Marketmind: Crude deflation?

A look at the day ahead in U.S. and global markets from Mike Dolan.

With everyone on Wall St seemingly hand wringing about stagflation next year, the price of crude oil has plummeted by up to 10% this week to its lowest since early January – offering some relief in an otherwise murky outlook.

Even though China proceeded to lift its strictest COVID curbs on Wednesday and incoming U.S. and G7 economic numbers continue to come in ahead of forecasts, Brent crude plunged below $79 per barrel for the first time since Jan. 4.

Crucially for inflation worriers, year-on-year crude price gains – which were running at 50-100% between February’s Ukraine invasion and midyear – have now fallen to just 4% and could soon be a disinflationary force in consumer price baskets. U.S. gas pump prices are down almost 30% from June peaks.

Oil prices have been undercut generally by 2023 recession fears, the lack of fresh OPEC output cuts at last weekend’s meeting and evidence in dire China November trade numbers of the damage to date from China’s draconian zero COVID stance.

But, contrary to many prior energy market assumptions, the impact of Monday G7’s Russian oil price cap at $60pb for seaborne crude is anchoring prices and underscoring massive discounts for Russia oil – already selling for as low as $55pb.

U.S. Treasury officials reckon the price cap is “institutionalizing” current market discounts.

Aside from weighing down energy stocks themselves, the oil move has had little direct impact equity markets yet – rattled as they are by recession angst and the prospect of four more major central bank interest rate rises over the next week.

The Bank of Canada is the latest on the list on Wednesday and expected to hike rates by another half point, as are the Federal Reserve, European Central Bank and Bank of England next week.

S&P500 futures stayed in the red on Wednesday after a fourth down day in a row on Tuesday. European and Asia bourses – even Shanghai and Hong Kong despite the lifting COVID restrictions – were in negative territory too.

Ten-year U.S. Treasury yields held about 3.5%, but the recession flag embedded in the 2-10 year yield curve inversion deepened further to 84bp overnight. The dollar was a touch firmer.

In politics, Democrat Raphael Warnock won re-election to the U.S. Senate in a hard-fought Georgia runoff on Tuesday, strengthening his party’s razor-thin majority as he fought off a challenge by Republican former football star Herschel Walker.

Walker’s defeat is also another setback for Donald Trump as he seeks the Republican nomination to run for the White House again in 2024, not least with the Trump business found guilty of tax fraud on Tuesday. The former president endorsed Walker and dozens of other high-profile Republicans in this year’s midterm elections.

In Europe, there was some unease after German authorities detained 25 members and supporters of a far-right group that the prosecutor’s office said were preparing a violent overthrow of the state, with some members suspected of plotting an armed attack on the parliament.

Key developments that may provide direction to U.S. markets later on Wednesday:

* US Oct consumer credit, Q3 Unit Labor Costs, productivity

* Bank of Canada policy decision

* U.S. corporate earnings: Brown Forman, Campbell Soup, GameStop

* European Central Bank board member Fabio Panetta speaks

* Defense ministers of 13 European countries – so-called European Intervention Initiative – meet in Oslo to discuss the security situation in Europe after Russia’s attack on Ukraine Graphic: Crude Deflation? Graphic: China’s exports and imports contract in November,

(By Mike Dolan, editing by Alexander Smith; Twitter: @reutersMikeD)