Consumers stayed cool to price rises, just as Fed Chair Janet Yellen was reconsidering her bullish stance on inflation; OPEC showed signs of fatigue by nudging its own goalposts
“[We] stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.”
U.S. consumers: Not so hot The monthly retail sales figures issued by the Census Bureau can be fickle – especially the first look at the previous month, called the advance figures. For June, these figures told a disappointing tale – below-consensus expectations across the board. Sales ex autos and gasoline fell -0.1%, vs. an expected 0.4% rise; weak auto sales and falling gasoline prices drove the headline figure down -0.2%.
If the figures hold, stingy consumers might not to blame. Consumer prices ex food and energy for June rose 0.1%, bringing the 12-month figure to 1.7% -- the fifth decline in a row and well below January 2017’s 2.3%. At the same time, inflation-adjusted average weekly and hourly earnings are up 1.1% and 0.8% respectively, year-on-year for June.
The reluctance to pay up could be resulting in extra cash in households’ pockets. One clue about where the cash might be going: checking accounts. There is now an estimated $2 trillion in checking accounts, with the average checking account deposit at about $3,600, climbing from $1,000 in 2007. That could be driving overall bank deposits upward. One estimate shows that deposits account for 77.6% of total bank assets for 1Q 2017 -- the highest since 2006.
Inflation and the Fed: Hope springs eternal As scheduled, Fed chair Janet Yellen testified before Congress twice this week, part of a required semi-annual review. Yellen’s prepared remarks were generally consistent with the FOMC’s belief that price rises are in the offing, and that continued rate rises will be the most appropriate reaction. But the tone of her responses to Congressional questions was slightly less resolute, suggesting that it was “premature”, rather than incorrect, to conclude that wage pressure wasn’t going to lift the level of prices. Further, Yellen was willing to concede that this issue was also on the minds of Fed officials, who are “watching this very closely”.
Crude oil: NOPEC The Paris-based International Energy Agency reported that the global oil cartel’s compliance with its own production cuts fell in June to its lowest level in six months, to 78% versus 95% the previous month. Over-quota producers included Algeria, Iraq, the United Arab Emirates and Venezuela, with Saudi Arabia, Kuwait, Qatar and Angola attempting to make up the overage via their own cutbacks. Libya and Nigeria were exempted from the agreement due to internal unrest, but appeared to be recovering their ability to produce.
OPEC’s own reaction: nudge the goalposts. On Wednesday, OPEC Secretary-General Mohammad Barkindo announced a previously-undisclosed 500,000-barrel flexibility to its previously-announced ceiling, to 33 million barrels per day from 32.5 million, to account for “future supply developments". Crude-oil markets appeared to take the statement at face value, with West Texas Intermediate crude (WTI) rising about 5.6% between mid-Tuesday and mid-Wednesday to $46.37,1 and Brent crude rising 4.6% to $48.49.
But other factors might be at play, especially in the U.S. market: exploration-and-production companies have been coming to the financial markets with increasing frequency for issuance of high-yield debt. Based on that, it could be safe to infer that profit margins are being squeezed in the rush to provide crude oil amid brutally low market prices.
 Source for crude-oil prices: Bloomberg, July 11-12, 2017.