Daily Agenda: Oil Continues to Wag the Market Dog

今天早上,荷兰皇家壳牌(Royal Dutch Shell)成为第一个of the primary global oil producers to report earnings for the fourth quarter, and the news wasn’t pretty. Although its earnings, at $3.2 billion after excluding one-time items, rose by roughly 12 percent year-over-year, they fell well short of analysts’ consensus estimate. Critically, on the day after announcing a major refinery project in Iraq, Shell said that it was reducing capital investments by $15 billion over the next three years as the company adjusts to the new reality of low oil prices. In the accompanying statement, CEO Ben van Beurden stressed that his company will not overreact and make cuts so excessive that it would hinder Shell’s competitiveness. As major producers like Shell contemplate a future with sustained low oil prices, the impact on smaller players has been profound, particularly in credit markets. In a research note to clients earlier in the week, Rosenblatt Securities chief market strategist Brian Reynolds noted that corporate bond issuance in the U.S. for the first half of January were at its lowest level since the crisis period in 2008, as investors’ appetite for credit risk on energy companies wanes. For now it appears that oil continues to be the tail that wags the dog for both the global economy and financial markets.

NASDAQ beats estimates by a hair.After fluctuating trading volumes in recent months, the Nasdaq OMX Group announced earnings for the fourth quarter this morning that beat consensus estimates by a modest margin at a GAAP-adjusted $0.50 per share. After repurchasing 1.4 million shares of its own stock in the final three months of last year, Nasdaq also announced a quarterly dividend of $0.15 for shareholders.

Weak forecasts for German inflation.Regional reports from Germany released today suggest that consumer prices fell by an annualized 0.3 percent in December. If accurate, this would be the first negative reading for prices in the European Union’s largest economy since October 2009.

Mixed signals from European indicators.Private lending data released by the European Central Bank this morning confirmed that credit flows improved in December, with total fresh lending up 3.1 percent from the same month in 2013. Separately, fresh sentiment data compiled by the European Commission was downbeat, with headline economic sentiment as well as both industrial and service sector indexes failing to meet forecasted levels. Consumer confidence measures remained in negative territory for January.

More U.S. economic data trickles in.Initial jobless claims and pending new home sales figures are scheduled for release this morning. After a contraction that fell short of the pullback consensus forecasts predicted last week, economists are forecasting a significant dip in the number of recently unemployed workers. Meanwhile, National Association of Realtors’ data on pending sales for December is expected to register an advance over the stronger than anticipated November reading.

Portfolio Perspective: The Fed Remains in Wait-and-See Mode— Michael Gapen, Barclays

The contents of the January Federal Open Market Committee statement were in line with our expectations. The Fed raised its assessment of economic activity, saying output is expanding at a “solid pace,” versus its description in December that growth was “moderate.” The committee upgraded its view of economic activity largely on household spending, which it sees as boosted by the substantial decline in energy prices and its effect on consumer purchasing power. It left its description of business investment (advancing) and the recovery in housing (slow) unchanged. The committee said that inflation trended lower, “largely reflecting declines in energy prices,” and noted that market-based measures of break-even inflation “have declined in recent months.” The statement continues to characterize survey-based measures of longer-term inflation expectations as stable.

In its description of the outlook, the FOMC expects that economic activity will expand at a “moderate” pace and sees further labor market improvement ahead. We interpret the use of “solid pace” to characterize current activity and “moderate” to describe its expectation of future growth as indicating that the Fed expects GDP growth to slow in coming quarters. The committee reaffirmed its view that risks to the outlook for economic activity and labor markets are “nearly balanced.” In terms of inflation, the committee signaled that it sees the pass-through from lower oil prices to headline inflation as continuing in “the near term,” while saying it “expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipates.” This language is nearly unchanged from the December statement and, in our view, signals that the mid-2015 rate hike guidance remains in place. We continue to forecast that the Fed will raise its policy rate in June of this year, but see risks to this decision as skewed in favor of a later take-off.

Finally, the statement now says that “international developments” are an additional factor that will influence the committee’s assessment of progress toward its dual mandate. We believe the FOMC has always followed international developments and, therefore, this change to the statement does not necessarily represent new information. That said, we believe the inclusion of international developments reflects the numerous central bank actions taken in recent weeks, including the ECB’s announcement of a large-scale government bond asset purchase program. We believe the committee sees the ECB decision, as well as recent policy actions from other central banks, as reducing downside risks to U.S. growth from global growth and the likelihood of a worsening in global financial market conditions. However, these actions also likely support the foreign exchange value of the dollar in the eyes of the committee. Altogether, we believe the Fed sees the combination of central bank actions and lower oil prices as outweighing the negative effects on growth and inflation from a stronger dollar. We look to the minutes of the January meeting to provide further clarification on the committee’s thinking in this regard.

Michael Gapen is the chief U.S. economist for Barclays in New York.