Credit Suisse Explains When You Should Start Worrying About Oil Prices

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From Credit Suisse’s Andrew Garthwaite:The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth.This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.

Impact on equities: since 2007, equities have tended to fall when oil prices rise by 40% yoy (i.e. an oil price of c$150/bbl). From a macro perspective, we would start worrying if the rise in the oil price pushed up US CPI above 4% (that is when equities de-rate, c$160/bbl), US GDP started being revised down (c$150/bbl) or European inflation rose above 2% year-end (c$140/bbl). Another warning signal is when inflation expectations decouple and start falling as oil continues to rise (as has happened in the past week). Each 10% rise in the oil price takes 2% off European EPS and c1% in the US, on our estimates (yet current valuations can accommodate a c10% fall in earnings).

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