Investing.com – Here’s a look at three things that were under the radar this past week.
1. Will Valentine’s Magic Continue for Oil?
Are oil bulls off to the races? Those long or playing its spread versus U.S. would have rubbed their hands with glee as the U.K. benchmark hit the key $65 per barrel level this week.
But if analysts at Morgan Stanley (NYSE:) are right, that’s probably as much love as oil will get near term.
“We continue to see modest upside for Brent to $65/bbl in 2H,” the Wall Street bank said in an energy note this week, referring to second-half prospects.
Morgan Stanley agrees supply has tightened from relentless Saudi production cuts, reflected by the market’s recovery from Christmas Eve lows of around $50 for Brent and under $43 for WTI.
But it contends that a major imbalance has emerged and that’s the presence of too much light oil.
Together with modest gasoline demand, this is weighing on refinery margins and crude runs.
“Low refining margins and weaker economic data means oil prices can rally only so much,” it concludes.
The theory of an oil rally running on less-than-firm legs was reinforced by Thursday’s run-up, which came on the back of Saudi jawboning about upcoming production cuts and optimism over U.S.-China trade talks, despite mitigating weak U.S. crude supply-demand and economic data.
Scott Shelton, energy futures broker at ICAP (LON:) in Durham, N.C., notes that there was no real event driving the market the past few days but “prices are just strong.”
The Energy Information Administration says a new swell of U.S. light oil is headed to the market, boosted by technology to unlock production from shale formations.
Those efforts could add 1.45 million barrels per day to U.S. production this year, bringing output to a record 12.41 million bpd. Next year’s output could go up by a further 790,000 bpd to a new all-time high of 13.2 million bpd.
2. Wage Hikes Here Today, Gone Tomorrow
Small businesses have a knack of figuring out when the economic wind is about to change. And they signaled in a survey this week that trouble may be on the horizon.
In a day and age when companies are grappling with a shortage of skilled labor, a hefty wage package has proven effective bait to reel in top talent.
But small businesses indicated this week they don’t plan on feeding the wage machine much longer as they expect the economy to falter, leading to cheaper labor.
With near-term wages growing faster than expected future wages, the compensation spread, which measures the difference between what small businesses will pay for labor now against what they are willing to pay in the future, is at the biggest margin in history, according to an NFIB survey.
The survey is sourced by economists for a read on domestic demand and to extrapolate hiring and wage trends in the broader economy. Wage growth is what keeps consumption ticking over and inflation on pace, staving off the risk of the economy flatlining, barring a Federal Reserve or government policy misstep.
Most importantly, the compensation curve has moved fairly in tandem with a Treasury yield curve.
Inverted yield curves have preceded every U.S. recession in recent history by anywhere from 15 months to around two years.
3. U.S. Government Debt Expectations Jump
The expectations for government debt rose sharply in January, according to a latest survey by the New York Federal Reserve published this week.
The median year-ahead expected growth in debt rose to 9.1% last month from 6.1% in December, the New York Fed said. That is the highest reading since September 2014, when it was 9.2%.
That could have market implications this year if the government pushes for policies like real negative interest rates to reduce the debt level. The 10-Year Treasury real interest rate, which is adjusted for inflation, is currently around 0.85%.
But so far the Trump administration has shown no interest in reducing the debt level.
When asked about whether President Donald Trump would mention the deficit or debt in the State of the Union, White House Chief of Staff Mick Mulvaney reportedly replied “Nobody cares.”