- Crude oil prices plunge to 18-year low and help crush inflation expectations
- China cuts key rate by -20 bp as economy is set for new hit from overseas order-cancellations
- U.S. consumer confidence expected to plunge
Crude oil prices plunge to 18-year low and help crush inflation expectations — May WTI crude oil prices on Monday edged to a new 18-year low of $19.27 per barrel and closed the day sharply lower by -$1.42 (-6.60%) at $20.09. Meanwhile, May Brent crude posted its own 18-year low of $21.65 and closed the day down -$2.17 (-8.70%) at $22.76 per barrel.
Oil prices are reeling from the double-barreled blast from a plunge in demand from the pandemic, combined with the incoming supply deluge from the collapse of OPEC+ cooperation. Saudi Arabia says it intends to ramp up supply to 12.3 million bpd in April, which would be a record high and would be up by +27% from 9.7 million bpd in February.
President Trump on Monday talked with Russian President Putin about stabilizing the oil market, but Russia will not be shedding any tears over the impending doom for U.S. shale producers. Russia sparked the price war in the first place by refusing Saudi Arabia’s demand for an additional OPEC+ production cut of 700,000 bpd in Q2 in response to the pandemic. When Russia refused any new cut, Saudi Arabia went ballistic and launched a full-scale price war.
Russia says it is fine with oil prices at the historically low levels that are necessary to push high-cost producers out of the market and allow Russia to keep its market share. There have been no reports of any production-cut detente between Russia and Saudi Arabia.
Regarding demand destruction, Goldman Sachs is predicting that the partial global economic shutdown will cause oil consumption to plunge by -26 million bpd this week, which represents an unprecedented plunge of about -25% in global oil demand. World oil demand in February already fell to 99.54 million bpd, down by -3% from the record high of 102.440 million bpd posted in December 2019, according to the EIA. However, only China was seriously impacted by the pandemic in February. World oil consumption is about to collapse in April with many countries across the world now on lockdowns.
The plunge in oil prices, along with the plunge in the economy, have been instrumental factors in causing a sharp drop in inflation expectations. The 10-year breakeven inflation expectations rate has plunged by -70 bp to the current level of 0.95% from the 1.65% area that prevailed in mid-February before the pandemic emerged as a big problem globally. The sharp drop in inflation expectations has been a major bullish factor for T-notes.
China cuts key rate by -20 bp as economy is set for new hit from overseas order-cancellations — The Peoples’ Bank of China on Monday surprised the market with a -20 bp cut in the interest rate on its 7-day reverse repo operation, which was the largest rate cut since 2015. That -20 bp cut in the reverse repo rate is likely to be extended to the rate on the 1-year medium-term lending facility (MLF), which is the main driver of the benchmark 1-year loan prime rate (LPR).
In response to the coronavirus outbreak that began in China in December, the PBOC has so far injected reserves into the banking system and encouraged targeted lending programs, but has only cut interest rates by minor amounts. The Chinese government might now be getting more nervous about the Chinese economy, which is set to take a new hit as the rest of the world shuts down in response to the pandemic and cancels orders for products from Chinese factories. Indeed, the Communist Party Politburo last Friday issued a directive that the PBOC should “guide the LPR lower and maintain reasonably ample liquidity.”
With its aggressive containment actions, the Chinese government was able to largely halt the spread of the virus within China and businesses have been able to progressively reopen. Bloomberg Economics estimates that the Chinese economy last week was back to 95% of normal capacity, up from the 50% level seen in late January and early February. However, China’s economy will see continued weakness as the rest of the world goes through the pain that China went through in January through March.
Last night’s Chinese March PMI reports showed very sharp upward rebounds, which raised hopes that the worst has been seen for the Chinese economy. However, the PMI indexes may fall back in April as reality starts to set in about the poor shape of the rest of the world. China’s March manufacturing PMI rose by +16.3 to 52.0, more than reversing February’s sharp -14.3 point decline to 35.7. China’s March non-manufacturing PMI rose by +22.7 to 52.3, nearly reversing Feb’s -24.5 point decline to 29.6. Tuesday night’s (ET) China March Caixin manufacturing PMI is expected to show an upward rebound of +4.7 points to 45.0, recovering part of Feb’s -10.8 point decline to 40.3.
U.S. consumer confidence expected to plunge — The consensus is for today’s March Conference Board U.S. consumer confidence index to plunge by -20.7 points to a 3-year low of 110.0. The University of Michigan’s U.S. consumer sentiment index has already been reported for March and it dropped by -11.9 points to a 3-1/2 year low of 89.1.
The drop in consumer confidence in March is just getting started as most U.S. states in April will be under stay-at-home orders and a shutdown of non-essential businesses. There will also be millions more people who have been laid off in April. The consumer sentiment indexes are likely to quickly plumb the depths seen during the Great Recession since the upcoming recession is likely to be deeper than the Great Recession though hopefully much shorter.
