Lower Gas Prices + Stronger Yuan = Helpful Backdrop

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Lower Gas Prices + Stronger Yuan = Helpful Backdrop

Two items today:

#1: WTI Crude Oil prices are back over $40/barrel, and that got us thinking about US gasoline prices from a few perspectives:

  • The vast majority of working Americans (85%) commute to work in their personal vehicles or carpool, so gas prices are an essential and volatile piece of household budgets.
  • As people return to work, they will be driving more than under lockdown so gasoline prices will affect marginal consumer discretionary spending more than in past months.
  • With fewer Americans flying for summer vacation, driving trips will be more common so gas prices are especially important for near term leisure-related spending.
  • Many millions of still-unemployed Americans still need to drive in order to shop for necessities and look for a job. Every dollar counts for these households.

For some historical perspective, here is the last 10 years of US gasoline prices (including taxes):

Three points here:

  • At current levels gasoline is meaningfully less expensive than all but a handful of days in Q1 2015 and Q1 2016.
  • Gasoline is $0.54/gallon cheaper than a year ago this month, which equates to a monthly household saving of $65/month for a typical 2 car/2 worker household.
  • While oil prices have rebounded from their wacky April lows, we doubt they have much momentum now that they’ve stabilized around $40/barrel. Gas prices should therefore remain relatively low for the rest of the year.

Bottom line: that $65/month/household may not sound like a lot, but consumer spending always happens at the margin so lower gas prices are certainly helpful to aggregate demand.

#2: Peter Navarro’s comment about US-China trade deals/negotiations being “over” and its effect on overnight stock futures sent us to the offshore Chinese yuan market for a fresh look. This has been a reasonably good indicator of trader sentiment on the direction of American/Chinese relations since 2017. When tensions flare the offshore yuan tends to weaken, often to well over the 7.0/$ level. When things calm down, the yuan rallies.

Here is a chart of the offshore yuan over the last 12 months courtesy of MarketWatch:

Three points here:

  • The yuan is well off its worst recent levels of 7.18/$ on May 27th, which came a day after the Chinese government set the official rate at 7.13/$ – the lowest level since February 2008.
  • The offshore yuan is, in fact, as strong as it has been since mid-March of this year (i.e. before the global COVID Crisis really took hold).
  • This backdrop explains why Navarro’s comments came as such a shock (the yuan weakened by 0.5% in 30 minutes), because markets had been looking at a strengthening yuan over the last month as a sign that US-China relations were OK.

Bottom line: the yuan/dollar is the most important currency cross in capital markets because it measures the relative stability of economic and geopolitical conditions between America and China, and its current stability is saying “everything is basically fine between these two countries… For now, at least”.

Sources:

St. Louis FRED Blog: https://fredblog.stlouisfed.org/