Economics Update - Oil, EUR, USD, CAD
US Inflation Data
The annual inflation rate in the US accelerated to 9.1% in June of 2022, the highest since November of 1981, from 8.6% in May and above market forecasts of 8.8%. Energy prices rose 41.6%, the most since April 1980, boosted by gasoline (59.9%, the largest increase since March 1980), fuel oil (98.5%), electricity (13.7%, the largest increase since April 2006), and natural gas (38.4%, the largest increase since October 2005). Food costs surged 10.4%, the most since February 1981, with food at home jumping 12.2%, the most since April 1979. Prices also increased significantly for shelter (5.6%, the most since February 1991), household furnishings and operations (9.5%), new vehicles (11.4%), used cars and trucks (1.7%), and airline fares (34.1%). Core CPI which excludes food and energy increased 5.9%, slightly below 6% in May, but above forecasts of 5.7%
The Bank of Canada raised the target for its overnight rate by an entire percentage point to 2.5% on July 13th, 2022, a move not seen since 1998 and surprising analysts who expected a 75bps hike while signaling that it will hike interest rates further in the coming meeting to curb rising inflation. The Bank is also continuing its policy of quantitative tightening. The committee noted that inflation became more persistent than the Bank expected in its April Monetary Policy Report and will likely remain around 8% in the next few months. It has also slashed its growth forecasts for 2022 and 2023, saying that tighter financial conditions will cool pent-up demand.
WTI crude oil futures steadied around the flatline at $96 per barrel on Wednesday, relatively unchanged from the 8% loss on Tuesday that sank prices to three-month lows as the weakened demand outlook offset concerns of tight capacity and the dollar’s pullback. Hotter than expected inflation figures in the US strengthened bets that the Federal Reserve will accelerate its aggressive tightening path, exacerbating concerns of a recession that would hurt energy demand. Consequently, both the OPEC and the IEA warned that demand trends point downwards among the world’s largest economies in their latest monthly reports. On the supply side, the EIA reported US crude oil inventories unexpectedly rose by 3.254 million barrels last week, while analysts expected a 0.154 million drop. The weekly figures provided momentary relief from supply concerns ahead of US President Biden’s visit to Saudi Arabia this week to push for increased production from OPEC nations amid efforts to bring down prices.
Euro continues to drop
The euro has fallen below the dollar for the first time in nearly 20 years as the war in Ukraine pushes the single currency down. A single euro bought $0.998 on the foreign exchange market at 12:45 GMT, down by 0.4% in the day's trading. Fears that Russia may restrict Europe's supplies of energy have increased the chances of recession in the euro area. The European Central Bank has lagged other central banks in raising rates, further weakening the euro. Currencies tend to rise when the relevant central bank increases interest rates, as international investors eye a larger return for holding assets priced in that currency.
The dollar has also been strong in recent months, buoyed by the US central bank raising interest rates, and investors seeking the safe haven of dollar assets in times of global turmoil.
A weakening currency will make imports more expensive for eurozone countries, especially goods priced in dollars such as crude oil. That could contribute to even higher inflation in the eurozone, which is already running at 8.6% for June. A spokesperson for the ECB said it does not "target a particular exchange rate. However we are always attentive to the impact of the exchange rate on inflation, in line with our mandate for price stability." The bank is expected to start increasing interest rates next week. The euro has fallen almost 12% against the dollar since the start of the year. The single currency has been worth more than the dollar for most of its history. It lagged below the dollar in the years following the currency's launch in 1999, but the last time it traded below the dollar was December 2002 - less than a year after euro notes and coins were introduced for the first time.