likely have had an impact during the critical holiday period for many companies. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge. Which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and continues to point to a tight labor market. The PPI data on the other hand will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to abate which will come as a relief after inflation hit a near-40 year high last month.

Sterling solid as pressure mounts on Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets but the pound is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, omicron, energy prices etc.

Oil remains bullish near highs

Oil prices are easing again today after moving back towards seven-year highs in recent weeks. It was given an additional bump yesterday following the release of the EIA data which showed a larger draw than expected. But with crude already trading near its peak, it maybe didn’t carry the same momentum it otherwise would.

The fundamentals continue to look bullish for gold. Temporary disruptions in Kazakhstan and Libya are close to being resolved, with the latter taking a little longer to get fully back online. But OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so.

A big test for gold

Gold is off a little today but the price remains elevated with key resistance in sight. The yellow metal has remained well supported in recent weeks even as yields around the world continue to rise in anticipation of aggressive tightening from central banks.

It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks’ recent record for recognizing how severe the situation is. But with inflation likely nearing its peak, that may not last. That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment but a break of that resistance could change that.

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Crude Oil

Brent Crude Oil Trading at $84.53 a Barrel

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Crude Oil - Investors King

The increase in Omicron variant cases has cast doubt on demand for crude oil in the near-term and trimmed gains recorded earlier in the week on Thursday during the Asian trading session.

The brent crude oil, against which Nigerian oil is priced, pulled back from $85.16 per barrel on Wednesday to $84.53 per barrel at 9:50 am Nigerian time on Thursday.

The uncertainty surrounding the highly contagious Omicron variant and its impact on fuel demand has shown by the U.S Energy Information Administration on Wednesday dragged on the global crude oil outlook.

The data released on Wednesday revealed that gasoline stockpiles rose by 8 million barrels last week, way higher than the 2.4 million barrel increase projected by experts. Suggesting that demand for the commodity is gradually waning in response to omicron.

“Gasoline demand was weaker-than-expected and still below pre-pandemic levels, and if this becomes a trend, oil won’t be able to continue to push higher,” OANDA analyst Edward Moya stated.

However, in a note to Investors King, Craig Erlam, a senior market analyst, UK & EMEA, OANDA, expected the impact of omicron to be short-lived. Libya’s inability to ramp up production after outage and OPEC plus continuous failure to meet production target are expected to support crude oil in the main term even with Kazakhstan expected to get back to pre-disruption levels in a few days.

“With omicron seen being less of a drag on growth and demand than feared. Combine this with short supply and there may be some room to run in the rally as restrictions are removed. Of course, Covid brings unpredictability and zero-covid policies of China and some others bring plenty of downside risk for prices,” he said.

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Commodities

Soybean Oil Prices to Rise by 4% in 2022 Over Increase in Demand for Biofuels

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Soybean Oil

In 2022, global soybean oil prices, driven by an increase in the demand for biofuels, have been projected to rise by about 4 percent, to $1,425 per tonne; a market report from IndexBox reveals.

According to the IndexBox report, the growing demand for biofuels, especially in Asia, will increase the prices of soybean oil globally.

The platform put it that in 2021, the average annual soybean oil price rose by 65 percent year-on-year to $1,385 per tonne, from $838 per tonne. Strong demand and high freight rates in China, which is the world’s second-largest importer of soybean oil, resulted in the most rapid price growth of the commodity in the third quarter (Q3) of the same year. Weather-related disruptions to production in South America also caused soybean oil prices to rise fast.

In 2020, IndexBox estimates that soybean oil purchases in the foreign markets rose by 7.5% to 13 million tonnes, increasing for the second year in a row after three years of decline. In value terms, soybean oil imports have grown notably to $10.3 billion.

India was the highest importing country with a purchase volume of around 3.7 million tonnes, accounting for 28% of global supplies. China ranked second with a purchase volume of 963 thousand tonnes.  Algeria (670 thousand tonnes) and Bangladesh (666 thousand tonnes) were ranked as the third and fourth major importing country.

The four countries altogether accounted for about 17% of total soybean oil imports. Coming behind as the fifth-highest importer is Morocco (547 thousand tonnes), followed by Mauritania (537 thousand tonnes), Peru (521 thousand tonnes), South Korea (390 thousand tonnes), Colombia (378 thousand tonnes), Venezuela (373 thousand tonnes), Egypt (243 thousand tonnes), Poland (229 thousand tonnes) and Nepal (215 thousand tonnes).

India in value terms ($3 billion) being the largest market for soybean oil imports in the world, accounted for 29 percent of global imports. The second position in the ranking was taken by China ($725 million) with a 7 percent share. North African country, Algeria came third with a share of 4.6 percent of the total value.

Top Soybean oil exporters

In 2020, Argentina was the major exporter of soybean oil (5.3 million tonnes), constituting 42% of total exports. The United States (1238 thousand tonnes), Brazil (1110 thousand tonnes), Paraguay (631 thousand tonnes), the Netherlands (615 thousand tonnes) and Russia (611 thousand tonnes) follow, altogether accounting for 33% of global supplies. Meanwhile, Spain (387 thousand tonnes), Bolivia (377 thousand tonnes), Ukraine (302 thousand tonnes), Turkey (208 thousand tonnes) and Germany (192 thousand tonnes) had relatively small shares in the total volume.

In value terms, Argentina remains the largest supplier of soybean oil in the world ($ 3.7 billion), which accounts for 39% of global exports. The United States ($ 979 million), with a share of 10% of the total supply is ranked second. Both countries are followed by Brazil with an 8% share.

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