With the selling pressure in global oil markets continuing on, what will be the net impact of cheap crude on the markets and the economy as a whole? As Andrew Lapthorne, head of quantitative equity research at Société Générale in London elucidated in a note to clients this morning, determining the root cause of the sell-off is critical to this process. “Whilst many associate the slump in oil with a supply-side shock, the decline has also been associated with significant downgrades of future growth expectations,” he wrote. “Hence one view is that investors were happy to ignore the oversupply of oil for as long as they also believed that we were at the beginning of a new economic recovery.” With the good news for the U.S. consumer and specific sectors of the equity markets there offset by concerns about the future for global demand, the U.S. economy is presently a glass half-full or half-empty scenario.
Moody’s cuts Japan’s credit rating. Moody’s Investors Service downgraded Japanese sovereign debt securities one level to A1. In its release the credit ratings agency cited increased uncertainty that the Bank of Japan’s easing facility will have the desired impact on growth necessary to manage the nation’s massive debt-to-GDP ratio. This marks the first downgrade for the nation by one of the primary three credit agencies since Prime Minister Shinzo Abe was re-elected to office in December 2012.
China releases more soft factory data. National Bureau of Statistics final manufacturing purchasing managers’ index data for November registered lower than initial estimates at 50.3, the lowest reading in eight months. Separately, the HSBC index measuring activity at smaller private enterprises remained unchanged at 50. This is the latest in a series of economic data points indicating a slowing pace of industrial growth in the world’s most populous country.
U.S. manufacturing data on deck. November ISM manufacturing index levels are due out this morning with consensus forecasts for a contraction from the prior month’s readings. Separately, the Philadelphia Federal Reserve is releasing regional manufacturing activity data for November, with analysts’ expectations that local Pennsylvania factories saw activity slow in step with national levels.
Ruble under pressure. Over the weekend the Russian ruble fell to new historical lows against the U.S. dollar, with the currency climbing to higher than 50 versus the greenback. With oil markets continuing to sink and the impact of Western sanctions continuing to reverberate through Russia’s economy, some analysts are predicting a high single-digit contraction in the nation’s gross domestic product in 2015.
Portfolio Perspective: Low Oil Prices Will Drive Global Auto Sales Higher — Carlos Gomes, Scotiabank
The recent sharp drop in oil prices to their lowest level since 2010 is positive for the global auto industry and economic activity. It boosts household purchasing power and reduces overall transportation costs at a time when labor markets are strengthening and household balance sheets are improving in most regions, led by the U.S. Lower fuel costs will also accelerate the shift towards light trucks, helping to boost industry profitability, as crossovers, sport utility vehicles and pickup trucks become more profitable than small- and mid-size cars.
Oil prices have dropped more than 20 percent in eight previous occasions during the past 30 years. On four occasions, the decline was linked to global economic downturns and lower prices at the pump were not enough to prevent deteriorating economic fundamentals from leading to sharp declines in global vehicle sales. On four other occasions, however, — 1986, 1988, 1994 and 1998 — the situation was more in line with current developments, with the oil price contraction driven by accelerating supplies and slowing — but not declining — demand. During these periods, global economic growth strengthened, especially in the revitalized industrial economies, and new vehicle sales increased an average of 4 percent the following year. Lower oil prices provided the greatest boost to global auto sales in 1994, with volumes advancing 9 percent, alongside solid gains in every region. The impact was smallest in Western Europe, as the economy was struggling to build momentum following the recession of the early 1990s — a development analogous to the present cycle.
We believe that the environment today is most similar to 1994, with the North American economy beginning to build momentum and providing a boost to global activity. In both periods, interest rates had remained low for an extended period and labor markets — the key economic driver of new vehicle sales — were finally recovering following a long period of subpar performance. During this present economic cycle, the U.S. job market has posted nine consecutive monthly gains in excess of 200,000, lifting year-over-year growth to the highest level since 2006, and job growth has finally resumed in Western Europe.
Carlos Gomes is a senior economist and auto specialist at Scotiabank in Toronto.
