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Oil gets the blame for the fading of Wall Street’s ‘warm, fuzzy feeling’ about a soft landing
Saudi Arabia’s decision to maintain production cuts is rippling across global oil markets — and into the world economy.
Photographer: Simon Dawson/BloombergWelcome to the Bloomberg Surveillance newsletter, a daily look at the best interviews and insights from Bloomberg Television and Radio’s flagship morning show co-hosted by Tom Keene, Jonathan Ferro and me. Sign up here if you’re not yet a newsletter subscriber.
What if Goldilocks doesn’t arrive?
Higher oil prices are throwing a wrench in the soft-landing story.
More expensive gasoline and diesel are already pressuring consumer and corporate balance sheets, while also making headline inflation look higher than it would otherwise be.
Brent crude is flirting with $90 a barrel and US benchmark oil is near its 2023 high, turbocharged by Saudi Arabia's latest extension of supply cuts. All of this is forcing a rethink of the “warm, fuzzy feeling” that had been swaddling investors, according to JPMorgan Asset Management’s David Lebovitz.
“It creates a tension between the growth story and the inflation story,” Lebovitz said today on Surveillance. As for the Fed, “Their job has become infinitely more difficult because of this move.”
US economic resilience in the face of global concerns from China and Europe had fed the latest conventional wisdom about a Fed victory over inflation that wouldn’t require a job-killing recession. Treasury yields came off their recent highs. Then came this week’s oil news.
“I’m not sure we have more clarity where we’re going to be in 12 months from now,” Lebovitz said. “But I think you are seeing investors begin to entertain the idea that maybe a soft landing isn’t a guarantee, and I think that’s what’s causing market volatility.”
US airlines highlighted the inflation-versus-growth worries today with warnings from United, Alaska and Southwest about higher-for-longer pressure from costlier kerosene. Jet fuel was up 48% through yesterday since the year’s low on May 3. Consumers’ resilience will be tested — and if they buckle, carriers risk a squeeze on profit margins.
Whenever energy prices rise, the effect on consumer prices over the longer term isn’t immediately clear. But in the short term, higher costs for gasoline — and diesel fuel and airfares — will boost headline inflation rates.
“It’s going to be a little tough,” Allspring Global Investments’ Ann Miletti said. “Remember, travel is something you can cut back on. And I think we will tend to see that.”
At RBC Capital Markets, Lori Calvasina said there are signs of consumers tapping the brakes a bit on discretionary spending, after their pandemic-era focus on goods gave way to an equally robust bull run of outlays on services.
“From my seat, I wouldn’t see that as reason to panic,” she said. “I would see that as evidence of rationality.”
Margin compression has been a “hot topic” for discussions with clients, Calvasina said. With headline inflation coming down, companies are losing their built-in excuse for passing on price increases, she said. While managers still have levers to tug on, their job is going to get more difficult.
“There are so many wrinkles right now,” Calvasina said. “You can add this to a conflicting, cross-current list.”
Piercing the China gloom
Leland Miller of the China Beige Book offered a take that ran head-on into the glum, daily drumbeat of headlines from the world’s second-largest economy.
“China is doing better than people think,” he said today on Surveillance.
He wasn’t breaking out the pom-poms. And to be sure, he said, President Xi Jinping’s all-in bets on national security and deleveraging versus the US aren’t necessarily the policy prescriptions that market participants would adopt. But under the hood, China has some strengths.
“China is not collapsing. Property is a mess, but most of the economy is chugging along,” Miller said, citing firmness in manufacturing and pockets of strength in personal consumption. And Beijing’s grip on all facets of Chinese life should remind investors that the slow-motion meltdown in real estate and the weakening yuan are features of Xi’s policy, not bugs.
Miller’s assessment might be considered clear-eyed China realism. The old narrative of a go-go China powering the globe is gone. In its place is a market where corporations can serve local consumers and diversify their supply chains, he said.
“Part of what we’ve done over the last decade is tell companies: Be very clear on what you want to accomplish in China. If you think you’re going there because it’s the growth engine of the world, you’ve got a very bad China strategy,” Miller said. “There is a China growth story. It’s just not the one people have been running on for the past 10 years.”
‘Trapped on a boat’
Since travel and energy prices were a theme today, it was probably inevitable that the discussion would turn to our personal views. Jon made clear that he’s no fan of cruise ships, since their gargantuan proportions can ruin the beauty of the ports that lure tourists.
DZ Bank’s Sonja Marten volunteered that she was a “passionate sailor” who shared Jon’s distaste — he promptly invited her back any time — and Clearview Energy Partners’ Kevin Book had a similar riff.
“I like cruising in a car, slowly down the street on a hot summer day,” he said. “Trapped on a boat with nothing but food and booze? Not so much.”
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