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Poloz and the Urgency of a July Rate Hike

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  • Poloz and the Urgency of a July Rate Hike

There is nothing in the Bank of Canada’s market-moving statements last week to indicate an interest rate hike is imminent, but investors aren’t taking chances.

The central bank’s next decision on July 12 is now a toss up, with traders assigning a 50 percent chance of an increase. Before Governor Stephen Poloz and his top deputy Carolyn Wilkins talked openly about the prospect of raising rates, odds were close to zero for a July hike and investors hadn’t priced in a full 25 basis point increase until the end of 2018.

Why the sudden urgency?

Part of the explanation may be that after being caught short by Poloz in the past, investors have become “twice shy” with the bank. The last time Poloz changed direction on rates — in January 2015 — he went from a change in tone (a deputy’s speech) to an interest rate cut in a matter of eight days. The cut was unanticipated and investors complained about message confusion.

Compared to that move, Poloz can reasonably argue he’s left investors plenty of time to ponder a rate increase.

“We got a rate cut surprise in January 2015 with very little softening up of the ground,” said Michael Gregory, an economist at Bank of Montreal. “Therefore the Bank of Canada is saying, ‘We may or may not go in July, probably won’t, but if we do be warned.”

Accommodating Banker

In fact, by choosing to soften the ground last week during a deputy’s speech, Poloz is only fueling speculation he’s itching to move. If he wanted to raise rates later this year, then he could have set the stage at next month’s decision, which coincides with new quarterly forecasts and a press conference.

This is a central banker, after all, who has a reputation for being accommodative, and who only a few months ago was talking about rate cuts. By the time his seven-year term is done, Poloz will probably have kept borrowing costs on average at lower levels than any of his eight predecessors — a legacy shared by many of his contemporaries in other countries.

“You can argue Steve has been more accommodating, so must feel really confident in the economy’s prospects if he’s itching to go,” said Andrew Spence, head of liquid alternatives at Scotia Institutional Asset Management and a former adviser at the Bank of Canada.

In other words, the fact Poloz has moved so quickly into what is for him uncharted territory may be a signal he’s determined to move. Talk of higher rates may suggest an underlying change has taken place.

Tightening Bias I

Of course, just because there’s a particular bias, it doesn’t mean rates will move in that direction. A lot depends on what inflation does. Take 2013 as an example.

When he took over at the Bank of Canada in June of that year, Poloz inherited a tightening bias from his predecessor, Mark Carney. But it didn’t last long as inflation continued to remain sluggish.

At his first rate decision six weeks later, Poloz kept the bias but toned it down. In October, amid a deteriorating global growth outlook, Poloz dropped the bias altogether.

That year, quarterly GDP growth was robust, averaging 3.6 percent, but inflation was hovering around 1 percent. Inflation concerns won the day. (Not surprising given the Bank of Canada’s mandate.)

Today, it’s a similar story. In the last three quarters, growth has averaged 3.5 percent, while inflation is running at just 1.5 percent.

Inflation Matters?

That’s why last week’s changes were such a surprise, given how much inflation does matter. Could the new language mean the central bank’s modeling — at the current pace of growth — is beginning to forecast inflation well beyond the Bank of Canada’s 2 percent target.

As recently as May, the bank said low inflation was a sign of the economy’s excess slack. In her June 12 speech, Wilkins said it measured the “lagged effects” of excess capacity.

That’s a big change in three weeks, and makes consumer price inflation data due Friday — the last set before the July 12 decision — particularly important.

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.

Energy

African Energy Developments Demand Sustained Investment With New Projects in Mozambique, Tanzania, Uganda, and Senegal

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In the past twelve months, the African energy sector has seen several encouraging developments – in the form of both Foreign Direct Investment (FDI) and strategic partnerships – that have advanced the sustainable development of its natural resources. In fact, despite a global downturn in investment in 2020, FDI flows to developing economies accounted for 72% of global FDI, the highest share to date. Given the magnitude of Africa’s oil and gas reserves – not to mention its abundant renewable resource wealth – the continent remains a highly attractive market for inbound investment, which is vital for its growth.

Take Uganda, for instance, which is home to one of the largest onshore discoveries in sub-Saharan Africa. Following multiple petroleum discoveries in Uganda’s Albertine Graben – estimated to contain 6.5 billion barrels of oil, of which 1.4 billion are considered recoverable – foreign investments into the country are expected to reach nearly $20 billion. Last April, Total E&P Uganda B.V. signed a Sale and Purchase Agreement with Tullow Oil PC, through which Total will acquire Tullow’s entire 33.34% interests in Uganda’s Lake Albert development project and the East African Crude Oil Pipeline (EACOP). Five months later, the Ugandan Government and Total signed a host government agreement for EACOP, representing a significant step toward reaching a final investment decision. The deal pushes along an extended development process – slowed by infrastructure issues, tax complications, then COVID-19 – that not only promises to bring first oil by 2022, but also provides a pathway to monetization via associated transport infrastructure.

In addition to developments at Lake Albert, the Ugandan Government has proven its commitment to attracting FDI to its hydrocarbon sector through its second licensing round held last year, as well as its invitation to local and foreign entities to forge joint-venture partnerships with the Government. By prioritizing the establishment of mutually beneficial partnerships, the emerging East African producer aims to facilitate the successful transfer of skills, knowledge and technology, initiating an influx of technical expertise and working capital into the country.

“Those who have been locked out from access to opportunity want the same from the energy sector that the energy sectors want from governments.  We must not forget local content, local jobs, local opportunities especially for young people and women” Stated NJ Ayuk Executive Chairman of the African Energy Chamber.

Meanwhile, in West Africa, Senegal has been reaping the rewards of a long-standing partnership with Germany, which has resulted in more than one billion Euros in funding, including significant support for small-scale power plants and renewable energy projects. Holding sizeable potential for solar and wind energy development, Senegal serves as a regional leader in renewable deployment as a means of rural electrification. Indeed, energy is a central component of poverty alleviation across Africa, with electricity access enabling greater independence, clean cooking and potable water, as well as dramatically improving the well-being of individuals, businesses and communities alike.  Rural populations are cognizant of the challenges posed by a lack of stable electricity supply – increased urban migration, lack of access to basic services, low economic competitiveness, to name a few – and distributed renewables can represent the fastest and least expensive path to electrification.

European interest in Senegal has shed light on and served as a model for co-operation opportunities between renewable-rich African countries and developed partners, which offer cutting-edge technologies and technical expertise to transform raw resources into viable off-grid and mini-grid solutions.

Furthermore, while the cost of deploying renewable technology has never been lower, the availability of renewable-focused capital has never been higher. Investment in commercial and industrial solar has demonstrated resilience against the pandemic, continuing to be seen as a safe investment in light of rising utility costs and increasing distribution of both solar and financial technologies. Yet resource potential and low costs of equipment are not enough; Senegal and other resource-rich African nations require active investor interest and strong government support to unlock diversified energy mixes. In turn, a lack of investment represents a pointed threat to the achievement of long-term energy security.

“Young people and women have shown their great resilience, and it is our hope we close these deals in the renewable energy sector, Africans can have a sense of some hope that they will be included in the industry contracts and opportunities. It is no longer correct for the African to be the last hired and the first fired” Concluded Ayuk.

Moreover, without sustained levels of FDI continuing to move the needle on oil, gas and renewable developments, energy export revenues run the risk of being stranded and resources left undeveloped. For emerging producers like Uganda – as well as Tanzania, Kenya, Mozambique, among several others – this would mean foregoing critical government revenues that could aid in a much-needed, post-COVID-19 economic recovery. FDI is vital to Africa’s growth, and while it may be challenging to procure capital in a tepid global economy, it is even more difficult not to. Yes, COVID-19 has put emerging producers in a tough spot: new exploration is seen as risky, and new producers lack existing assets or low-cost development of marginal fields on which to fall back. However, it is not an option to slow or postpone time-sensitive developments that promise to harness natural resource wealth and make sustainable improvements in standards of living across the continent. Africa requires a sustained flow of investment and has proven time and again that it offers the scope of projects and magnitude of resources that are worthy of foreign capital.

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Energy

Saudi Aramco’s Profit Halved in Two Years, Market Cap $210B Below Apple’s

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Even before the pandemic, the oil and gas industry was faced with slumping prices. However, with a record collapse in oil demand amid the lockdowns, the COVID-19 crisis has further shaken the market, causing massive revenue and market cap drops for even the largest oil companies.

According to data presented by Finaria.it, the net income of the world’s biggest oil producer and one of the largest publicly listed companies, Saudi Aramco, dropped to $49bn in 2020, a 55% plunge in two years.

The COVID-19 Crisis and Oil Price War Cut Profits by Almost $40B in a Year

In preparation for its IPO, which took place in December 2019, Saudi Aramco had published 2018 profits. With a net income of $111.1bn, Saudi Arabia’s state-run oil giant ranked as the most profitable publicly listed company in the world.

Global macroeconomic concerns like the US-China trade war and the oil overproduction set significant price drops even before the coronavirus outbreak. In 2019, the company reported a profit of $88.2bn, a 20% drop year-over-year.

However, a standoff between Russia and Saudi Arabia in the first months of 2020 sent prices even lower and caused a massive hit for Saudi Aramco’s profits.

After global oil demand plunged in March, Saudi Arabia proposed a cut in oil production, but Russia refused to cooperate. Saudi Arabia responded by increasing production and cutting prices. Shortly Russia followed by doing the same, causing an over 60% drop in crude oil prices at the beginning of 2020. Although OPEC and Russia agreed to cut oil production levels to stabilize prices a few weeks later, the COVID-19 crisis already hit.

In March, Saudi Aramco announced full-year figures for the second time since going public, and the results revealed huge financial losses. In 2020, Saudi Arabia’s state-run oil company reported a net income of $49bn, almost a $40bn drop in a year.

While Saudi Aramco was the most profitable publicly listed company globally in 2019, the current result puts the company behind Apple, which reported a net income of $57.4bn in 2020.

Saudi Aramco’s Market Cap $210B Below Apple’s

In December 2019, Saudi Arabia’s state-run oil giant completed its long-awaited IPO and hit a staggering $2 trillion valuation on the second day of trading, nearly one trillion higher than the world’s next-largest publicly listed companies Microsoft and Apple. The initial public offering was an essential part of Crown Prince Mohammed bin Salman’s Vision 2030 program to transform the Saudi economy.

However, Saudi Aramco’s stocks were outperformed by Apple in 2020. After plunging to $1.61trn in March last year, the market cap of the Dhahran-based company jumped to $2.15trn in September. By the end of the year, this figure slipped to $2.05trn. Statistics show that Saudi Aramco’s market cap floated around this value for the last three months and then dropped to $1.87trn in April after the company revealed the full-year results.

Although valued one trillion less than Saudi Aramco at the time of its IPO, the world’s largest tech company, Apple’s, has seen its market cap surge last year. In January 2020, the combined value of shares of the US tech giant stood close to $1.4trn. After plunging to $1.1trn in March, Apple’s market cap soared to over $2.3trn in December. Although this figure slipped to $2.08trn last week, it still represents almost a 90% increase in a year.

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Crude Oil

Oil Inches Higher But Rangebound as COVID-19 Cases Soar

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Oil prices edged higher in rangebound trade on Monday on optimism about a rebound in the U.S. economy as vaccinations accelerate, but rising COVID-19 cases in other parts of the world kept a lid on prices.

Brent was up 22 cents, or 0.4%, at $63.17 a barrel by 0843 GMT. West Texas Intermediate (WTI) U.S. crude rose 12 cents, or 0.2%, to $59.44 a barrel.

The prices have remained rangebound in the last three weeks, with Brent between $60 and $65 per barrel and WTI at $57 to $62.

“Oil prices are entering a consolidation phase after swinging wildly last month,” Stephen Brennock of oil broker PVM.

“While there are still plenty of reasons to be bullish, market players have become more cautious as infections have surged in Europe, India and some emerging markets, while vaccine rollouts have proved slower than anticipated,” he added.

India now accounts for one in every six daily infections worldwide, and other parts of Asia are seeing infection rates rise.

Asian oil demand remained weak and some buyers asked for lower volumes in May partly because of refinery maintenance and higher prices.

The United States has fully vaccinated more than 70 million people but U.S. gasoline demand has not picked up as much as expected.

The U.S. economy is at an “inflection point” amid expectations that growth and hiring will accelerate in the months ahead, but faces the risk of reopening too quickly and sparking a resurgence in coronavirus cases, Federal Reserve Chair Jerome Powell said in an interview broadcast on Sunday.

“There really are risks out there. And the principal one just is that we will reopen too quickly, people will too quickly return to their old practices, and we’ll see another spike in cases,” Powell said in a CBS interview, recorded on Wednesday.

On the production side, no new oil drilling rigs were started in the United States in the most recent week, a report published by Baker Hughes showed.

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