Oil Price Drop Weakened NOK

The oil price has fell from yesterday after climbed markedly over the last few days. In line with th

(12.04.2011) The oil price has fell from yesterday after climbed markedly over the last few days. In line with the oil price decline, the NOK fell versus both the Euro and USD.

By Kyrre Aamdal, Senior Economist at DNB Markets

The Brent oil prices fell from 127 USD/brl yesterday morning to 122 USD/brl this morning. The decline caused a drop for energy related share prices and contributed to lower the main U.S. stock indices. A new earthquake in Japan also contributed and caused a yen strengthening versus the USD. The latter reversed some of the losses versus the Euro the last weeks. The drop in oil prices went along with rising EURNOK. The latter increased 1.3 per cent from yesterday morning. Some of the weakening took place in the Asian trading tonight, and may to some extent be reversed after European trading starts today.

Norwegian core inflation (CPI–ATE) rose by 0.8 per cent y/y in March, the same as in February. This was slightly below consensus and Norges Bank's estimates, both 0.9 per cent y/y. Two factors stand out. First the monthly rise in prices of clothes (7.9 per cent) was the strongest registered for the month of March since the start of the index in 1979. Normally clothing prices increase in March after sale activity in January and February. But this year's rise was much higher than usual and unexpected in the light of a strong NOK.

Second, food prices fell 0.9 per cent m/m, the first reported decline in March since the index started in 1979. High price growth in international food prices should indicate rising food prices also in Norway. But during the last year food prices have declined 8 out of 12 months.

The price of electricity fell, and annual growth in CPI came down, as expected, to 1.0 per cent y/y in March, from 1.2 per cent in February. Norges Bank's measure of underlying inflation, CPIXE, increased however from 1.1 per cent y/y in February to 1.2 per cent y/y in March, one tenth above Norges Bank's forecast in the Monetary Policy Report from March.

Over all the core inflation remains well below target, and yesterday's figures are in line with expectations. Hence, the March inflation figures will probably not affect the central bank's assessment when choosing between a hike in May or in June. We still believe that the hike will come in May. The market reactions were small.

After hawkish signals from some Fed-members last week, other representatives gave more dovish signals this week. In a speech from San Fransisco's Jane Yellen said: "Critically, so long as longer-run inflation expectations remain stable, the increases seen thus far in commodity prices and headline consumer inflation are not likely, in my view, to become embedded in the wage and price setting process and therefore are not likely to warrant any substantial shift in the stance of monetary policy."  

Chicago Fed's Charles Evans presented a paper along with Jonas Fisher with following conclusions: "The shares of firm costs accounted for by energy and commodities are not large and, in fact, have fallen over time. Moreover, at least in the case of oil, price increases tend to slow the economy even without any policy rate increases. Of course, if commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified. But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do."

And finally New York Fed's William Dudley on his Hong Kong trip stated: "We shouldn't be enthusiastic about tightening monetary policy too soon … If inflation expectations became unanchored, the Fed would have to respond. I don't see any sings that expectations are becoming unanchored." We believe the FOMC will keep key policy rates unchanged until summer next year, ant the markets do not price in any rate hikes this year.

IMF released its World Economic Outlook yesterday. The forecast for world growth are unchanged for both 2011 and 2012 with 4.4 per cent and 4.5 per cent respectively. For advanced economies growth is adjusted down 0.1 percentage point in 2011, but adjusted upwards in 2012. For Japan the growth is 0.2 percentage point lower in 2011 compared to IMF's January forecasts, but 2012 is increased by 0.3 percentage points. Over all, IMF states: "Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good".