2017 Will Be The Year Of Inflation
With crude oil prices up over 50% YoY (the most in 6 years), and retail gas prices up over 10% YoY (the most in 5 years), Bloomberg’s Garfield Reynolds suggests the Saudis have sealed it then, 2017 will be the year when inflation takes over from disinflation. That’s certainly the tale the market is telling us right now and any devils out there are tucked well away in the details.
The bottom looks to be in for oil. Thanks to OPEC’s capacity to agree among themselves and with “NOPEC,” it’s likely we’ve seen the last of Brent or WTI with a 4 handle at the start of the price for a while.
The new question will be how far up Saudi Arabia is willing to let crude go — it won’t want to encourage shale oil producers to resume building capacity. Still, a new, higher equilibrium price would restore one of the foundations for inflation.
As UBS shows below, if oil tracks its forward curve then inflation will likely meet (or exceed) ECB and Fed mandates next year…
Those foundations were already looking more stable as indications of stronger U.S. economic outlook, especially labor markets, hint the Fed would finally get the classic, wage-driven PPI and CPI increases it wants.
Chinese factories look to again have power to raise prices and are doing so at the fastest clip in five years.
Metals are also climbing, and were doing so even before the latest oil surge.
Bonds are taking a hammering; Australian 10-year yields look to be heading back above 3% to join their New Zealand counterparts and Treasuries cracked 2.5% yesterday.
Bond-market inflationary expectations are going with them, with U.S. CPI seen averaging 2% a year again for the first time since 2014. European inflation swaps are up for a sixth-straight month, something that hasn’t happened since at least 2004.
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There are a few notes of caution to be sounded — there’s still a lot of oil around, and OPEC accords have fractured before. Also, the pace of the turnaround in assets has been so extreme — from stocks, (fresh record highs daily), to bonds (10-year U.S. yields set for worst quarter since 1994) to currencies (yen dropping fastest since 1995) — as to raise questions about sustainability.
Still, OPEC’s determination has echoes of the start of the millennium, when their unwillingness to accept $10 oil helped set off a sustained rally in crude. And if that’s curtains for global disinflation then we could see the start of a great unwind in central bank easing, something capable of spurring all manner of extraordinary market disruption.