Oil $114: Good News for Brazil

Rob Mackrill - Wed 16 Apr, 2008

Brazil could be a new oil super power following a big discovery

Wading through more tales of woe from the high street...

JJB Sports saw profits fall 28%; it’s closing 72 stores and laying off 800...

The nation’s indebted...1m have an average £25k in unsecured debt...

...we find some good news today in the unemployment numbers...

The world’s banks may have lost billions and UK mortgage deals have evaporated, but unemployment fell by 39,000 in the quarter to the end of February to 1.61m. The numbers claiming jobseekers allowance is at its lowest level for 33 years. Most of the job losses in the quarter had nothing to do with the financial world, says the BBC report. The bulk of them were lost from manufacturing, which shed 27,000. In spite of these losses, overall there were the fewest redundancies since 1995. Okay, so the numbers may be massaged and analysts will find technical factors that influenced the result, but unlike the US, the jobless rate is yet to increase.

Also, average earnings inflation (AEI) measured 3.7% over the year. Ahead of current CPI at 2.5% but 40 basis points below RPI at 4.1%. That looks like trouble brewing. On the RPI measure, average earnings are lagging inflation. Either RPI will fall or AEI will rise going forward. The latter looks more likely at this point, which won’t help Mervyn King & co.

Analysts greeted the unemployment news “cautiously”, it was reported. Vicky Redwood, an economist at Capital Economics, said: "Overall, the labour market remains in fairly good health – but the unambiguous robustness seen just a few months ago is starting to fade."

Okay, so we’re in a slippery-slidey slowdown, but for all the wailing and gnashing of teeth from the financial sector, trouble is yet to show up in the unemployment numbers. Maybe it’s further down the track. Unemployment is rising in the US and there are those that say our economy lags the US by several months, so a similar trend may yet materialise. It’s yet to show up, but economy watchers are “cautious”. The prevailing mood is downbeat, but could it be that the government is right and the UK economy will actually prove to be more robust than the analysts give it credit for?

Of course, jobs will be and are going in the City. It’s goodbye to those structured finance departments now being closed down by the banks, plus related areas also in recession. The axe is swinging. It could be 10,000...it could be 20,000. JP Morgan thinks it’ll be as many as 40,000 jobs cut. But even if it is that large, do ex-bankers show up in the unemployment numbers anyway? Or perhaps they lay low on ‘gardening leave’ at the continental villa until things pick up.

Less flippantly, the resilience of UK employment levels makes me think things aren’t quite as bad with UK plc as they are sometimes painted. That may yet change going forward if the economy continues to deteriorate, but while employment remains resilient, the worst case scenarios look just that. UK stocks have been encouraged and are up 40 points at midday.

A ray of hope in the withered UK mortgage market... Barclays is “wide open for new business” according to a report in the FT,and Abbey has reduced its variable rate by 0.25%, reports Headline Money. Plus, recently HSBC made an offer to the country’s 1.4m people coming off fixed rate mortgages this year...though with strings attached.

Looking more internationally we see the dominant trends still in place. Oil is still going up. It’s topped $114 for the first time and there’s talk of $120 next quarter. Petrol at £5 a gallon is looming for car drivers, warns The Times, as a consequence. It’s not a great time to be running an airline either as wafer-thin margins get overwhelmed. US airlines Delta and NorthWest clearly saw the writing on the wall when they announced a merger of their businesses earlier in the week. Brazil won’t mind higher prices though. Its latest big offshore find has got tongues wagging that this country’s image is about to change from carnival to oil super-power. The Carioca discovery, if confirmed as containing the estimated 33bn barrels of oil, could be the largest find in 30 years, reports The Times.

Gold’s positive today too, now $938. You know the drill by now, dear reader: commodities going up, means the currency in which they’re traded, the dollar, is going down. It’s fallen to a record low against the euro at $1.5967 after the latest Euroland inflation number came in higher at 3.6%. This its highest level in almost 16 years and further confirmation to currency traders that there’s no easing on the horizon for EU interest rates (currently 4%). The pound traded hit a record low too against the euro yesterday at 80.64p.

As the economies of the industrialised nations are skewered on the treacherous prongs of the credit crisis, China continues unscathed on its double digit growth march to world economic leadership. It may overtake Germany this year as the world’s third largest economy, reports Bloomberg. It grew 10.6% in the first quarter of the year, slightly down on over 11% last quarter but still in defiance of the authorities’ attempts to cool the economy.

Growth is not without its problems. Inflation, for one. It’s out of control says one commentator. Higher interest rates and currency appreciation are needed to cool things down. Yet the latest inflation figure for March is 8.3%. Still high, but less than the 8.7% recorded last time around suggesting some of the heat is starting to be taken out of the system.

Another problem is the combination of destroyed crops from the worst storms in half a century, soaring food prices and 300m (about the population of the US) people estimated by the World Bank to be living in poverty. Buying the yuan seems a good idea for investors – one suggested by Jim Rogers some time back - but how to do it? That’s the question…

Back in the West, JP Morgan reports another $5.1bn in writedowns related to subprime and home loans gone bad. RGE Monitor says to date we’ve now accounted for about $230bn of the estimated total subprime losses of around $1trn. Some way to go.

Regards

Rob Mackrill
The Daily Reckoning