Energy and Politics

October 25, 2022

According?to officials at the International Energy Agency, amid Russia's war in Ukraine, and OPEC's recent decision to cut supply by 2M barrels per day, the world is in the midst of a global energy crisis, which could result in a global recession.

Of course, it’s not necessarily the United States that will suffer the most from rising energy costs. With higher import fees and a weaker currency relative to the dollar, emerging markets in regions such as Africa, Asia and Lain America will suffer disproportionately. While many nations are for better or worse focused on climate goals, given the current environment, energy security may reemerge as the number one priority.

With oil consumption expected to grow by a further 1.7M bpd in 2023, an insufficient global supply will likely result in ongoing volatility and lingering price pressures, complicating the outlook for global growth and closer to home, Federal Reserve policy aimed at reining in cost pressures.

Natural gas prices are up 3.1% this morning at $5.36/MMBtu as of 9:07 a.m. ET.

Crude prices, however, are down 0.41% at $84.23 a barrel as of 9:08 a.m. ET,?still up 12% since the start of the year.

Gasoline prices, meanwhile, are down from a recent peak of $5.02 a gallon on average in June of this year, currently at $3.78 a gallon as of yesterday. However, at $3.78, gasoline prices are also up 12% from this time last year.

According to reports, Rishi Sunak was elected as the leader of the Tory party in the U.K. and will formally become the country’s third prime minister in two months later today. Sunak’s move to power follows the departure of Liz Truss after only 45 days at 10 Downing Street.

Contrary to the prior administration’s proposed plan to cut taxes and increase spending, Sunak is expected to prioritize fiscal conservatism and reduce government spending with potentially sizable cuts. Aside from government finances, the new PM will also need to contend with a number of issues facing the country including a rapidly growing deficit, immigration, as well as the U.K and EU’s tenuous relationship.

The pound is trading up 0.99% at $1.14 against the U.S. dollar as of 9:13 a.m. ET.

Back in the U.S., equities are trading lower with the Dow down 0.39% at 31,422 as of 9:14 a.m. ET.

Yields are trading lower with the 10-year UST yield down 11bps at 4.13% as of 9:14 a.m. ET.

Yesterday, the Chicago Fed National Activity Index remained at a reading of 0.10 in September for the second consecutive month. According to?Bloomberg, the index was expected to decline to

-0.10 in September. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In September, 48 of the 85 monthly individual indicators made positive contributions, while 37 made negative contributions.

This morning, the S&P CaseShiller 20-City Home Price Index dropped 1.32% in August, more than the 0.80% decline expected and the largest monthly decline since March 2009. Over the past 12 months, the 20-city index rose 13.08%, the smallest gain since February 2021 and down from the 16.01% increase the month prior. On a national level, home prices fell 0.86% in August and rose 12.99%, also the smallest gain since February 2021 and down from the 15.62% rise in July.

Also this morning, the FHFA House Price Index fell 0.7% in August, the largest monthly decline since March 2011. According to?Bloomberg, the index was expected to decline 0.6% for the second consecutive month.

Additionally this morning, the Conference Board’s Consumer Confidence Index dropped from 107.8 to a reading of 102.5 in October, more than the expected decline to 105.9, and a three-month low. In the details of the report, a gauge of current conditions plunged from 150.2 to 138.9, the lowest reading since April 2021, and future expectations slipped from 79.5 to 78.1 in October.

Finally this morning, the Richmond Fed Manufacturing Index decreased ten points to -10 in October, double the decline to -5 expected and the lowest reading since May 2020. In the details of the report, shipments fell from 14 to -3, new order volume declined from -11 to -22 and order backlogs slipped three points to -28, the seventh consecutive month of a negative print. On the other hand, inventory levels of finished goods rose six points to a reading of -2, and inventory levels of raw goods increased from 4 to 20 in October.

Tomorrow, new home sales data from September will be released. Last week, existing home sales declined 1.5% in September and 23.8% on annual basis. This week, that declining trend in activity is expected to continue. New home sales, already down 0.2% over the past year, are expected to decline by more than 15% in September. Later in the week, on Friday, pending home sales are expected to decline 4.5%.

Additionally from a broader perspective, on Thursday, we look at the overall health of the economy with the preliminary read on Q3 GDP. According to the Atlanta Fed’s GDP Now model, Q3 GDP rose 2.9%, although according to?Bloomberg, GDP rose 2.3%, with further risks to downside given a slower-than-expected pace of consumption at the end of the quarter.?

Also, with the latest GDP release, September durable goods orders are expected to rise 0.6%. Year-over-year, headline orders rose 11.2% in August, up from the 9.2% annual increase the month prior. Excluding aircraft and defense, durable orders climbed 1.3% in August and rose 9.8% in the past year.

Finally on Friday, personal income and consumption and the latest PCE reports will be released. Consumer spending rose 0.4% in August, and 8.2% year-over-year. Personal income, meanwhile, rose 0.3% last month, and 3.9% over the past 12 months. Adjusting for inflation, however, real consumer spending has failed to regain momentum after slowing to below a 2% pace with nominal wage gains remaining negative for the better part of the past year.?

After all, prices remain stubbornly elevated, with the PCE, the Fed’s preferred measure of inflation, rising 6.2% in the latest August report, down however from a peak level of 7.9% in June. The core, meanwhile, pushed higher in August rising from 4.7% to 4.9%. While prices aren’t expected to push higher from here, the headline and core are both expected to remain near a four-decade high, complicating the outlook for the Fed as monetary policy struggles to have a meaningful impact on bringing down costs.?

-Lindsey Piegza, Ph.D., Chief Economist?