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The Bank of Canada Shows It’s the Federal Reserve of the North

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  • The Bank of Canada Shows It’s the Federal Reserve of the North

A North American central bank hiking rates in the face of strong job growth and deteriorating core inflation rates, citing temporary factors for the drop-off in price pressures.

No, it’s not Janet Yellen’s Federal Reserve — it’s Stephen Poloz’s Bank of Canada.

On Wednesday, the Bank of Canada delivered its first interest-rate hike in almost seven years, becoming the first Group of Seven central bank to join the Fed in policy normalization, the first concrete step toward global monetary policy convergence. And it followed the Fed in more ways than one.

The Bank of Canada now sees inflation averaging 1.6 percent, down three tenths of a percentage point from its April Monetary Policy Report. At the same time, the bank estimates economic slack will be eliminated by the end of 2017, sooner than it had anticipated three months ago. That’s an echo of the Fed’s move in June, which saw officials mark down their forecast for the unemployment rate forecasts and core PCE inflation, its preferred gauge of price pressures.

For Janet Yellen, Verizon has been the big headache in suppressing inflation. Stephen Poloz and Canadian policymakers attributed the shortfall to sluggish food inflation, measures by the Ontario government to reduce the cost of electricity and a significant slowdown in auto price gains.

Core Measures

The bank’s three core measures of inflation were designed by officials in part to filter out exactly these sector-specific shocks. However, they’ve proven unable to fully do so, contributing to a downward trend in all three metrics since early 2016.

The bank’s Monetary Policy Report even alluded to an Amazon effect potentially contributing to subdued inflation globally, just as Chicago Fed President Charles Evans did in late June.

“The rise of e-commerce may also have heightened retail competition, by enabling retailers to compete across national borders, thus changing pricing behavior and making prices more sensitive to new information and global market conditions,” the bank’s Governing Council wrote in its opening statement before Wednesday’s press conference.

Steeled Resolve

Canada’s best quarter for employment gains since 2010 and broadening economic growth bolstered the central bank’s confidence in the outlook and steeled its resolve to increase interest rates. As such, the Fed and Bank of Canada are expected to lead the charge away from the zero lower bound. That’s after an onslaught of hawkish rhetoric from top Canadian monetary policymakers over the past month.

Historically, the two central banks’ policy rates have moved in sync. However, a Canadian credit cycle that’s completely divorced from that of its largest trading partner in the wake of the financial crisis, a weakened link between U.S. demand and Canadian exports, and the plummet in oil prices starting in mid-2014 has prompted policy to decouple this decade.

The Bank of Canada and Fed have different government-appointed directives: the U.S. central bank has a dual mandate for full employment and stable inflation; its Canadian counterpart targets only the latter. At this juncture, both are fundamentally relying heavily on unobservable constructs to justify the removal of monetary stimulus in the face of subdued price pressures.

Yellen still puts faith in the Phillips Curve, which suggests that an unemployment rate that sinks beyond a sustainable level will foster higher wages and price pressures broadly.

Poloz’s basis for tightening rests upon his outlook for the output gap — the cumulative difference between the central bank’s estimate of how fast the economy can grow and how fast it has — buttressed by the notion that central bank policy changes influence economic activity with a lag. A zero output gap is consistent with an economy that’s operating at full capacity with stable inflationary pressures.

“It is the output gap which guides the pressures on inflation through time,” the governor said in the press conference following his first rate decision in 2013.

While using slightly different compasses, Poloz and Yellen have the same rationale in mind: easing up on monetary accommodation now — despite the current lack of success on their government-appointed inflation mandates — will help avoid a situation in which they fall behind the curve and need to tighten policy swiftly to tamp down on inflation, sending their respective economies into recession.

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

Nigeria Pumps 236.2 Million Barrels in First Half of 2024

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Nigeria pumped 236.2 million barrels of crude oil in the first half of 2024, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

This figure represents an increase from the 219.5 million barrels produced during the same period in 2023.

In January, Nigeria produced 44.2 million barrels of crude oil while February saw a slight dip to 38.3 million barrels, with March following closely at 38.1 million barrels.

April and May production stood at 38.4 million barrels and 38.8 million barrels, respectively. June’s output remained consistent at 38.3 million barrels, demonstrating a stable production trend.

Despite the overall increase compared to 2023, the 2024 production figures still fall short of the 302.42 million barrels produced in the same period in 2020.

This ongoing fluctuation underscores the challenges facing Nigeria’s oil sector, which has experienced varying production levels over recent years.

On a daily basis, Nigeria’s crude oil production showed some variability. In January, the average daily production peaked at 1.43 million barrels per day (mbpd), the highest within the six-month period.

February’s production dropped to 1.32 mbpd, with a further decrease to 1.23 mbpd in March. April saw a modest increase to 1.28 mbpd, which then fell again to 1.25 mbpd in May. June ended on a positive note with a slight rise to 1.28 mbpd.

The fluctuations in daily production rates have prompted government and industry leaders to address underlying issues.

Mele Kyari, Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPC), has highlighted the detrimental effects of oil theft and vandalism on Nigeria’s production capabilities.

Kyari emphasized that addressing these security challenges is critical to boosting production and attracting investment.

Kyari also noted recent efforts to combat illegal activities, including the removal of over 5,800 illegal connections from pipelines and dismantling more than 6,000 illegal refineries.

He expressed confidence that these measures, combined with ongoing policy reforms, would support Nigeria’s goal of increasing daily production to two million barrels.

The Nigerian government remains focused on stabilizing and enhancing oil production. With recent efforts showing promising results, there is cautious optimism that Nigeria will achieve its production targets.

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Crude Oil

Oil Prices Steady Amid Mixed Signals on Crude Demand

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Crude oil

Oil prices remained stable on Thursday as investors navigated conflicting signals regarding crude demand.

Brent crude oil, against which Nigerian oil is priced, settled at $85.11 a barrel, edging up by 3 cents, while U.S. West Texas Intermediate (WTI) crude dipped by 3 cents to $82.82 a barrel.

The stability comes as the U.S. economy shows signs of slowing, with unemployment benefit applications rising more than expected.

Initial claims increased by 20,000 to a seasonally adjusted 243,000 for the week ending July 1, prompting speculation that the Federal Reserve might cut interest rates sooner than anticipated. Lower rates could boost spending on oil, creating a bullish outlook for demand.

Fed officials suggested that improved inflation and a balanced labor market might lead to rate cuts, possibly by September.

“Healthy expectations of a Fed rate cut in the not-so-distant future will limit downside,” noted Tamas Varga of oil broker PVM.

However, rising jobless claims signal potential economic easing, which could dampen crude demand.

John Kilduff of Again Capital highlighted the impact of a slowing economy on oil consumption despite a significant drop in U.S. crude inventories last week.

Global factors also weighed on the market. China’s economic policies remain steady, though details are sparse, affecting investor sentiment in the world’s largest crude importer.

Meanwhile, the European Central Bank maintained interest rates, citing persistent inflation.

An upcoming OPEC+ meeting in August is expected to assess market conditions without altering output policy, according to sources. This meeting will serve as a “pulse check” for market health.

Overall, oil prices are caught between economic concerns and hopes of a rate cut, maintaining a delicate balance.

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Crude Oil

Oil Prices Slide on China Demand Concerns, Brent Falls to $83.73

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Crude Oil - Investors King

Oil prices declined on Tuesday for the third consecutive day on growing concerns over a slowing Chinese economy and its impact on global oil demand.

Brent crude oil, against which Nigerian oil is priced, dipped by $1.12, or 1.3% at $83.73 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $1.15, or 1.4%, to close at $80.76.

The dip in oil prices is largely attributed to disappointing economic data from China, the world’s second-largest economy.

Official figures revealed a 4.7% growth in China’s GDP for the April-June period, the slowest since the first quarter of 2023, and below the forecasted 5.1% growth expected in a Reuters poll.

This slowdown was compounded by a protracted property downturn and widespread job insecurity, which have dampened fuel demand and led many Chinese refineries to cut back on production.

“Weaker economic data continues to flow from China as continued government support programs have been disappointing,” said Dennis Kissler, Senior Vice President of Trading at BOK Financial. “Many of China’s refineries are cutting back on weaker fuel demand.”

Despite the bearish sentiment from China, there is a growing consensus among market participants that the U.S. Federal Reserve could begin cutting its key interest rates as soon as September.

This speculation has helped stem the decline in oil prices, as lower interest rates reduce the cost of borrowing, potentially boosting economic activity and oil demand.

Federal Reserve Chair Jerome Powell noted on Monday that the three U.S. inflation readings over the second quarter “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target in a sustainable fashion.

This has led market participants to believe that a turn to interest rate cuts may be imminent.

Also, U.S. crude oil inventories provided a silver lining for the oil market. According to market sources citing American Petroleum Institute figures, U.S. crude oil inventories fell by 4.4 million barrels last week.

This was a much steeper drop than the 33,000 barrels decline that was anticipated, indicating strong domestic demand.

The International Monetary Fund (IMF) also weighed in, suggesting that while the global economy is set for modest growth over the next two years, risks remain.

The IMF noted cooling activity in the U.S., a bottoming-out in Europe, and stronger consumption and exports for China as key factors in the global economic landscape.

In summary, while oil prices are currently pressured by concerns over China’s economic slowdown, the potential for U.S. interest rate cuts and stronger domestic demand for crude are providing some support.

Market watchers will continue to monitor economic indicators and inventory levels closely as they gauge the future direction of oil prices.

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