On the last day of 2014, the major market narrative remains oil, as West Texas Intermediate crude futures are down more than 46 percent for the year, the largest annual price decline since their 61 percent drop in 2008. Many investors are looking beyond price movements, however, and focusing instead on what the impact of cheap oil will be on global fundamentals in the coming quarters. While the pain for energy export dependent economies is significant, the picture for the U.S. is quite different. For the ever important U.S. consumer, the boon of lower oil prices is twofold: cheaper gas at the pump and a Federal Reserve that can keep interest rates low, longer, as inflation remains below the central bank’s targets. Of course, these rosy conclusions are predicated on oil remaining cheap, a prospect that the recent budget announced by Saudi Arabia discounted with an $80 per barrel target. As Robert Savage, CEO and chief market strategist for New York–based hedge fund CCTrack Solutions, noted in a letter to investors yesterday, “The sharp drop in prices in 2014 seems out of character to how smooth oil prices have been traditionally — and that may mean we see a 2008–2010 like response back up in prices making the $65 a barrel average forecast too low for 2015 — with $80 the more logical bottom rung of the recent 5 year period.” Savage concludes that this scenario “would leave the growth hopes for 2015 dashed.”
Activity in Chinese factories remains sluggish. Revised December HSBC Purchasing Managers’ Index data released today in Beijing registered a contraction at 49.6, down from 50.0 in November. While a marginal improvement from the initial reading, the new figure suggests that the industrial sector in China remains under pressure caused by lingering excess capacity. The HSBC/Markit index, drawn from over 400 surveyed managers, focuses on smaller private sector companies than the official index scheduled for release by the National Bureau of Statistics tomorrow.
A busy day on tap for U.S. economic indicators. A slew of important U.S. economic data points will be announced today, including weekly initial jobless claims, pending home sales and weekly Energy Information Administration oil stockpile levels. Consensus forecasts are for jobless claims to rise by a modest margin while crude stockpiles are expected to remain at multidecade highs.
Commodity investors crushed. As the year comes to a conclusion, broad commodity indexes are set to lock in their largest annual losses since 2008 and their fourth consecutive annual decline. One small bright spot in commodities markets is gold, which has rallied in recent weeks, closing the decline in price for the year to just 0.3 percent and creating the possibility that the precious metal can finish 2014 in positive territory.
Portfolio Perspective: Positive Signals from the U.S. Consumer for 2015 — Adrian Miller, GMP Securities
Following the lead of the University of Michigan December consumer confidence survey, the Conference Board’s confidence survey marked a notable improvement in attitude this month, though somewhat less than expected. The Consumer Confidence Index increased to 92.6 in December, versus 91.0 in November (revised up from 88.7).
At 92.6 the Conference Board’s index has risen to the highest level since it hit 95.2 in October 2007. The increase in December’s reading was powered by a near 5 point increase in the present situation component, to 98.6. Yet, respondents’ view on expectations moderated somewhat, falling nearly a point to 88.5, though still very much elevated.
The bottom line is that U.S. consumers in general are feeling better about their financial situation, thanks to reduced energy prices, an increase in hiring and initial signs of gains in wage growth. All of these factors should bode well for personal consumption trends throughout 2015, as U.S. GDP growth could exceed 3 percent annually if energy prices remain subdued throughout the year.
Adrian Miller is the director of fixed-income strategies for GMP Securities in New York.
