Week of 2/6/2023 | StreetFins®

1. Down Week

The S&P 500 index experienced a slight 1.1% decline following two weeks of growth, marking its most significant weekly drop since mid-December. The NASDAQ encountered a more substantial 2.4% decline, while the Dow slipped by approximately 0.1%. On Friday, the cost of U.S. crude oil rose by almost 9%, reaching nearly $80 per barrel. Experts attribute this price surge to Russia’s announcement of a production cut of 500,000 barrels per day in March, accounting for roughly 5% of its output, in response to recently imposed sanctions.

During a moderated discussion on Tuesday, the Federal Reserve Chair, Jerome Powell, stated that it will be a challenging and unpredictable process to bring inflation down to the central bank’s goal of 2%, following an unexpected strong jobs report and another Fed rate hike. As the quarterly earnings season concludes, analysts have been revising their forecasts for Q1 earnings results, which companies will report in April. According to FactSet, analysts reduced their earnings-per-share estimates by an average of 3.3% for companies in the S&P 500, exceeding the 1.5% average of the past five years.

A Consumer Price Index report, which is scheduled to be released on Tuesday, will determine whether the recent decline in inflation persisted into January. In December, inflation rose annually by 6.5%, marking the smallest increase since October 2021. Though inflation continues to rise, this CPI report has given hope to some investors hoping their fortunes reverse from last year.

2. US Trade Deficit

The US trade deficit has hit an all-time high for the third year in a row, driven largely by higher oil prices and strong consumer demand for new cars, cell phones and other imported goods. The trade gap rose by 12.2% to $948.1 billion, up from $845.1 billion in the previous year. As recently as six years ago, the deficit was half this size.

While the US has run large trade deficits for years, the wide swings in the trade gap produced large swings in gross domestic product last year. For example, the deficit rose 10.5% to $67.4 billion in December alone, while both imports and exports softened at the end of the year, suggesting economic weakness both at home and abroad. US imports increased 1.3% in December to $317.6 billion, while exports fell 0.9% to $250.2 billion, reflecting lower petroleum prices.

During 2022, imports jumped by 16% to $3.96 trillion, while exports increased by 17.7% to a record $3 trillion. The deficit widened during the year with both China and Mexico, the two biggest trading partners of the US, while the US gap with China grew to a record $382.9 billion from $353.5 billion, despite rising political tensions between the two countries and lingering disruptions in trade due to the pandemic.

The US trade deficit rose in 2022 due to three main factors: rising inflation, a huge spurt in oil prices and strong demand for imported goods. A strong dollar made foreign goods less expensive, which enabled Americans to buy more imports, and the US economy was in better shape than other countries. The economies of other countries were also slower to recover, and they could not afford to buy as many American exports, which resulted in the deficit increasing.

3. The War in Ukraine on Oil

The war in Ukraine has had a significant impact on global energy markets, and countries are taking measures to ensure their energy security. Europe’s heavy reliance on Russian natural gas has been a major concern, as it makes them vulnerable to energy supply disruptions. The crisis has encouraged the European Union to adopt price caps on seaborne Russian oil and oil products, and the ban on imports of Russian oil has forced Russia to cut its oil output.

The U.S. petroleum market was also affected by the war, with a less than two-week rise of about 38% in U.S. oil prices hitting U.S. consumers at the pump. As a result, consumers had to pay more for gasoline and other transportation costs, contributing to overall inflation. However, the price of WTI crude has dropped by 38% from its peak last year.

The geopolitical situation has changed the dynamics of U.S. oil and fuel markets, and the war in Ukraine has led to a new era in global energy markets. The sanctions and the refusal of most EU countries to import oil from Russia have resulted in strong foreign demand for U.S. crude, which will direct crude flow to Texas ports such as Corpus Christi for export. The situation has encouraged countries to source their energy supplies more locally instead of searching for the cheapest energy molecule. This shift will have a significant impact on global trade flows developed in recent decades.

Summary:

The market slipped a little bit this week as oil spiked in price. The US trade deficit continues to rise and hit another all-time high, a result of the strong US dollar. The war on Ukraine has wreaked havoc on the price of Oil in the US and around the world.