Oil Supply Shocks Creating ‘Nightmares’ for Central Banks

0:00Let's move on and joining us now is Terry Weisman, the global FX and rate strategist over at Macquarie Terry, lovely to have you on on such a busy and important day. What does the stronger dollar knocking on the door of 100 with oil and triple digits tell you right now? What is it signal? Well, it signals that, you know, traders and investors have a bit more confidence about growth in the US relative to the rest of the world still. And the reason for that is somewhat fundamental in the context of oil prices that are rising. The US should be hurt less than other countries. And the reason for that, of course, is that the US is a large oil producer. It does not necessarily rely that much on oil from the mid-east. And of course, there are certain areas of activity in the US that will do well, especially in the oil patch, when oil prices are higher and that could, of course, permeate the general economy too. So I think what the market is saying when the dollar is rising in this context is that the US is relatively isolated from what is happening here.

1:01It doesn't mean it's absolutely isolated. There's a lot of empirical evidence out there suggesting that when oil prices surge, there is inflation globally. And of course, there is a global slowdown in GDP growth as well, which to some extent will touch on the US. Okay. So the US relatively insulated, perhaps why we're only about 3.5% off the all-time highs on the S&P 500. No doubt we can take some comfort in that, Terry, but I'm just wondering as far as those who are more vulnerable, I'm thinking of our friends out in Asia. I mean, the kind of pullback we've seen in markets like Japan and Korea. I mean, I was looking at some of the data out of India overnight as well. I mean, porting 60% of energy requirements, the repair at a record low against the green back, Taiwan's got 11 days of LNG storage right now. How do you think about the folks over there? Well, I think it speaks to exactly the point we were making earlier, which is that if you are an industrial economy, if you export the pendant industrial economy and you're dependent

2:05on imports of oil, especially in view of the prospect that the rest of the world will slow down, your industrial economy can slow down. But of course, margins will get squeezed as well in your industry, which is going to be simply just another factor in slowing down production and output growth. So it stands to reason that countries like Taiwan, Japan will be hurt the most. India too, of course, because it has to import all of its oil. And of course, agriculture is very energy intensive and of course that's what the Indians do a lot of. So I think the pattern of who's getting hurt here and who's getting help is following for the most part, the pattern of relative dependence on imported oil versus non-dependence. I think we're going to have to live with this until we get clarity, of course, on what is going to happen to oil prices. And of course, that's depending right now on what the generals are doing, not so much on what the central banks and the other policymakers are doing. Okay, but I do want to focus on that because I mean with that tough jobs report on Friday,

3:07that is not what the markets wanted to see. Is this a central bank as worse nightmare, Terry? Supply shocks tend to be nightmares for central banks. The reason is because it makes more difficult aspiring to reach dual mandates, for example, price stability and unemployment at the same time. What we can tell from the empirical evidence historically is that higher oil prices cause both. They cause inflation, but they also cause unemployment in a slowdown in growth. If you're asking me what the current cohort of central banks is going to do in this context, I suspect very strongly that it's going to be tilting more towards the hawk side of the spectrum than the other side. I think the experience from the inflation of 2022 and 2023, each of us, that these general global inflationary surges are usually started with commodity price increases. Of course, central banks relate to some extent in raising interest rates at that time.

4:07I think those are two important lessons to have been learned from the recent history and taking that those lessons to heart means that these central banks are going to be more inclined to either hold off on cutting interest rates or prospectively raise rates in this context should it persist. Yeah, I mean, look at the Australians, they've already hiked and now talking about every meeting being live going forward, Terry, we have to wrap it up there, but really appreciate your thoughts this morning. My pleasure. Terry Weisman, global FX and rates are strategists over at Macquarie.