Daily Agenda: Oil-Dependent Economies Left Scrambling

Alcoa kicks off earnings season; Roche announces acquisition; Japan releases record-high annual budget.


Andrey Rudakov

Over the weekend Venezuelan President Nicolás Maduro visited Iran, a country that like his own, has been suffering from the slump in oil prices. This past week marked the seventh weekly contraction for prices of front-month crude oil futures contracts, as swelling North American production, aggressive selling by Saudi state oil company Saudi Aramco, and weakened demand has created a perfect storm for leveraged producers as well as the more fragile petro-based economies. On Friday, Fitch Ratings downgraded the sovereign debt of energy-export-dependent Russia to BBB–, and analysts speculate that Standard and Poor’s will soon cut Russia’s bond rating to noninvestment status on the back of declining oil revenues and sanctions. In U.S. debt markets, the deleveraging of exploration and production companies continues as bond investors punish overextended players in the sector. With oil price volatility seeping into forecasts for equity markets from corporate profit concerns and debt markets on lowered inflation expectations the price of the benchmark global energy commodity is a central theme in market narratives.

Japan announces record annual budget. Over the weekend Japan revealed a record annual budget for the 2015–’16 fiscal year of 96.3 trillion yen ($800 billion), subject to cabinet approval on Wednesday and subsequent parliamentary acceptance. The plan will allow for a 4.4 trillion yen reduction in bond issuance according to government estimates, despite increased spending as consumption tax increases swell government coffers.

Australian home loans subside. The pace of new home financing in Australia for November, released today, contracted by 0.7 percent from October, surprising economists. Consensus forecasts had called for a 2 percent expansion for the period, as record-low interest rates helped to drive prices in residential markets in primary Eastern Coast cities, including Sydney, Melbourne and Brisbane. Critically, the proportion of loans to first-time buyers registered an uptick, as did those to investors. Loans earmarked for fresh construction subsided, indicating that property speculation may be cooling.

Alcoa to announce quarterly earnings. Alcoa, the world’s third-largest aluminum company, will release fourth-quarter 2014 earnings after the close of equity markets in the U.S. today. Many investors and analysts consider the firm’s earnings announcement as both the kickoff for the quarterly earnings season and a macro barometer for global industrial demand. Consensus forecasts among analysts are for an increase in earnings per share of $0.04, versus the same period last year, to bring the total to $0.26.

Roche to acquire stake in diagnostic firm. In a statement released today Basel–based pharmaceutical company Roche Holding announced an agreement to acquire a majority stake in Foundation Medicine in an offering of 5 million fresh shares of the U.S. based company, priced at $50 each. Foundation is a maker of genomic diagnostic tests for tumors and blood cancers. Roche and Foundation have partnered in an immunotherapy treatment to aid patients in combatting tumor growth.


Portfolio Perspective: Are Consumers Still Spending Their Gas Savings?Derek Holt, Scotiabank

A data-dependent Federal Reserve will get a couple of key new nuggets to ponder next week. Softer vehicle sales and lower gasoline prices will probably weigh on headline retail sales on Wednesday when the December update arrives. Recall that Ward’s Automotive vehicle sales data fell by 1.6 percent month-over-month in seasonally adjusted terms. Even though the level of sales remains around its highest since before the crisis, the month’s particular influences won’t help headline retail sales that include dealers. Those two factors should be well understood, so markets will likely cut straight to the core measures for signs of whether consumers are spending more because of lower gas prices. Recall that they did just that in November when sales handily beat expectations. Proxy measures for core sales, such as volatile chain-store sales are looking decent, job growth was solid and despite softer nominal wages, real wage growth (adjusted for inflation) has accelerated.

A stronger indicator of growth, however, may be offset by weaker inflation signs when the December consumer price index (CPI) report is released on Friday. The consensus view is that headline CPI fell to 0.7 percent year-over-year from 1.3 percent the prior month. Core CPI (ex-food and energy), however, is expected to strengthen a touch to 1.8 percent from 1.7 percent. If core remains resilient in the face of pass-through risks stemming from lower energy prices, then the Fed’s reasoning to look through oil price downsides will be a boost. A year from now, oil price effects could shake out or begin to put upward pressure on headline inflation. This is where global central banks need vastly different approaches to falling oil prices. Net oil importers such as the U.S. are probably well advised to look through them in favor of possibly stronger growth expectations that could reflate core CPI and prompt an inflation challenge into next year, once the base effects of lower oil prices on headline inflation measures shake out. Net oil exporters — such as Canada, or Norway — cannot do so as falling oil prices carry negative feedback effects on growth and perhaps also core inflation over time.

Derek Holt is a vice president in capital markets research at Scotia Economics, part of Scotiabank, in Toronto.