Oil prices firmed over 3%

May 17, 2016

FX News Today

Oil prices firmed over 3% to hit a peak of $48.16 bbl (at the time of writing), with gold prices hitting a high of $1,290. Oil was supported by a Goldman Sachs report that the oil market had shifted from a supply glut to a deficit earlier than expected. Oil prices in general markets have been supported over last few trading days by news of decreasing US production and output disruptions in Canada and Nigeria. The production cuts are helping to rebalance the global oil market awash with unwanted crude oil and pushing up prices almost 12% since the market rallied from my Buy Area published in the May 5th analysis on oil.

A known gold bull John Paulson reduced his investments on the yellow metal while George Soros and other large investment funds increased their holdings in the metal for the first time in years. This was shown by filings on Monday. Reuters reports that New York-based hedge fund Paulson & Co, led by John Paulson, cut its investment in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund (ETF), by 17 percent to 4.8 million shares,  according to US Securities and Exchange Commission filings.

RBA’s May cut was driven by “broad-based” softening in inflation, even as the growth outlook remained largely steady, according to the meeting minutes. They had considered waiting for more information, but of course decided to cut 0.25% to 1.75%. Recall that the CPI fell in Q1, marking the first drop since 2008. Core CPI growth moderated to the slowest pace on record. And labour costs have been soft. The RBA’s target band for underlying inflation is 2-3%, but they lowered it to 1-2% for 2016 in the forecasts released May 6. In our view, another rate cut is likely in June or August.

US NAHB homebuilder sentiment was flat at 58 in May, holding at that relatively firm level for a fourth consecutive month. The current single family sales index was also unchanged at 63 after dipping 2 points to that level in April. The future sales index rose 3 points to 65 after inching up 1 point to 62 last month. The index of prospective buyer traffic was steady at 44. Builders cited the regulatory environment and low inventories as sources of restraint, according to the report, while low mortgage rates and a solid job market underpins.

Main Macro Events Today

UK Inflation April CPI: is expected unchanged at 0.5% y/y (median same) while core CPI is seen ebbing back to 1.4% y/y from 1.5% in March. This would closely fit BoE projections. PPI output prices are seen at -0.7% (median -0.8%) after -0.9% in March. However, with the BoE having stressed last week that economic and financial indicators are likely to be “less informative than usual” in light of the uncertainties being thrown up by approaching referendum on EU membership, the figures may not carry the usual potential to impact sterling markets.

US Industrial Production: April industrial production should reveal a 0.3% increase on the month after dropping by 0.6% in both March and February. The capacity utilization rate should rise to 75.0% from 74.8% in March and 75.3% in February. Mining employment in the April report extended the run of recent weakness that the collapse in oil prices has driven and could lend some downside risk to the release.

US CPI The April CPI: should reveal a 0.4% (median 0.4%) headline increase while the core rises by 0.2% (median 0.2%). This follows respective March figures which had the headline up 0.1% and the core up 0.1% as well. The declines in gasoline prices over the winter have weighed on price report headlines but we have seen some rebound in oil prices this spring which should begin to bring an end to this effect.

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