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Soaring Oil Prices An Emerging Weak Link For Economic Growth

Petróleo, dólar, salarios y desempleo en EEUU Via Ostrum Asset Management more at the bottom of the article

Oil prices is it so climbing without control until little more than $ 75 / dls . per barrel , while the dollar this winning ground again and now It is below 1.2 against the euro with increased rapid exchange rate cash that has awakened the uncertainty markets, particularly in economies emerging.

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Oil Prices
Image source: YouTube Video Screenshot

Meanwhile, wages Continue to Rise in state United , despite the fact that unemployment It fell below 4% for the first time since December 2000: at the time, the reference wage rose 3.8% vs. an increase of 2.6% in April 2018.

Petroprecios , above US $ 70 / barrel

The trend of the petroprecios has changed since early April, with figures ranging from $ 70-75, compared with a previous figure about $ 67 in average , for example , greater than the figures we saw since the end of 2014. This reflects the impact of demand driven by global growth .

The graph below shows the same trend altered after April 6 , when the White House implemented sanctions against Russia , with threats subsequent to Iran that only they served to expand said trend.

The sanctions they affected one of the largest oil producers in the world, a group that includes to Saudi Arabia and the USA. Russia should continue investing in order to maintain production in the levels current , but this often requires the use of technologies foreigners and nobody assume the risk of violating the sanctions to finance Russia and US cause discomfort. So this obviously It leads to uncertainty about the future production Russian.

Meanwhile, doubt about the situation between the US and Iran and the nuclear pact too maintains the pressure , but we do not have a vision very clear of the result of the situation .

If everything keep going same , the continuous US sanctions United against Russia and the possible measures against Iran tend to increasing oil prices, resulting in benefit of producers US. The production keep going growing quickly in others regions, while stocks have stabilized . state United is the big winner with the current situation , since the production It has never been so high.

However, there is another source of concern : Venezuela. The production is being collapsing and the country's ability to reverse the trend decreases very quickly , when losing support for financial , particularly from China. This is a problem important since , on the one hand , the decline still not come to an end and production to be continue falling down in 2018 (no more financing external to an economy on the verge of chaos ) and, on the other side , Venezuela has the largest Reservations oil companies , even more than Saudi Arabia . This generates uncertainty in the long - term prospects, since production is compensated short term by States United in particular. The demand for oil in the world will continue for quite time and its main long- term producer will not be able to use their oil sources. This pose problems and generates uncertainty .

If oil prices remain in the levels current , would boost slightly the contribution of resource prices energies to inflation at levels higher than expected does some weeks.

If we compare the prices average oil in April 2018 with the same period of the year past , there is a 16% increase in terms of euros and 33% in dollars , and if we apply the prices average from April to May and June , there is a clear acceleration in terms of euros and dollars .

Therefore, the contribution of resources in energy to the euro zone would increase from the current 0.25% to almost 0.4% in June , and later I would go down as oil prices strengthened in the second half of 2017, as shown in the next graph.

If prices are maintained in levels current , the impact inflation will not be too significant neither durable, so the drag effect about the rest of the economy be minor . Already we have attested this in the past with older price increases (after 2011), so the effects secondary to a fluctuation less will be less extensive and minor range.

Oil prices could rise again depending on the progress of tensions and sanctions international relations with Iran and even with Venezuela after the elections presidential in May.

We hope that the prices are maintained in the current range in the next months , and Saudi Arabia could potentially increase production to stop the rise in prices and hamper global growth. Be important place attention to events politicians , while at the same time, is expected to boost demand softens as growth world stop accelerate.

This means that I do not anticipate an increase dramatic inflation, so there will be an effect in chain for the rest of the economy . Therefore, banks central is it so willing to allow the situation continue such which without intervening .

The dollar is poised to continue upward

The dollar moved below the 1.2 mark against the euro and the exchange rate Cash dollar has followed a clear trend bullish in the past days. The next graphic shows trends in both metric dollar exchange since the beginning of the year, the exchange rate against the euro presented like 1 dollar = X euro in instead of the usual presentation of 1 euro = Y dollar , just to show that the two metrics go exactly to the same rhythm in the period recent.

The reason for this is that the dollar has won ground quickly since mid - April and it has been reinforcing against all currencies, which also leads to a fast depreciation of currencies emerging.

This situation It reflects expectations on the rise in interest rates of the Fed, which should address the acceleration of the deficit public through an increase in the interest rate plus fast than expected to avoid imbalances .

The policy mix is too accommodating in view of the very low unemployment rate (the Fed is accommodating and fiscal policy is ready to provide stimulus economic ). The Fed must turn plus restrictive.

This change of attitude of the bank is particularly surprising since admits expected inflation slightly higher, as noted in the minutes of your last meeting , so it will have to be more proactive to prevent the situation from getting out of control .

We can compare expectations on the attitude of the authorities US currency to the projections for the ECB, in order to get a better picture of this change.

Policy expectations monetary policy for the euro area are low and Mario Draghi and the ECB members have fact everything possible to reduce in the next months.

However, the expectations of the policy monetary in state United are very high and strengthen the attractiveness of the dollar in arbitrage strategies. As well we observe that the gap between the US and the euro zone has never been so wide since the creation of the single currency in the area.

This Metric of expectations is particularly useful , especially when looking at the differential , that frequently is a good prediction exchange since 2007, in addition to that since mid -2017 we have seen a true divergence.

It is expected that the policy monetary be more restrictive sooner than expected, as necessary rebalance the policy mix, so it is expected that this differential be substantial in the next months , since the ECB still will keep his strategy moderate. The dollar this ready to strengthen against the euro still plus in the next weeks and we should wait for an advance towards 1.10-1.15.

TO East respect , we must remember that the deficits they have an impact limited about the dollar : this is the advantage of being THE currency international , which allows the country have a deficit external and a currency that remains firm.

The key question is the markets Emerging : more Beyond some details like Argentina, Brazil and Turkey , the fall of the currency Really hinders financing in the countries emerging since , on the one hand , the attractiveness of States United drift in the repatriation of capital and leakage of capital from markets emergent and, on the other side , this situation generates difficulties real so that these countries find new financing until the markets think that the dollar needs to stabilize ( why? to invest in a country where the currency depreciates?).

Although the euro area is ready to benefit from the appreciation of the dollar , you can not say the same about the markets emerging, which will face new difficulties and will have to adjust his politics monetary policy earlier than expected .

Unemployment continues to decline, but wages  still do not improve

unemployment It fell below the mark of 4% for the first time since December 2000, but this did not lead to pressure salary , which follows restricted to 2.6% per year , as shows the graph below.

We can see that salaries do not show the same trends cyclicals that unemployment , and this is cause for concern , causing doubts among economists about the existence of a Phillips curve ( relation reverse between unemployment and inflation , sometimes represented by inflation salary).

We can change the reference wage using the employment cost index or costs labor units , but this does not make the difference. The costs of employment rose 2.7% year -on- year and the cost labor unitary gained 1.1% in the same period , so there is no evidence convincing of an increase in wages.

And then the question It is still : how we explain the lack of pressure salary? Unemployment is low, and other measures that have used recently to explain the lack of pressure Wage (employment for the age group 25 to 55 years work involuntary half- time ) have improved considerably without generating increases salary significant , so the question this still unanswered.

This could mean that we have to reach an unemployment rate yet plus low before wages Really begin to increase . If this is the case in the USA and the Kingdom United , then certainly also applies in the euro area, so that if the ECB uses its inflation projections to raise rates, it is unlikely to see East Short movement term . In an article recent , I calculated that unemployment should reaching 6.4% for a first rate hike in the euro area at the end of the autumn of 2019.

Article by Philippe Waechter of Ostrum Asset Management, a subsidiary of Natixis IM 

Translated from Spanish using Google Translate

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