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The rebound in oil prices has accelerated in recent days, pushing Brent well above $90. This represents an increase of almost 25% over 3 months. Saudi Arabia's production restrictions are obviously playing a part, as is the continuing reduction in the number of wells in operation in the United States. Also, the latest economic statistics from China seem to show that activity is stabilizing, particularly in industry. This is seen as a positive sign for future demand, helping to put upward pressure on the price.
We continue to believe that global growth is likely to remain weak, particularly in the developed world given the current restrictive financial conditions. This should translate into moderate pressure on oil prices.
Of course, more resilient growth, particularly across the Atlantic, could continue to push prices higher. Already, however, rising oil prices must be seen as a new "tax" on consumption, which should have a negative effect on activity.
Central bankers should take this recessionary effect of rising oil prices on board, while at the same time worrying about its impact on corporate pricing, with the risk of further complicating the disinflation dynamic.
Fig.1 Oil: The surge in oil prices continues, with Brent crude topping $94 a barrel.
-Oil price, Brent, dollars per barrel
As we all know, activity indicators in the United States have been fairly positive in recent months, particularly those linked to demand, with household consumption remaining solid. On the supply side, indicators have been more mixed at times. As we know, the manufacturing sector remains one of the weakest links in the economic chain. August's data confirmed this weakness, although it is clear that the situation is no longer deteriorating. Year-on-year, industrial production is still contracting by 0.6%.
At the same time, the dynamics within industry are rather erratic. The technology sector remains buoyant, but trends in the automotive sector have been much more volatile. This is largely due to the difficulties of breaking out of the constraints created by the Covid period. In July, for example, there was a sharp rise in production, but this was largely offset by a downward correction in August. At the same time, production in the defense industry continues to accelerate.
The strikes that have begun in the automotive industry, over demands for higher wages, should complicate the situation in the very short term, but production should still be sustained by demand that was severely constrained during the pandemic period.
Fig.2 United States: Industrial production growth slows in August, mainly due to the correction in automobile production
-Manufacturing production
-Cars
-Defense
-Manufacturing production, slide, annual,%
In an attempt to forecast business trends, we follow activity indicators based on business surveys. The New York Fed's indicator of manufacturing activity, known as the Empire State, came out in September much better than expected, showing a clear rebound on the previous month. Almost all segments showed an improvement, particularly new orders.
Fig.3 United States: The New York Fed's indicator of activity in the manufacturing sector showed a clear rebound in August, even though it has been very volatile of late
-%Empire State, index
-New orders
Does this confirm a rebound in the manufacturing sector? In our view, it is possible that production will pick up slightly in the very short term after several months of inventory adjustments. Nevertheless, the restrictive financial conditions in place are likely to weigh on demand and therefore on activity in fine. It therefore seems difficult to see a very solid and, above all, sustainable rebound in these conditions.
On the demand side, the University of Michigan's preliminary household confidence survey for September revealed that the confidence index had lost ground, notably due to perceptions of current conditions. At the same time, although the level of the index remains historically low, it is well above the level that prevailed a year ago. Household concerns continue to be dominated by purchasing power. In particular, households seem inclined to reduce their consumption of durable goods in view of price levels.
Paradoxically, in these conditions, the survey reveals that inflation expectations have fallen sharply. This is all the more strange given that energy prices have risen quite sharply recently. Of course, this statistic is quite volatile, and these expectations could be corrected by the end of the month.
Fig.4 United States: Household inflation expectations fall...despite higher oil prices
-Consumer confidence, U. Michigan, index
-Anticipated inflation in 1 year, %*, ED
-Anticipated inflation in 5-10 years, %*, ED
Nonetheless, for the Fed, the fall in household inflation expectations will be seen as a good thing. This should help keep key rates stable on Wednesday. Nevertheless, we find it difficult to envisage at this stage that the monetary authorities will declare, as the ECB has done, that peak rates are here. The door should remain open to a possible further rise, given the resilience of the economy.