Oil Up, Rates Down: Is the EM Carry Gone?
Key Indicators to Watch and Potential Challenges for Emerging Markets As Rate Cuts Persist
Hey guys,
Good Friday is tomorrow, so make sure you have one.
Lend me your attention, we’re headed straight in today.
We’re going to cover the following topics:
U.S Macro Update
Is the EM FX Carry Still Alive?
US Macro Update
In the U.S policymakers are at a standstill, last week we received the revived SEP (Summary of Economic Projections), which showed a modest increase in expectations for 2024’s GDP growth, +0.7% vs December’s GDP projections and +0.2% for PCE inflation.
There was one notable change in Jay’s opening statement on page 3 of the transcript: “unexpected weakening in the labor market could also warrant a policy response”. The Fed made it clear, that regardless of the hot CPI prints, ensuring they do not overdo the tightening process is front of mind.
Here’s what I’m looking at as a gauge of US financial and economic conditions:
1. Durable Goods Reading (Tuesday 26th March)
In February, new orders for durable goods recovered to 1.4% after January’s negative revision to 6.9%. As given in the name, durable goods are items like cars, refrigerators, machinery equipment etc, that have a lifespan of more than three years.
Durable goods are an important economic indicator for a few simple reasons:
Signals future demand: Durable goods like cars appliances and machinery are typically expensive; so when there is an uptick in new orders for these goods it’s an indication of consumer sentiment and business confidence.
Strength in durable goods orders signifies more than just consumer confidence; it's a positive indicator of domestic manufacturing health. Take the example of increased car demand. This translates to higher orders for car manufacturers, who in turn need to purchase more parts like steering wheels. This ripples through the supply chain, forcing upstream suppliers and producers to ramp up production to meet this demand.
2. Weekly Gasoline Prices
As expected, along with the rise in Crude prices, gasoline prices have rebounded since bottoming out in December 2023. Several factors, ranging from underlying demand increasing for Crude to the IEA’s energy outlook upgrade. To further add, airstrikes on Russian refineries by Ukraine and refineries entering maintenance season have all contributed to prices on Brent & WTI being up 17% and 14% respectively.
As it stands oil fundamentals remain bullish, which isn’t good for the Fed or for the Biden administration, so it’ll be important to watch ongoing developments through to the summer.
For those who don’t know, during maintenance season refineries shut down parts of their operations, or even entire facilities, to perform necessary repairs and upgrades. This reduces their ability to convert crude oil into gasoline, diesel, and other refined products.