As Middle East tensions continue to ratchet up, oil prices are once again in the spotlight threatening central banks with a potential new headwind to build into their continually oscillating inflation outlooks.
News that Israeli embassies have been placed on high alert after Iran vowed retaliation over a missile strike on its consulate in Damascus amid escalating confrontation with Tehran has dominated global headlines in recent days and oil prices have been quick to respond.
The rapidly deteriorating situation saw the price of a barrel of oil surge a further 4.5 percent ending the week above US$90 a barrel for the first time since October last year. The latest move brings oil’s advance since the start of the year to 17 percent, while also notching up a third consecutive month of gains.
Though the escalating tensions between Israel and Opec member Iran have raised renewed fears of a dramatic new conflict in the Middle East that could squeeze oil supplies even further, other analysts point to Ukraine’s drone strikes against Russian oil infrastructure which they believe are what is really affecting prices.
“The Ukrainian strikes against Russian infrastructure really registered with the market,” one analyst told US business news network CNBC on Friday. “We have damaged refining infrastructure in Russia as well as significant other infrastructure problems and that has impacted their production capacity.”
“For the first time since this war started, we may end up finally having material amounts of Russian supply taken off the market, which would have serious price implications.”
The global oil market is also expected to enter a deficit of 450,000 barrels a day in the second quarter with demand growing while global inventories fall as Opec+ members voluntarily lower production, according to Bank of America.
As a result, those much-talked about interest rate cuts that have fuelled equity markets are suddenly becoming ever more elusive.
Against this escalating geopolitical backdrop, the Reserve Bank will release its latest Monetary Policy Review this Wednesday, minus the full statement and media conference that accompany the release of the more detailed policy statements.
Economists are expecting little change to the central bank’s previous outlook.
“We’re not expecting much at all this Wednesday,” Kiwibank chief economist Jarrod Kerr said.
“The RBNZ are in a much happier place now. They’re growing in confidence that inflation will return to 2 percent, in time. So there’s no longer any need to contemplate rate hikes, and it’s still too early to contemplate rate cuts. Basically, they’re in a holding pattern.”
Kerr believes they will wait to see the annual rate of inflation break below 3 percent before they can contemplate rate cuts.
“On our forecasts, inflation breaks below 3 percent in the third quarter of this year. And the Q3 CPI data comes out in October. So the soonest they can cut (without some sort of economic meltdown) is November.”
Also on the reporting agenda this week is the closely watched NZIER Quarterly Survey of Business Opinion which will be released on Tuesday.
As BNZ economist Stephen Toplis noted in a recent commentary piece, the mood among businesses seems to have lost some of the optimism at the start of the year as the prospect of early interest cuts initially kept confidence levels buoyed.
“The murmurings of our corporate customer base have had us questioning whether the recent upward trend in business confidence might have stalled.
“Enthusiasm for a change in government is one thing, but new governments can do little to immediately affect the lagged effects of past policy measures (both fiscal and monetary), structural issues and cyclical momentum.”
Increasingly, 2024 is shaping up to be a year of simply grinding it out for many businesses and the same might also apply to consumers, particularly those with mortgages that have recently reset to much higher interest rates, who are desperate for some much needed relief from the higher cost of living.
The likelihood of the Government being able to deliver on their election promise of tax cuts is also looking increasingly elusive as the economic reality the country faces begins to hit home.
Attempting to put a brave face on the current situation, Kiwibank’s Jarrod Kerr sums it up this way: “The good news is the worst should be over, though we still expect 2024 to be a year of low growth. Policy settings are still aggressively tight and a softening global backdrop doesn’t help either. But the turning point is on the horizon. This year may not be the year of growth but it is the year of central bank rate cutting.”
And though offshore central banks such as the US Fed are likely to beat us to it, Kerr believes their intention to lower rates will help boost global demand and in turn feed through to our export volumes.
“Here at home, it shouldn’t be too much longer before the RBNZ can cut rates themselves. We’re still pencilling in November. And expect to see growth pick up into 2025 as rate cuts are delivered and stimulate domestic demand. For now, the theme remains ‘survive till 25’.”
Perhaps that’s the mantra everyone will need to adopt to get through this year.
US job market strength continues to defy forecasts
We should all be wondering how NZ taps into the resilience of the US economy after it produced yet another blockbuster jobs number for March on Friday (US time) that continues to defy expectations of a downturn in its labour market.
US payrolls swelled by 303,000 last month topping all estimates, while the unemployment rate edged lower to 3.8 percent. Wages also grew at a solid clip and workforce participation rose, underscoring the strength of a resilient labour market that continues to underpin the world’s largest economy.
Though it was hard to fault Friday’s impressive jobs report, once again commentators point out that it pushes out the prospect of imminent rate cuts and there seems little urgency on the Fed’s part to lower rates in the short term.
Markets were further unnerved by comments from one Fed official who said the prospect of rate hikes still remain on the table.
Federal Reserve Governor Michelle Bowman said on Friday that it was still possible interest rates may have to move higher to control inflation, rather than the cuts her fellow officials have indicated are likely and that the market is expecting.
Noting a number of potential upside risks to inflation, Bowman said policymakers needed to be careful not to ease policy too quickly.
“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” she said in prepared remarks for a speech to a group of Fed watchers in New York.
“Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2 percent over the longer run.”
US equity markets pulled back on the prospect of further delays in the timing for rate cuts with the benchmark S&P500 index easing 1 percent.
The better-than-expected jobs report also saw US Treasury yields push higher with the closely watched 10-year gaining 4.4 percent for the week to finish at 4.7 percent, a four-month high.
Along with oil pushing higher, gold also extended it recent rally closing at a new all-time high of US$2345 an ounce as investors increasingly sought a safe haven during escalating tensions in the Middle East.
Gold is now just shy of a 20 percent gain since early February and a 30 percent advance since early October.
Coffee prices hit record high as agricultural goods surge
As if stubbornly high interest rates and petrol prices isn’t enough, consumers can now add their favourite beverage to the list of likely price hikes after coffee prices rose to a record high on Friday, another aspect of a recent upswing for commodities that have reached new peaks in recent months.
London robusta coffee futures, the global benchmark, increased 3.8 percent to US$3,800 a tonne on Wednesday. Further underscoring the scale of the move, the price of coffee beans has now risen almost 70 percent in the last 12 months.
And it’s not just coffee experiencing a surge in pricing. Cocoa traded above US$10,000 a tonne in March, more than doubling in price within two months, and olive oil prices hit a record high in late January, according to Bloomberg data.
Climate change has hurt recent harvests for agricultural goods, with droughts and heatwaves lowering yields providing further evidence that inflation is far from being properly reigned in as central banks continue to remind us.
