Originally published by Rivkin Securities
Oil prices surged on Wednesday as US crude oil inventories declined more than anticipated. Data from the Energy Information Administration showed that US that inventories for the week ending May 5th decreased by 5.247 million barrels, larger than the 2 million forecast. Gasoline inventories also unexpectedly declined by 150,000 barrels compared with estimates for a 300,000 barrel increase and distillate inventories decreased -1.587 million barrels compared with the anticipated 800,000 decline. In reaction both WTI and Brent crude surged +3.16% and +3.26% respectively shown on the first chart below while gasoline futures also rose +3.36.
That made the energy sector the best performer on the S&P 500 with the sector rising +1.32%. Overall the S&P500 index edged higher, up +0.11% as did the Nasdaq 100 index, up +0.06%. Earnings season is drawing to a close with 90% of S&P500 companies having reported earnings. Of those, 75% have topped analyst earnings estimates with expectations for +14.7% year-on-year growth compared with +10.1% initial expectations.
Elsewhere the offshore Chinese Yuan was relatively flat, strengthening just +0.03% against the US dollar following inflation data that was modestly above forecasts. Year-on-year consumer prices rose +1.2% from +0.9% previously and market expectations for a +1.1% gain. The disappointment was the producer prices, which are a forward indicator of inflation, having slowed to +6.4% from +7.6% previously as commodity prices declined. Still prices are a long way up from deflationary levels last seen in December 2016 and the Chinese economy grew at +6.9% in the first quarter of 2017. All in all the world’s second largest economy remains stable which is positive for the global recovery and reflation.
The British pound was little changed on Wednesday, up +0.02% against the dollar and +0.07% against the euro ahead of tonight’s Bank of England rate decision. Expectations are that the BOE will keep rates unchanged at the record low +0.25% however the focus will be on the inflation report accompanying the meeting. There have been suggestions that the Bank may raise inflation forecasts higher compared with the current estimates for prices to reach +2.7% by the first quarter of 2018. Higher inflation has been driven by the decline in the Pound and this relationship is shown on the second chart below with the decrease in the GBP/USD accompanying an increase in core consumer prices.
However recently the pound has risen, up +6.4% since March 2017 and +3.85% against the euro shown on the third chart below, which has slowed the pace of gains in inflation and producer prices most recently. This may see the BOE keep inflation projections unchanged although any slight revisions is unlikely to be market moving with the BOE expected to keep rates on hold in the coming months as it seeks to cushion any negative impacts from Brexit negotiations.
Locally the S&P/ASX 200 rose +35.54 points or +0.61% to close at 5,875.44 and we can expect a slightly stronger start to trading this morning with ASX SPI200 futures up +12 points in overnight trading.
Data releases:
· Japanese Current Account & Trade Balance (MoM Mar) 9:50am AEDT
· UK Industrial, Manufacturing and Construction Output (MoM & YoY Mar) 6:30pm AEDT
· UK Trade Balance (MoM Mar) 6:30pm AEDT
· European Commission Economic Forecasts 7:00pm AEDT
· Bank of England Rate Decision & Inflation Report (May 11th) 9:00pm AEDT
· US Producer Prices (MoM & YoY Apr) 10:30pm AEDT
Chart 1 – WTI (Blue) & Brent (Purple) Crude Oil
Chart 2 – GBP/USD & U.K. Core Inflation
Chart 3 – GBP/USD (Blue) & EUR/GBP (Purple)
Source: Rivkin, RivkinTrader