An International Energy Crisis, Global Central Bank Action

Tensions remain between Saudi Arabia and the U.S. as officials continue to respond to what many are calling a global energy crisis. In the latest, Prince Abdulaziz bin Salman, the Kingdom's oil minister, accused?“unnamed”?countries of using their emergency oil reserves to?"manipulate markets rather than helping with shortages of supply."?Speaking at the Future Investment Initiative Forum, also known as Davos in the Desert, he said,?"It is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come. Running out of capacity has a much dearer cost than what people can imagine."

The remarks follow a series of back and forth between the Biden administration and Saudi officials. Back in July, the White House made a plea to Saudi Arabia to increase production. However, on September 5, OPEC+ instead announced a production cut of 100K bpd. Earlier this month, OPEC+ deepened its cuts by a 2M barrels per day, or roughly 2% of global supply.

At the same time,?sales from the U.S. Strategic Petroleum Reserve were extended into December after initially poised to end in November. Of course, to be fair, while the time frame for sales continues to be prolonged from the original end date initially indicated back in March of this year, at least the next 15M barrels are reportedly part of the original 180M barrel release authorized in the first quarter.

According to the U.S. Energy Department, the Biden administration has released 165M barrels from the Strategic Petroleum Reserve (SPR), accounting for roughly 29% of the initial reserve holdings as of March of this year, leaving just 405M barrels for emergency measures, the lowest level since 1984.

While a short-term fix, the release of 165M barrels has worked to bring down gasoline prices from a recent high of $5.02 on average reached in June to $3.76 as of yesterday. Of course, at $3.76, gasoline prices are still up 11% from this time last year.

Crude prices, meanwhile, are up 0.98% at $86.18 a barrel as of 9:15 a.m. ET, and up 14% since the start of the year.

Ahead of the next week’s FOMC rate decision, other central banks around the globe are poised to announce their latest policy moves.

This morning, for example, the Bank of Canada (BOC) raised rates for the sixth time in eight months. The BOC surprised the market with a 50bp hike instead of a 75bp hike, bringing the key lending rate up from 3.25% to 3.75%.

On Thursday, the European Central Bank (ECB) is expected to raise rates by 75bps, potentially lifting the main refinancing rate from 1.25% to 2.00%. Recall, the ECB initiated rate hikes in July with already 125bps of tightening under its belt. Of course, as some analysts have noted, a shortage of bonds after years of quantitative easing has resulted in a?“scarce”?level of collateral. This could pose a sizable challenge for the ECB as policy makers embark along a pathway to tighter policy.

Longer-term rates in Germany, for example, are down 25bps from a recent peak of 2.41% on October 21, currently at 2.16% as of 9:30 a.m. ET.

Next week, the Federal Reserve is also poised to continue on the pathway to higher rates with a fourth-round 75bp hike nearly fully priced into the market. Of course, the bigger question is where does the Fed go from here? With investors and market participants consistently getting?“surprised to the upside”?by inflation, as Minneapolis Fed President Neel Kashkari noted last week, and nominal price levels still near a four-decade high, against the backdrop of a still solid labor market and expected pop in third-quarter activity, it’s hard to see a need for the Fed to reduce the size of rate hikes just yet. That being said, there are some policy makers that are anxious to slow policy in order to better assess the impact of the five earlier rate hikes.

Yesterday, 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, 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 yesterday, 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 on Tuesday, 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.

This morning, mortgage applications declined 1.7% in the week ending October 21, the fifth consecutive week of decline.

Also this morning, wholesale inventories rose 0.8% in September, less than the 1.0% gain expected and the smallest gain in two months.

Finally this morning, new home sales fell 10.9% in September from 677k to 603k, a two-month low. New home sales were expected to drop 15.3% in September, according to the median estimate on?Bloomberg. Year-over-year, sales fell 17.6%, the seventh consecutive month decline. Due to a fall in sales, the months’ supply of new homes rose from 8.1 months to 9.2 months. From a price standpoint, the median cost of a newly constructed home rose 8.0% from the month prior to $471k. Year-over-year, however, new home prices increased 13.9%.

Tomorrow, 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 2.4%, with further risks to downside given a slower-than-expected pace of consumption at the end of the quarter.?

Also tomorrow, 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.?

Additionally on Friday, pending home sales are expected to decline 4.5%.

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