The US CPI numbers increased 0.2% for the month, in line with the Dow Jones consensus that sets the stage for an expected quarter percent point rate cut from the Federal Reserve in the coming week. Are there any chances for an outsized rate cut given the recessionary fears are back in the US?
Arnab Das: Yes, we have and I have been in the 25 bps camp all along; 50 basis points are possible, but is unlikely at this stage. The market was pricing more like 30 bps before the CPI. Although the headline CPI number is fine, the core number is not as good as hoped, and core PCE will maintain that story. We are looking at a 25 bps cut. The Fed has kind of indicated and it is correct to say that it has shifted the focus of its dual mandate from inflation to jobs and the labour market, but it has to keep one eye on inflation and that points to a 25 bps cut.
The fall in oil probably speaks of a slowdown in demand that people are worried about. Generally, in China and the world as a whole, with the US and the UK now slowing down, maybe Europe is not slowing down as much, and even India, although growing very strongly, is showing some signs of deceleration. So, all the world’s big oil consumers are slowing down in a somewhat synchronized fashion, causing some concerns about the demand side of the market.
While the numbers showed that inflation continued to moderate, housing-related costs remain an issue. The shelter component of CPI which has about one-third weightage in the index increased half a percent accounting for much of the increase in all items measures. Going forward, is that likely to remain elevated?
Arnab Das: Shelter has been a big part of the volatility and the stubbornness of shelter inflation to come down as much as and as fast as many people have been hoping is reflective of the nature of this inflation process. It is a very different story than we are used to on a normal kind of “cyclical” basis. Possibly it has something to do with COVID directly and indirectly.
There has been a big upsurge in immigration, what former President Trump calls an invasion across the southern border; I think that is really overstating it. But there is nevertheless a very strong influx of immigrants who are possibly helping to keep shelter costs more elevated, shelter inflation more elevated than it would otherwise be at this stage in a “normal” cycle. We think that a more sustained decline in shelter inflation is still around the corner.
Many things in this cycle has been attenuated and extended because the labour market has been persistently strong and it looks like even some of the softening maybe as much as half, maybe a little bit less than half of the softening in the labour market owes to labour supply, including possibly immigration, rather than labour demand which is the usual kind of story as the Fed tightens, that demand takes a hit, including job demand, demand for workers. There has been some of that, but maybe there has more been more increase in supply, plus people coming out of the woodwork and back into the labour market.Crude is rebounding and is up 2%. But coming to the big fall in crude prices, which was as low as $67 a barrel, much below the $70 a barrel level. Now, traders are anticipating a deteriorating demand outlook in China and also they are anticipating potentially higher supply coming into the market than forecasted so far. At this point, what can stabilise the oil prices? And are there any chances of it falling to $60 a barrel?
Arnab Das: We have had a much softer than hoped-for and much anticipated reopening kind of rebound in China compared to the Western world, India, and many other emerging market countries. Demand is a bit of a concern. It looks like maybe what triggered this kind of overshooting to the downside in the crude oil price was an OPEC demand forecast, which was considerably softer than people in the oil market had perhaps expected and that is now sort of underscores the kind of overshooting and the bounce back that you mentioned today. The bigger story is that OPEC oil producers despite all the geopolitical tensions, the open conflict in the Middle East and the open conflict between Russia and Ukraine, actually because of those conflicts at least to some degree the major oil producers including Russia, Saudi, because of its desire to diversify the economy, probably all want to pump more oil rather and generate more oil revenues than cut back on oil production, oil supply, as had been the case with geopolitical conflicts affecting the oil market, in the 70s and early 80s where there were embargoes from the oil producers.
Now, if anything, there are sanctions, boycotts, and embargoes in a way from some of the oil consumers on one of the major producers. Of course, the dynamics have also significantly changed because the US is essentially energy independent and is once again the world’s largest producer of crude, so the second largest consumer, so not doing very much maybe for the global oil market, but there is less US demand pressure structurally and cyclically because of the slowdown and potentially impending recession in the US, less of demand-side pressure from the US than in a more kind of upbeat, buoyant part of the economic cycle.
So, I do not think we are going to have a big collapse in the price of oil. The big surges and the big collapses in the price of oil tend to come from the supply side rather than demand-side kind of behaviour which in the major economies tends to be a more gradual process than supply shocks.