Yellen: Turbulence in Global Financial Markets Worrying

Daily Analysis - 11/02/2016

Concerns Over Global Economic Outlook Mount

Federal Reserve Chair Janet Yellen reiterated that the US economy remains resilient, supported in large part by consumers and a strong labor market. If the global economy continues to appear gloomy due to recent turbulence in financial markets, declines in energy prices and prolonged weakness in major economies, these factors could weigh on the timeline for further interest rate hikes.

UK Industrial Production Sinks

Industrial output for the month of December continued to decline, reaching -1.10% on a monthly basis after missing estimates of -0.10% and falling below the previous month’s -0.80% contraction. Mining production was a main driver of the weakness, having slid by -4.00% while manufacturing also added to the pile on, slipping by -0.20% over the month. The UK Office of National Statistics (ONS) also reported ongoing shrinkage in industrial activity on an annualized basis, printing at -0.40% versus estimates of 1.00% and November’s revised value of 0.70%. The declines in industrial production also reflected on manufacturing production, which trickled -0.20% lower during the month of December after having falling by a revised -0.30% in November. The figures are expected to be echoed by gross domestic product projections from the ONS, with the low growth estimates likely to push a rate hike even further into the future.

Oil Futures Falter

The United States Energy Information Administration (EIA) reported crude oil inventories declined by -754,000 barrels for the week ending February 5^th, contrasting sharply with the API data released a session earlier. The EIA figure missed expectations of a 3.550 million barrel build, falling sharply below the prior week’s 7.792 million barrel inventory addition. Cushing stockpiles rose by another 523,000 barrels after having added 747,000 barrels the previous week, adding to a total stockpile of 64.700 million. The knee jerk reaction higher in oil futures during the announcement was short lived, with WTI cascading to new multi-year lows. The decline was reportedly due to comments from China National Petroleum Corporation forecasting the country’s oil exports to rise by 31.00% this year. The dumping of more fuel into an already oversupplied market with a softness in demand, could cause prices to crash even further.

US Outlook Shaky

In her semiannual congressional testimony, Federal Reserve Chairwoman Janet Yellen underlined that recent turmoil in financial markets and uncertainty attributed to the Chinese economy could cast a shadow over the US economy. If weakness persists in China while a pile up in commodities leads to increased deflationary threats, these factors may weigh negatively on the US economic outlook and the labor market. However, robust consumer spending and supported by modest wage growth, declining unemployment and business investment outside the oil sector is anticipated to aid the US economy proceed on its path towards growth and inflation, but at a more gradual pace.

French Industrial Production Plummets

Yellen stated that the continuation of job openings and a strong labor economy amid some adjustments in monetary policy will help expand the country’s GDP growth over the coming years. While some negative elements are looming large, Yellen did not dismiss the possibility of a more gradual increase in rates over the year.