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Daily Commentary 26/02/15

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Oil prices surge Oil prices surged yesterday after Saudi oil minister Ali Al-Naimi said that demand is growing and the market has turned “calm.” Personally I can’t understand why people listened to him talk his book when the US Department of Energy figures out the same day showed US inventories soaring by 8.4mn barrels during the latest week, double the 4.0mn barrels that was expected (and above the previous week’s 7.7mn). This is not the first time that oil prices have bottomed shortly after the figures came out and surged afterwards. I can’t explain it, but I don’t think it represents a fundamental change in the supply/demand picture. My guess is it was simply a technical move and as the oversupply still exists, I would remain cautious. Nonetheless, it is true that gasoline prices have stopped falling in the US (see below) and sales of larger cars have taken off, so it may be that demand is starting to respond to prices.

• Some good news in Europe Yesterday’s European news was fairly good – French consumer confidence rose and the number of job seekers fell. ECB Chief Economist Peter Praet said the timing of QE is favourable to maximize its effect because it was pro-cyclical – the chances are that the ECB may raise its growth forecast. Added to the acceleration in Germany GDP growth and we may be in for a period of stability at least and perhaps even modest growth in the Eurozone. Given that the ECB is already implementing extraordinary easing measures, the pick-up in growth suggests the Bank may be on hold for quite some time. ECB meetings were the driving force for moves in EURUSD last year but it’s unlikely to play that role again this year. That suggests slower movement in EURUSD and even more focus on the Fed.

• Australian capex disappoints Australia’s private capital expenditure for Q4 fell 2.2% qoq in 4Q, more than the 1.6% decline that was expected. AUD weakened as a result. NZD managed to shrug off the news that Fonterra maintained its 2014/15 milk payout forecast, disappointing those who had expected an increase. It noted that although dairy prices have risen, they haven’t risen enough to raise the forecast.

• Today’s highlights: During the European day, Eurozone’s M3 money supply is forecast to have risen 3.7% yoy in January, a slight acceleration from 3.6% yoy in December. The 3-month moving average is expected to accelerate if the forecast is met. This may also be the month when total lending finally turns positive on a year-on-year basis; it was down only 0.5% yoy in December as the growth in borrowing by financial companies almost (but not quite) offset the decline in borrowing by households and non-financial companies. The bloc’s final consumer confidence for February is due out. The German GfK consumer confidence for March and unemployment rate for February are also coming out.

• In the UK, the 2nd estimate of Q4 GDP is expected to show a +0.5% qoq pace of growth, in line with the preliminary estimate, confirming a modest slowdown in the country’s growth momentum towards the end of 2014.

• In the US, the headline CPI for January is expected to fall into deflation for the first time since October 2009. On the other hand, the core CPI rate is expected to remain unchanged in pace, indicating that the fall in the headline figure is mostly caused by low energy prices. This is not going to worry the Fed; on the contrary, Fed Chair Yellen yesterday argued that most of the decline in oil prices reflects “increased global supply rather than weaker global demand” and said that “it will likely be a significant overall plus, on net, for our economy.” She therefore does not seem particularly worried by the fall in core PCE and indeed noted that it would probably decline further “before rising gradually toward 2% over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” In fact, gasoline prices have stopped falling in the US and are now up some 15% from the low a month ago, so the Fed seems correct (so far) in looking through these effects. She also noted that inflation expectations “have thus far remained stable.” Even though Fed Chair Yellen mentioned that the Fed follows closely the core PCE inflation measure, investors may focus on the drop in the CPI, which could weaken USD a bit.

• Durable goods for January are also coming out. The headline figure and durable goods excluding transportation equipment are both estimated to rebound from the previous month, which could ameliorate the impact of a further slowing in inflation. Initial jobless claims for the week ended Feb. 21 are also due out.

• In Canada, CPI for January is expected to decelerate from the previous month and fall below the Bank’s lower boundary of 1%-3% target range. In the meantime, the core CPI is expected to slow a bit remaining however in between the target range. Recently, Bank of Canada Deputy Governor Agathe Cote said that the plunge in energy prices could send Canadian CPI into negative territory for a brief interval. It should however bottom out in Q2. Therefore, the market is expecting for further declines in the CPI rate that could keep CAD under selling pressure.

• From New Zealand, we get the building permits for January.

• We have one speaker on Thursday’s agenda: Bank of England Deputy Governor Minouche Shafik speaks.

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