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From the Floor: Is the US actually in deflation? — #SaxoStrats

   • EURJPY in focus if NFP surprises to the downside
   • Strong jobs data to place EURUSD decline in the spotlight
   • Gasoline rallies 13.7% as key pipeline shuts down
   • Gold rejects plunge below $1,300/oz
   • SocGen's Edwards says US core CPI minus rent shows the country in deflation
   • Chinese Party conference to begin October 18

By Michael McKenna

Tropical Depression (née Hurricane) Harvey has gasoline prices spiking higher in the wake of widespread devastation at Gulf Coast refineries and the shutting of the key pipeline from the Gulf to the RBOB gasoline delivery point at New York harbour. 

The September RBU7 gasoline contract surged by 13.7% yesterday on the news of the pipeline closure, where officials are working to reopen the corridor by Sunday.

"The question now is how long it will take the major refineries impacted by the storm to return to service," says Saxo Bank head of commodity strategy Ole Hansen. "We have seen the surge in gasoline prices give support to crude oil prices despite Opec compliance rising in August".

The oil trade is caught between a number of conflicting high-level factors at present, adds Hansen, with Libyan production down 33% from highs. Ultimately, he says, support in WTI lies at $45.25/barrel; "I do not expect prices to sink below this level," Hansen concludes.

Today brings latest updates to US PMI data as well as the nonfarm payrolls report for August, with forex traders watching both the euro and the dollar closely in the run-up to the release at 1230 GMT.

"If the number surprise to the upside," says Saxo Bank head of commodity strategy John J Hardy, "the focus will be on EURUSD, but one pair to watch in the case of a disappointment is EURJPY."


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Source: Saxo Bank 

An interesting US data fragment published this morning came in a report from SocGen's Albert Edwards, who pointed out that US core CPI minus rent shows the country to be in deflation. Calling this an "unprecedented slump," Edwards says that never since the mid-1960s, when records began, has core CPI (less food, energy and shelter) declined over a six-month period.

This reading should give pause to US Federal Reserve policy hawks whatever the nonfarm payrolls data say, according to Hardy.

In gold markets, Thursday saw the precious metal reject a dip below $1,300/oz, with prices supported by political and geopolitical uncertainties in the US and North Korea. As was the case earlier this week, notes Hansen, resistance now lies at $1,337/oz, with support at $1,295/oz and $1,277/oz.

While silver is trading above a key downtrend line, Hansen adds, it is not showing any signs of a rally versus gold; for that, he says, we would need to see the ratio break below 74.90.

Finally, as the US tallies up the wreckage left by Harvey, Hurricane Irma is gathering strength in the western Atlantic, with models suggesting a landfall in the Caribbean. it is not yet known to what degree this storm will be felt in the devastated Gulf Coast region, but forecasters are expressing concern, and the National Hurricane Center is reporting that Irma is currently a Cat-3 storm with sustained winds of 115 mph, but is expected to strengthen to a devastating Cat-5 with winds that could top out at 180 mph or more.

Hurricane Irma
Watch this space. Photo: Shutterstock

Michael McKenna is senior editor at Saxo Bank


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