Charts of the Week: Energy, Naturally

Growth surprises and US Treasury yields US Treasury yields have, on the whole, been climbing over the past few months reflecting the resilience of the US economy and the implications of this for Fed policy. This linkage is illustrated in chart 1 below showing a tight correlation between US yields and US growth surprises. But over the past few weeks incoming US growth data have disappointed expectations more frequently. Yet US yields have continued to climb. US bond investors are, in other words, signalling heightened fears about the inflation outlook relative to growth. Investors are equally be heeding the recent messaging from the Fed suggesting that monetary policy could be tighter for longer in the immediate months ahead. Rising real yields additionally suggest that debt sustainability concerns have surfaced as well.

US service sector inflation and natural gas prices A key question now is whether US (and broader global) inflationary pressures will begin to build. Latest data certainly point that way. US natural gas prices, for example, have spiked sharply higher over the past few weeks, partly because of an unusually cold snap of weather. More recently, global oil prices have begun to trend higher as well. Inasmuch as this has ramifications for companies’ energy costs it should be no surprise that latest business surveys additionally point to some intensification of cost and price pressures. This week’s US ISM survey of the service sector, for instance, revealed a big spike in the prices component in December and specifically to its highest level since February 2023 (see chart 2 below).

Expectations for policy rates in the world’s major economies Although inflation concerns have intensified, most major central banks are still expected to continue reducing their policy rates in the year ahead. That at least is the message from the latest Blue Chip Survey of Financial Forecasts. Still, US policy rates are now projected to decline by 60 bps over the next 12 months. That contrasts with a 12 month ahead projection for policy rates last October for cumulative cuts amounting to 125bps though since that time the US Fed Funds rate has been reduced by 50bps. Elsewhere, Japan stands out with an anticipated increase in policy rates over the next 12 months, amid signs of improving wage growth. In contrast, the UK and the euro area, are expected to continue reducing rates and by a relatively large degree.

Euro area CPI inflation and wage growth Recent data for the euro area economy have reinforced the view that the ECB will continue cutting rates in the immediate months ahead. That’s certainly true of the incoming growth data. But latest data on the inflation front have been reassuring as well. This week’s flash CPI data for December, for instance, suggested that service sector CPI inflation has been levelling off. Forward looking indicators, moreover, suggest as the ECB’s monthly tracker of negotiated wages, offer compelling evidence to suggest a big slowdown in inflation lies ahead.

US energy trade and the dollar Against a macroeconomic backdrop where the US economy has remained resilient compared with other major economies, the real trade weighted value of the US dollar has been appreciating in recent weeks. However, as chart 5 illustrates, this appreciation is not merely a short-term fluctuation but part of a longer-term secular trend toward a stronger US currency that has been unfolding for over a decade. Simultaneously, the chart highlights the steady improvement in the US trade balance for petroleum products (in real terms), transitioning from a significant deficit in the early 2000s to a consistent surplus in recent years. This shift can largely be attributed to the US shale revolution, which has significantly increased domestic oil and gas production, reduced reliance on imports, and positioned the US as a net exporter of petroleum products.

Global trade in oil (and US resilience) The contrast with other major economies could not be starker. Chart 6 below highlights the net exports of oil and petroleum products in 2023 (measured in thousand barrels per day) across major economies. As suggested above the US stands out as the only net exporter, with a significant surplus, underscoring its position as a dominant player in the global energy market. However, other major economies, such as the euro area, China, India, Japan, and the UK, exhibit large deficits, reflecting their heavy dependence on oil imports to meet domestic demand. China and the euro area have the largest deficits, indicating their substantial reliance on external energy supplies, which makes them more vulnerable to global energy price fluctuations and supply chain disruptions.

The implications remain significant. The US economy’s s energy independence provides it with a strategic economic and geopolitical advantage, insulating its economy, via trade channels, from external price shocks. On the other hand, the energy import dependency of other regions highlights their exposure to volatile global energy markets, making energy security a key policy priority. For countries with large deficits, such as China, transitioning to renewable energy sources may help mitigate these vulnerabilities over the long term.