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UK inflation hits new 40-year high of 9.1% as food and energy price surge persists
Oil prices climb $2 on strong demand, tight supply (June 21)
Oil prices rose almost $2 on Tuesday on high summer fuel demand while supplies remain tight because of sanctions on Russian oil after its invasion of Ukraine.
Brent crude rose $1.80, or 1.6%, to $115.93 a barrel.
The U.S. West Texas Intermediate (WTI) crude contract for July, which expires later on Tuesday, rose $2.26, or 2.1%, to $111.82. The more active WTI contract for August was up $2.37 at $110.36.
UBS analyst Giovanni Staunovo said that despite concerns over economic growth, latest data on flight activity and mobility on U.S. roads continues to show solid oil demand.
“We expect oil demand to improve further, benefiting from the reopening of China, summer travel in the northern hemisphere and the weather getting warmer in the Middle East. With supply growth lagging demand growth over the coming months, we continue to expect higher oil prices,” he said.
Prices have been supported by supply anxiety after sanctions on oil shipments from Russia, the world’s second-largest oil exporter, and questions over how Russian output might fall due to sanctions on equipment needed for production.
European Union leaders aim to maintain pressure on Russia at their summit this week by committing to further work on sanctions, a draft document showed.
“Supply concerns are unlikely to subside unless there is a resolution to the Russia-Ukraine war, or unless we see a sharp rise in supply from either the U.S. or OPEC,” said Madhavi Mehta, commodity research analyst at Kotak Securities.
Prospects are receding for successful negotiation of a nuclear deal with Iran and a lifting of U.S. sanctions on the Iranian energy sector.
Iran is escalating its uranium enrichment further by preparing to use advanced centrifuges at its underground Fordow site, a United Nations nuclear watchdog report seen by Reuters showed.
“Iran’s measures, if correct, likely mean we won’t be seeing a return of Iranian crude to greater world markets any time soon,” said OANDA analyst Jeffrey Halley.
Weekly U.S. petroleum inventory data will be delayed by a day this week because of a U.S. public holiday on Monday, with the American Petroleum Institute industry data for the week ending June 17 due on Wednesday and U.S. Energy Information Administration data scheduled for Thursday.
‘Perfect storm’ for airlines facing strong U.S. dollar and high oil prices
Global airlines are grappling with a double whammy from the rare combination of a strong U.S. dollar and high oil prices at a time when broad inflationary pressures and worker shortages are also placing pressure on the pandemic-hit industry’s recovery.
The oil price and the U.S. dollar typically have an inverse relationship so that when one is high, the other is low, helping to even out the financial impact on airlines that operate in other currencies.
That correlation, however, has broken down in recent months with the war in Ukraine causing a spike in oil prices at a time when the United States is a net oil exporter and the U.S. dollar receiving a boost from interest rate rises designed to temper inflation.
Airlines gathering at the International Air Transport Association annual meeting in Doha this week expressed concern about the oil price and U.S. dollar rising in tandem.
“For airlines, it is not good at all. It is the perfect storm,” Tony Webber, a former chief economist at Australia’s Qantas Airways.
The U.S. trade-weighted real exchange rate index, established in 2006, is at a record high and the benchmark Brent oil price is around $115 a barrel.
Non-U.S. airlines have dollar exposure in the form of oil prices, aircraft purchase and leasing charges, maintenance costs and sometimes debt, all of which become higher in their local currency when the dollar is stronger.
“It’s painful, buying fuel, buying everything,” Korean Air Lines Co Ltd Chief Executive Walter Cho said of the strong U.S. dollar, trading at the highest level against the won in more than a decade.
“We have a lot of U.S. dollar debt and we have to pay interest on that. Interest is low but at this exchange rate it might as well be 10%,” he said on the sidelines of an airline industry gathering in Doha.
For most non-U.S. airlines, the hit from rising costs far exceeds the benefit from ticket sales to U.S.-based customers converting to more local currency.
Indian low-cost carrier SpiceJet last week warned it would need to push up fares by 10% to 15% due to an increase in fuel prices and rupee depreciation.
Malaysia Airlines Chief Executive Izham Ismail said fuel had typically accounted for 20% of its costs, but that had risen to 45% due in part to the weak ringgit.
U.S. airlines are mostly unhedged and want a low oil price but prefer a weaker dollar because they benefit from a higher conversion rate when they sell tickets in euros and other currencies to foreign customers, Webber said.
Hawaiian Airlines Chief Executive Peter Ingram said the airline was watching the yen, trading at 20-year-lows, as it ramped up flights to Japan, traditionally the biggest foreign tourism market for Hawaii.
“It’s not the binding constraint on demand at this point, but it is something that we’re certainly mindful of since the vast majority of the traffic on our flights, plus or minus 90% is Japanese originating traffic,” he said of the yen. “And so the cost of travelling to the United States is going to be inflated by the exchange rate.”
Airline failures have historically risen at times when an index that combines the oil price and U.S. dollar strength has been high, according to data from aviation consultancy IBA.
IBA Chief Economist Stuart Hatcher said in a webinar last month that strong pent-up demand means there have been few failures this year, but the situation could change once the peak summer season is over.
Chinese manufacturing orders decline by 20-30%, according to shippers, as consumers pull back on buying goods
‘The situation is serious’: Germany plans to fire up coal plants as Russia throttles gas supplies
Blown off course again, Fed policymakers see near-record uncertainty
Federal Reserve policymakers are less confident than at any time since the height of the pandemic about what will happen with the economy, data published alongside their forecasts and the Fed’s hefty three-quarters-of-a-point rate hike this week show.
The last time they were this worried they could be underestimating the coming deterioration in the labor market was in the depths of the Great Recession. But they are even more worried they are overestimating a hoped-for decline in inflation, documents charting confidence and risks seen in their forecasts show.
The data helps underscore why policymakers are so focused on raising interest rates fast even if doing so causes a bigger dent to growth and unemployment than previously hoped, and why it is clarity on the inflation outlook that will drive policy.
“It is clear that path of inflation continues to be the key consideration in how quickly the Fed gets to, and how far it moves past, the range of neutral in order to bring inflation down ‘clearly and convincingly,’” wrote Morgan Stanley economists, referring to the standard Fed Chair Jerome Powell has set for declaring victory on price pressures and slowing up on rate hikes.
All 18 Fed policymakers are more-than-usually uncertain about their inflation and economic growth forecasts, and all but one note the same about their unemployment rate projections, the data shows. The same documents also show that no policymaker believes their forecasts are too pessimistic, and most believe they could be underestimating the risks.
Graphic: Fed uncertainty on the rise- https://graphics.reuters.com/USA-FED/zdpxoedzjvx/chart.png
That means that though Fed forecasts embody the “softish” landing to which they aspire – inflation dropping to 2.2% by 2024, with the economy motoring along at 1.9% and unemployment rising just half a point to 4.1% – they are worried things could be worse, particularly for inflation.
It also means, as with this week’s last-minute decision to deliver a hefty 75 basis point move after worse-than-expected inflation readings, that what Powell calls this “extraordinarily challenging and uncertain time” is sure to leave investors hanging.
RAPID PACE OF RATE INCREASES
Unquestionably, interest rates will rise, and rise fast: 17 of the 18 Fed policymakers see the target rate at least at 3.6% by next year, two full percentage points higher than today, and five see it above 4%.
But is that where they will end up? Not even Fed Chair Powell knows. “I think we’ll know when we get there,” Powell told reporters Wednesday.
“With the FOMC looking to remain nimble amid heightened uncertainty, guidance set out by communications should not be regarded as written in stone,” Barclays economists said in a note to clients following the this week’s Federal Open Market Committee meeting.
It’s a warning that investors may need to keep in mind as Powell’s colleagues start Friday to make their first public statements after this week’s policy meeting, and when Powell gives testimony next week before lawmakers on Capitol Hill.
Oil wobbles as global economic worries offset tightening supply
https://www.cnbc.com/2022/06/20/oil-markets-global-economy-supply-concerns.html
South Korea drops 2%; China keeps benchmark lending rate unchanged
https://www.cnbc.com/2022/06/20/asia-markets-china-loan-prime-rate-alibaba-currencies-oil.html
Workers at Canadian National Railway go on strike after failing to reach contract, union negotiator says
Workers in signals and communications have gone on strike at Canadian National Railway Co. CNR-T +0.61%increase in a development that threatens to exacerbate transport bottlenecks across the country in the midst of the COVID-19 pandemic.
Some 750 members of the International Brotherhood of Electrical Workers in Canada walked off the job Saturday after failing to agree to a new labour contract with the railway, union negotiator Steve Martin said in an interview. The two sides are not meeting in person but continue to talk and exchange contract proposals, he said.
A spokesman for Canadian National would not confirm that the walkout had occurred. “We’re not saying anything at this point on our end,” Jonathan Abecassis said by phone on Sunday.
A lasting strike could deliver yet another hit to supply chains in Canada and drive up prices for goods, which have already been affected by the pandemic. And last year in British Columbia, mudslides and flooding severed all major highways between the Lower Mainland and the Interior, as well as freight routes used by Canadian National and rival Canadian Pacific.
The railway has a contingency plan in place to ensure that the safe transport of goods continues, Mr. Abecassis said. There is no impact to operations currently and there is none expected, he said.
The union challenged that view, saying fallout is unavoidable if the work stoppage continues. “The impact to operations is highly likely,” Mr. Martin said. That’s because a large percentage of workers are on-call employees responding to troubleshooting situations like the aftermath of thunderstorms, he explained. Others do preventative maintenance.
The striking workers repair and maintain CN’s trackside electrical and signalling equipment, such as crossings, track signals and switches. This equipment dictates the potential speed of trains, much in the same way traffic lights dictate the speed of motor vehicles on the road, Mr. Martin said.
CN intends to use managers and contract workers to do the work if needed, Mr. Abecassis said. It was unclear how this would be possible in Quebec, which has stringent laws against using non-management replacement workers in a labour-conflict situation.
The union last week gave the company a 72-hour notice of its intention to strike. The company has offered to resolve the remaining differences with the union, chiefly on wages and benefits, through binding arbitration.
One major issue being contested concerns what’s called “out-of-region work.” The company wants to be able to move workers out of their home region for a specific number of days at time, Mr. Martin said. The same issue came up during the previous contract negotiations, which yielded a five-year collective agreement that expired at the end of 2021.
