No more oil black swan
Remember Al Arabiya channel’s General Manager Turki Aldakhil warning that imposing sanctions on, Saudi Arabia, the world’s largest oil exporter could spark global economic disaster? I wrote about it when the Jamal Khashoggi crisis began. He was saying “no one should rule out the price [of oil] jumping to $100, or $200, or even double that figure”. I think we can rule that out completely now.
In fact, $100 oil – which, three weeks ago, I wrote was a target bandied about – is looking less likely now too. I wouldn’t say we can completely discount this outcome. But it is looking very unlikely at this point.
Instead, we have the WTI variant of crude trading at $63.52 and Brent trading a shade below $73. People will tell you a lot of this has to do with signs from the Saudis that they are willing to keep output up. But I believe it has as much to do with the prospect of weakening demand.
To be sure, some are still concerned about supply, but because of Iran:
“I think we went from being too worried about losing Iranian oil to now being too complacent,” says Phil Flynn, senior market analyst at Price Futures Group. Many traders believe that global production “can fill the Iranian void” if world economies slow down, as some expect. That’s why prices have slid. But if that expectation proves to be wrong, the market will get “caught short oil supply, causing a price spike,” he adds.
But my concern is demand and the global economy.
Markets are calm
At least on the equity and bond market fronts, we can say the volatility is probably over. As a former bond guy, I like to look to bonds first. And what I see is a complete reversal of the flight to safety of mid-October. Italy’s 10-year, for example, is down to 3.32% from a 52-week high last month of 3.78%. On the other end of the spectrum, all of the safe asset bond yields are up: the US, Germany, Japan and France. The US-10 year is gapping up past 3.16% and could soon close in on the 3.25% level that precipitated the last market spasm.
You can see the flight to safety is likely over on the equities side as well. On the equities front, look at the iShares MSCI Emerging Markets ETF. That got as low as $37.575 and the bid/ask is now $4128/$41.31.
I think Apple’s earnings yesterday were good enough to have helped here. They beat estimates for their Q4 earnings, mostly due to price hikes. Unit sales were flat but revenue jumped 29 percent as the average unit selling price was $793 in the quarter versus $618 a year ago.
The stock still fell 7% in after hours’ trading due to a weak holiday sales outlook. But I believe the impact will be limited. The weak outlook, however, is more reason to be concerned about the real economy going forward.
The real economy
I am writing this in advance of the US jobs numbers. I am not expecting a huge number. But I also don’t expect the number to be market moving in any direction. A bad number won’t change the Fed’s forward guidance because the Fed has a tightening bias. But that bias means that a good number could tip us toward four rate hikes in 2019 from three.
(UPDATE: The number came in at a robust add of 250,000 to non-farm payrolls. That should send rates higher)
Looking at real economy data elsewhere, the ISM’s PMI came out yesterday at 57.7% for the manufacturing sector. That’s a good number, if a tad below expectations.
But I also saw some interesting comments at Axios on the economy. They touted their piece as “The signs that the booming economy could slide into recession“. I think that’s a bit overwrought. But look at what they had to say:
Cracks are beginning to show in a booming economy that’s on pace for a 10th year of continuous growth.
Why it matters: There’s plenty of good news — economists expect today’s jobs report to show unemployment holding at a stunning 49-year low, for instance. But look closer, and visible threats suggest an all-out recession could come as soon as next year.
Between the lines: Key economic indicators are flashing red.
- Worker productivity is sluggish. The third quarter marked the “32nd straight quarter of yearly growth below 2%, a long and consistent stretch of anemic growth that hasn’t happened before in the post-World War II era,” the WSJ reports.
- Manufacturing activity has stalled for the first time in two years, possibly the result of President Trump’s multi-front trade war.
- Business investment is laggardly. Rather than using their $1.2 trillion tax cut on capital spending, companies are on track for the biggest-ever year of stock buybacks, possibly reaching $1 trillion.
And U.S. economic growth is already slowing. In the third quarter, GDP growth retreated to a 3.5% annual rate, down from 4.2% the prior quarter. Going forward, economists expect growth to hit 2.9% in the fourth quarter, and 2.5% in the first quarter of 2019.
That last part sounds about right – growth slowing from a high number to a lower but still decent number in the near term. The question is what happens later, in 2019 and 2020.
Housing
A lot of what happens next has to do with credit markets. And right now, we can see housing soften. I think it’s interesting to note Robert Shiller’s comments. He says the housing market now ‘reminds me of 2006’. His generic comment was as follows:
Housing pivots take more time than those in the stock market, Shiller said. Still, “the housing market does have a momentum component and we’re seeing a clipping of momentum at this time.”
But more specifically about what to expect, this is alarming:
“If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession. By the way, we’re overdue for another recession…
“The drop in home prices in the financial crisis was the most severe drop in the U.S. market since my data begin in 1890,” Shiller said. “It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”
I am not going to give that pointed a view but rising rates are already pinching both auto and home sales. And we have more hikes in the pipeline. The legitimate worry is that the Fed overdoes it and Shiller is proved right.
In the near term, expect less dramatic movements though. The jobs number shows you how bright the near-term picture still is. Nevertheless, watch for signs of weakening in the real economy, particularly housing.