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Falling Inflation, Retail Sales Bolster Fed’s Go-Slow Approach

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7 years ago

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Consumer Prices
  • Falling Inflation, Retail Sales Bolster Fed’s Go-Slow Approach

The economic case for a Federal Reserve interest-rate increase in June just became a little less solid.

Inflation took a surprising step back in March at the same time retail sales dropped for a second month, according to a pair of U.S. government reports on Friday. Labor Department data showed the consumer-price index fell a larger-than-forecast 0.3 percent, while a measure excluding food and energy fell by the most since 1982.

While the pullback at retailers underscores a weak first quarter for consumer spending that economists had already penciled in, the inflation data are what surprised them given recent signs that businesses had been able to regain pricing power. A further cooling of price pressures and modest household demand would raise questions about whether the economy could withstand a mid-year move by the Fed to lift borrowing costs.

“Both reports would be arguments in a case that a dove would make for why the Fed needs to be more patient,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “It’s a relatively soft consumer performance in the first quarter, and you couple that with a pretty abrupt halt in the gradual uptrend in inflation. If I were a dovish policy maker, I’d say ‘what’s the harm in holding off a little bit and seeing how all this plays out.”’

That would make the June meeting more of a toss-up for a rate increase. As of Thursday, federal funds futures showed about a 57 percent chance that policy makers will raise their target rate for overnight bank lending. Financial markets in the U.S. were closed for Good Friday and the Easter holiday.

Retail sales were down 0.2 percent last month after a 0.3 percent drop in February that had previously been reported as a gain, Commerce Department data showed. Six of 13 major retail categories registered lower March receipts. At auto dealers, purchases fell 1.2 percent after a 1.5 percent slide a month earlier.

Low prices may have also played a role in restraining total sales as the retail figures aren’t adjusted to account for changes in inflation.

To be sure, two more months of economic data will be available before the Fed’s June 13-14 meeting. Spending, which accounts for about 70 percent of the economy, has room to pick up on the heels of steady hiring, healthier household balance sheets and more optimistic consumers. Income-tax refunds, which had been delayed earlier this year, may also provide a spark in the months ahead.

“The retail sales data are not adjusted for price changes which, as we have often noted, causes considerable misinterpretation of the underlying health of consumers,” Richard Moody, chief economist at Regions Financial Corp., said in a note after the report. “Ongoing improvement in labor market conditions, rising household net worth, and notably higher consumer confidence leave us with a much more constructive view of U.S. consumers than does the Q1 retail sales data.”

The decline in the CPI was the first in 13 months and was also broad, reflecting cheaper goods such as motor vehicles and gasoline, as well as a drop in the costs of services, including mobile-phone communications. The core CPI, which excludes energy and food, fell 0.1 percent.

Services prices also declined 0.1 percent, the most since 2010. Overall housing costs rose just 0.1 percent, the smallest advance in a year. The cost of lodging away from home dropped 2.4 percent, the most since October 2013, while the prices of mobile phone service slumped a record 7 percent. Combined with a 0.7 percent slide in the cost of goods, the most in 13 months, the results underscore the broad decline.

Still, “we don’t think this is enough to cause the Fed to swerve from their stated desire to continue gradually increasing the funds rate, though it may embolden the doves’ rhetoric,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note. “Until it gets reversed with stronger inflation data, today’s number will leave lingering doubts about the popular reflation narrative.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Dangote Mega Refinery in Nigeria Seeks Millions of Barrels of US Crude Amid Output Challenges

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16 hours ago

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May 16, 2024

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Dangote Refinery

The Dangote Mega Refinery, situated near Lagos, Nigeria, is embarking on an ambitious plan to procure millions of barrels of US crude over the next year.

The refinery, established by Aliko Dangote, Africa’s wealthiest individual, has issued a term tender for the purchase of 2 million barrels a month of West Texas Intermediate Midland crude for a duration of 12 months, commencing in July.

This development revealed through a document obtained by Bloomberg, represents a shift in strategy for the refinery, which has opted for US oil imports due to constraints in the availability and reliability of Nigerian crude.

Elitsa Georgieva, Executive Director at Citac, an energy consultancy specializing in the African downstream sector, emphasized the allure of US crude for Dangote’s refinery.

Georgieva highlighted the challenges associated with sourcing Nigerian crude, including insufficient supply, unreliability, and sometimes unavailability.

In contrast, US WTI offers reliability, availability, and competitive pricing, making it an attractive option for Dangote.

Nigeria’s struggles to meet its OPEC+ quota and sustain its crude production capacity have been ongoing for at least a year.

Despite an estimated production capacity of 2.6 million barrels a day, the country only managed to pump about 1.45 million barrels a day of crude and liquids in April.

Factors contributing to this decline include crude theft, aging oil pipelines, low investment, and divestments by oil majors operating in Nigeria.

To address the challenge of local supply for the Dangote refinery, Nigeria’s upstream regulators have proposed new draft rules compelling oil producers to prioritize selling crude to domestic refineries.

This regulatory move aims to ensure sufficient local supply to support the operations of the 650,000 barrel-a-day Dangote refinery.

Operating at about half capacity presently, the Dangote refinery has capitalized on the opportunity to secure cheaper US oil imports to fulfill up to a third of its feedstock requirements.

Since the beginning of the year, the refinery has been receiving monthly shipments of about 2 million barrels of WTI Midland from the United States.

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Crude Oil

Oil Prices Hold Steady as U.S. Demand Signals Strengthening

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17 hours ago

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May 16, 2024

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Crude Oil - Investors King

Oil prices maintained a steady stance in the global market as signals of strengthening demand in the United States provided support amidst ongoing geopolitical tensions.

Brent crude oil, against which Nigerian oil is priced, holds at $82.79 per barrel, a marginal increase of 4 cents or 0.05%.

Similarly, U.S. West Texas Intermediate (WTI) crude saw a slight uptick of 4 cents to $78.67 per barrel.

The stability in oil prices came in the wake of favorable data indicating a potential surge in demand from the U.S. market.

An analysis by MUFG analysts Ehsan Khoman and Soojin Kim pointed to a broader risk-on sentiment spurred by signs of receding inflationary pressures in the U.S., suggesting the possibility of a more accommodative monetary policy by the Federal Reserve.

This prospect could alleviate the strength of the dollar and render oil more affordable for holders of other currencies, consequently bolstering demand.

Despite a brief dip on Wednesday, when Brent crude touched an intra-day low of $81.05 per barrel, the commodity rebounded, indicating underlying market resilience.

This bounce-back was attributed to a notable decline in U.S. crude oil inventories, gasoline, and distillates.

The Energy Information Administration (EIA) reported a reduction of 2.5 million barrels in crude inventories to 457 million barrels for the week ending May 10, surpassing analysts’ consensus forecast of 543,000 barrels.

John Evans, an analyst at PVM, underscored the significance of increased refinery activity, which contributed to the decline in inventories and hinted at heightened demand.

This development sparked a turnaround in price dynamics, with earlier losses being nullified by a surge in buying activity that wiped out all declines.

Moreover, U.S. consumer price data for April revealed a less-than-expected increase, aligning with market expectations of a potential interest rate cut by the Federal Reserve in September.

The prospect of monetary easing further buoyed market sentiment, contributing to the stability of oil prices.

However, amidst these market dynamics, geopolitical tensions persisted in the Middle East, particularly between Israel and Palestinian factions. Israeli military operations in Gaza remained ongoing, with ceasefire negotiations reaching a stalemate mediated by Qatar and Egypt.

The situation underscored the potential for geopolitical flare-ups to impact oil market sentiment.

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Crude Oil

Shell’s Bonga Field Hits Record High Production of 138,000 Barrels per Day in 2023

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17 hours ago

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May 16, 2024

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oil field

Shell Nigeria Exploration and Production Company Limited (SNEPCo) has achieved a significant milestone as its Bonga field, Nigeria’s first deep-water development, hit a record high production of 138,000 barrels per day in 2023.

This represents a substantial increase when compared to 101,000 barrels per day produced in the previous year.

The improvement in production is attributed to various factors, including the drilling of new wells, reservoir optimization, enhanced facility management, and overall asset management strategies.

Elohor Aiboni, Managing Director of SNEPCo, expressed pride in Bonga’s performance, stating that the increased production underscores the commitment of the company’s staff and its continuous efforts to enhance production processes and maintenance.

Aiboni also acknowledged the support of the Nigerian National Petroleum Company Limited and SNEPCo’s co-venture partners, including TotalEnergies Nigeria Limited, Nigerian Agip Exploration, and Esso Exploration and Production Nigeria Limited.

The Bonga field, which commenced production in November 2005, operates through the Bonga Floating Production Storage and Offloading (FPSO) vessel, with a capacity of 225,000 barrels per day.

Located 120 kilometers offshore, the FPSO has been a key contributor to Nigeria’s oil production since its inception.

Last year, the Bonga FPSO reached a significant milestone by exporting its 1-billionth barrel of oil, further cementing its position as a vital asset in Nigeria’s oil and gas sector.

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