L’essentiel: Attention le thème de l’inflation commence à faire boule de neige

Oil continues to languish as OPEC deal remains elusive, Mark Carney decides to stay at the BOE until Brexit is done, and we’re finally in the home straight of the U.S. election.

Oil stays low

A barrel of West Texas Intermediate for December delivery was trading near a one-month low at $46.66 at 6:20 a.m. ET with analysts at Goldman Sachs Group Inc. predicting a slide to the low-$40s if an OPEC deal to cut output fails to emerge. Gasoline futures in New York jumped the most in almost eight years after an explosion shut down the largest fuel pipeline in the U.S. In corporate news, BP Plc saw its profits slide by 49 percent in the third-quarter. While that number beat expectations of a larger drop, shares in the oil-major fell in London trading. Royal Dutch Shell Plc’s third-quarter profit came in a full $1 billion ahead of the average of analyst estimates, with the company’s February acquisition of BG Group Plc boosting production. Shares were 3.4 percent higher at 6:16 a.m. ET.

Carney staying at the BOE

Bank of England Governor Mark Carney says he will remain at the helm of the central bank until June of 2019, ending months of speculation about his future. With the British Prime Minister expected to trigger Article 50 to start the official process of the U.K. leaving the European Union by the end of March next year, and that process expected to take a maximum of two years, the governor’s new departure date will see him in position throughout the negotiations. The pound rallied after the announcement and was trading at $1.2249 at6:08 a.m. ET. U.K. manufacturers are continuing to benefit from weaker sterling, with IHS Markit’s Purchasing Managers Index coming in at 54.3 for October, down from the previous month’s 55.5, but still well above the 50 level that indicates an expansion.

BOJ holds, China data beats

The Bank of Japan voted to keep its monetary policy unchanged while delaying the projected timing for reaching its 2 percent inflation target to beyond the end of Haruhiko Kuroda’s term as governor. The yen was trading at 105 to the dollar at 6:20 a.m. ET, near a three-month low. In China, an official manufacturing purchasing managers index rose to 51.2 in October, the highest level since July 2014, while non-manufacturing PMI rose to 54. Also in China, trading incredit default swaps began yesterday on the nation’s interbank market as the country faces mounting bond failures.

Markets inch higher

Overnight, the MSCI Asia Pacific Index added 0.3 percent while Japan’s Topix index closed the sessionbroadly unchanged. In Europe, the Stoxx 600 was 0.2 percent higher at 6:17 a.m. ET with Standard Chartered Plc dropping 5.5 percent following disappointing earnings. S&P 500 futures advanced 0.2 percent.

One week to go

This day next week will be voting day the in long-anticipated U.S. presidential election. Last week’s revelation that the Federal Bureau of Investigation is reopening its inquiry into Hillary Clinton’s use of private e-mail has put the election back to the top of currency traders’ list of worries, as polls that had shown the Democratic nominee with a commanding lead start to tighten. The two leading candidates have drawn up plans for a post-vote battle in case there are opportunities to challenge results in decisive states. Keep up with all the final week developments at Bloomberg Politics.
 History might well remember 2016 as the year that populism swept the developed world.

And finally, here’s what Joe’s interested in this morning: inflation

When will inflation show up? That’s a question that people have been asking non-stop for years since the financial crisis. But instead of asking « when » the inflation will come, it’s better to ask « where » there are signs of price increases.

Here’s where it gets interesting. As George Pearkes of Bespoke Investment Grouppointed out yesterday, following the release of the latest Personal Consumption data, services inflation is up 2.4 percent year over year while goods inflation is down 1.1 percent over the same period.

As the attached chart shows, services prices have been remarkably firm and steady since the crisis, whereas the pricing of goods has jumped all over place and remains in deflation.

A key difference between goods and services is that the former are sold and traded on a much more global market, and thus more prone to reflect international economic conditions such as spare capacity in China, which is beyond the Federal Reserve’s control.

This is a topic that Matt Busigin of New River Investmentstackled in a recent blog post. « The consequence of trade is that there has been a bifurcation of price level change, but not upon the stunted pivot of need or want, but rather on domestic or international, » he writes.

This, then, is the key thing to watch with inflation: What’s happening with slack for domestic industries and for goods that are traded around the world? If the U.S. services sector continues to stay firm and slack begins to get gobbled up internationally (note the strong Chinese manufacturing PMI and surging zinc prices) then a key drag on aggregate inflation could rapidly diminish.

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