“Do You Ever Have Déjà Vu, Mrs. Lancaster?”: Oil And The “Slippery Slope”

Do you ever have déjà vu, Mrs. Lancaster?

I don’t think so, but I can check with the kitchen.

That exchange is from Groundhog Day, the American cinema classic that finds weatherman Phil Connors reliving the same day over and over in Punxsutawney, “a tiny hamlet in Western Pennsylvania” which, in the beginning, he views as something akin to the Seventh Circle of Hell.

Well if you remember the deflationary doldrums of early 2016, you might be getting a little bit of déjà vu yourself considering what we’ve seen in crude over the past week.

That sense of feeling like you’ve been here before might be enhanced by the rather dour economic outlook in the US…

CESI

… a Fed that’s intent on hiking rates, and persistent worries about China.

All of those concerns were factors that contributed to the market turmoil we saw early last year, and they’re all factors that are just as relevant today as they were then.

But there are some differences, and here to outline them is BofAML…

Via BofAML

For the macro outlook there is no doubt the recent plunge in oil prices provides a reminder of a movie we have seen before, where it played a lead role in the systemic events when credit spreads blew out during the second half of 2015 and into early 2016 (Figure 1).

But the situation back then was very different, as the root fear was that the US economy was heading into recession (Figure 2) amidst a backdrop of global weakness (Figure 3) – including fears of a hard landing in China and the deflationary effects of Renminbi depreciation (Figure 4). In addition to reflecting excess production, oil prices then became seen as real-time indicator of (weak) demand.

BofAGHD

Different movie this time.

However, while oil prices are important macro indicators they should have little systemic importance in the present environment for three reasons. First the global growth picture is much more positive now with both the Eurozone and Japan growing above trend. Second China has experienced a soft landing. Third, while US economic growth appears not to be accelerating the way many investors hoped for after the US elections, the data is still consistent with a ~2% GDP growth rate.

But there are some warning signs, and it is impossible to rule out that eventually once again we get to the point where oil prices become systemic. For example US data is below expectations, there is a lack of inflation globally and China has been tightening financial conditions to combat leverage.

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