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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.

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.

Crude Oil

Oil Prices Slip as Japan’s Rising Inflation Signals Rate Hikes

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Crude oil fell in early trading on Friday as concerns over sustained high interest rates in both Asia and the United States weighed on the outlook.

This trend is attributed to Japan’s increasing inflation, which is prompting expectations of imminent rate hikes by its central bank.

Brent crude edged declined by 11 cents to settle at $85.60 per barrel while the U.S. crude oil declined by 9 cents to $81.20 per barrel.

Recent data revealed that Japan’s core consumer prices rose by 2.5% in May compared to the same month last year. This increase marks a growth from the previous month, suggesting that the Bank of Japan is likely to raise interest rates in the upcoming months to curb inflation.

In the United States, data released on Thursday showed a decrease in the number of new unemployment claims for the week ending June 14, indicating continued strength in the job market.

This persistent robustness in employment raises the likelihood that the U.S. Federal Reserve will maintain higher interest rates for a longer period.

Higher interest rates typically have a dampening effect on economic activity, which can subsequently reduce oil demand.

The prospect of prolonged elevated interest rates in two major economies has therefore put downward pressure on crude oil prices.

Despite the downward trend, oil prices received some support from the latest figures from the Energy Information Administration (EIA).

The data showed a drawdown in U.S. crude inventories by 2.5 million barrels in the week ending June 14, bringing the total to 457.1 million barrels. This exceeded analysts’ expectations, who had predicted a 2.2 million-barrel reduction.

Also, gasoline inventories fell by 2.3 million barrels to 231.2 million barrels, contrary to forecasts that anticipated a 600,000-barrel increase.

“Gasoline finally came to life and posted its first strong report of the summer driving season,” remarked Bob Yawger, director of energy futures at Mizuho in New York, highlighting the surprising uptick in gasoline demand.

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Crude Oil

Nembe Creek Oil Field Halted After Leak, Impacting 150,000 bpd

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Nigeria’s oil output has taken a significant hit following the shutdown of the Nembe Creek oil field due to a major oil leak.

The Nembe Creek oil field, responsible for producing approximately 150,000 barrels of crude oil per day (bpd), was forced to cease operations on June 17, 2024.

The leak occurred on the Nembe Creek Trunk Line (NCTL), a critical pipeline that transports oil from the Nembe Creek oil field to the Bonny Oil Export Terminal.

The operator of the pipeline, Aiteo Eastern Exploration and Production Company, confirmed the leak and the subsequent shutdown in a statement released yesterday.

Aiteo reported that the leak was discovered during routine operations in the Nembe area of Bayelsa State, located in Nigeria’s oil-rich Delta region.

This region is notorious for environmental degradation due to decades of oil spills, which have severely impacted local agriculture and fishing industries.

Following the discovery of the leak, Aiteo activated its Oil Spill and Emergency Response Team and shut down all production from Oil Mining Lease (OML) 29 as a precautionary measure to prevent further environmental damage.

“While we regret the production losses and the potential environmental impact, our current priority is to expedite an efficient spill management process in line with regulatory standards and collaborate with all stakeholders to restore production and mitigate associated risks,” said Victor Okronkwo, Managing Director of Aiteo Eastern E&P.

The exact cause of the leak remains unknown. Aiteo emphasized that the shutdown was a precautionary step to contain the spill and minimize environmental harm.

The company has notified its joint venture partners and relevant regulatory bodies, including the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the National Oil Spill Detection and Response Agency (NOSDRA), about the incident.

This development comes as a setback for Nigeria, which holds Africa’s largest natural gas reserves and is a major oil producer.

The country’s oil sector has faced numerous challenges, including aging infrastructure, theft, and environmental issues, which have hindered its ability to maximize production and exports.

The Nembe Creek shutdown also highlights ongoing concerns about the safety and reliability of Nigeria’s oil infrastructure. The NCTL has been a frequent target of oil theft and sabotage, exacerbating the challenges of maintaining a steady oil output.

Energy analysts believe that the latest incident could impact Nigeria’s ability to meet its export commitments and exacerbate the country’s economic challenges.

The Nigerian government, under President Bola Tinubu, has been making efforts to attract investment into the energy sector to boost production and address infrastructure deficits.

“The government will hope this offers confidence not only in the quality of the Nigerian resource base, but also in the government’s pledge to improve ease of doing business,” said Clementine Wallop, director of sub-Saharan Africa at political risk consultancy Horizon Engage.

As Nigeria works to address the immediate spill and restore production, the broader implications for the country’s oil sector and its environmental impact remain to be seen.

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Crude Oil

Brent Crude Nears Seven-Week Highs as Market Eyes US Inventory Report

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Brent oil, the international benchmark for Nigerian crude oil, remained steady on Thursday, hovering just below seven-week highs as the escalating conflict in the Middle East raised concerns over potential supply disruptions.

At the same time, the market eagerly awaits U.S. inventory data for further indications of demand trends.

August Brent crude rose 28 cents, or 0.3%, to $85.35 a barrel while the U.S West Texas Intermediate (WTI) oil gained 13 cents, or 0.2%, to $81.70 a barrel.

“There was no WTI settlement on Wednesday due to a U.S. public holiday, which kept trading subdued,” noted Ricardo Evangelista, an analyst at ActivTrades.

“However, oil prices are likely to remain supported around current levels due to a growing geopolitical risk premium driven by conflict in the Middle East.”

Israeli forces have intensified their operations in the Gaza Strip, targeting areas in the central region overnight while tanks advanced into Rafah in the south.

The escalating violence has heightened fears of a broader conflict that could impact oil supplies from the region.

“Expectations of an inventory build appear to be overshadowing fears of escalating geopolitical stress for now,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Investors are keenly awaiting the release of U.S. inventory data from the Energy Information Administration (EIA) later on Thursday, delayed by a day due to the Juneteenth holiday.

An industry report released on Tuesday by the American Petroleum Institute (API) indicated that U.S. crude stocks rose by 2.264 million barrels in the week ending June 14, while gasoline inventories fell, according to market sources.

The summer season typically sees an uptick in oil demand due to increased refinery runs and weather-related risks.

“Ongoing production cuts by the OPEC+ group, combined with seasonal demand, should tighten oil balances and lead to inventory draws during the summer months,” J.P. Morgan commodities analysts wrote.

Refining margins have also improved, with the ICE gasoil futures premium to Brent crude jumping to $20.63 a barrel on Wednesday, a two-month high.

“Firmer fuel refining margins provide a healthy dose of encouragement for those expecting improvements on the demand side,” commented Tamas Varga, an analyst at PVM.

In other economic news, the Bank of England’s decision to keep its main interest rate unchanged at a 16-year high of 5.25% ahead of the national election on July 4 has been noted by market observers.

Higher interest rates generally increase the cost of borrowing, which can slow economic activity and dampen oil demand.

As the market braces for the upcoming EIA inventory report, analysts and traders are closely watching for any signals that could influence oil prices in the near term.

The delicate balance between geopolitical tensions and supply-demand fundamentals continues to play a critical role in shaping the oil market landscape.

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