The longer the Strait of Hormuz is closed, the less market impact US President Trump’s early morning social media posts are likely to have. While physical reserves exist, prices can move on expectations. As physical shortages become a threat, expectations will have less of an impact—bad news for speculators placing conveniently timed trades. However, consumers can absorb higher prices for a time.
Transcript
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management.
It's 6.30 in the morning, London time. On Tuesday, the 28th of April.
The relationship between the oil market and social media posts from US President Trump
is likely to continue to change in the coming weeks.
While the developed economy had reserves to replace the missing oil,
Trump's late night speculations on where the war might be going
were able to move financial markets as they changed expectations
about future physical supply.
The closer that we get to a point where physical supply is limited,
the less shifting expectations will be able to change the near-term oil price.
That's bad news for speculators rushing to put on conveniently timed trades
around Trump's announcements and its bad news for the wider economy.
Consumers should still be able to limit the damage, however,
as they are using savings to smooth consumption rather than cutting back
on non-oil consumption.
So the price effect will come well before the real economic effect fully takes hold.
The Bank of Japan left interest rates on hold, but there was more dissent
in favor of a rate increase with three of the nine votes looking for a tightening.
It is important to recollect the starting point of the different central banks
before the war began.
In Japan, there was a sense, albeit not universal, that policy was accommodative
and should be tightened.
That encourages the idea of rate hikes even if looking through the temporary effects
of the oil price spike.
In Europe, the ECB was neutral, suggesting masterful inactivity even with oil price effects.
In the UK and the US, policy started this year restrictive
and the need to ease would only be changed if second-round inflation effects
from the oil price increases became obvious.
UK's British retail consortium shop price index for April,
measuring price changes from selected retailers, showed less inflation than had been expected.
There was discounting of food prices and ongoing deflation in non-food retail.
The timing of Easter and school holidays can always be a bit of a complication
around supermarket pricing schemes, but the good news from this is that on the basis of at least very early data,
the UK is not currently showing evidence of second-round inflation effects.
We know consumer spending continues to be quite robust,
but consumers seem to be more price sensitive.
This therefore gives real economic growth without evidence of second-round inflation,
which is probably the best economic outcome one can expect at this stage,
though doubtless Bloomberg will strive to find a negative spin somewhere.
The ECB's inflation expectations data is due, which is not especially important
as consumers are terrible at forecasting inflation.
Future economy-wide price increases are assumed to be the same as past perceived price increases
for a small number of high-frequency purchases.
However, too many financial market participants half remember the economics they were taught decades ago
and give unnecessary weight to this sort of data.
The US offers a consumer sentiment poll, which just reflects political partisanship.
Last week's Michigan data shows a laughable comparison between Republican and Democrat-stated views of the economy.
The Dallas Fed Manufacturing Survey comment section released yesterday was very much focused on uncertainty.
Tower F's also played a large role, war consequences notwithstanding.
Policy uncertainty was supposed to be fading in the state, or at least something that could be managed this year.
Its persistence is a potential economic problem.
That's all for today. Have a good day.
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