The US breathed a sigh of relief last week when it was reported a positive change in the number of jobs created and that the reduction in the unemployment figure from 9.8% to 9% seems to be more than an anomaly, but rather the beginning of a new trend. Essentially the good news comes at a time most needed in the face of an economic catastrophe hanging on a knife edge in that inflation without substantial economic growth will prolong and hinder the recovery and result in stagflation.
The fact that the ECB stated during the ECB press conference on Thursday that's it is likely to raise the interest rates in an effort to curb the rise in inflation, causing the EUR to sour against the USD, may prompt the FED to do the same as they may now see economic growth apparent in job growth. However, the USA along with every other economy is quite out of the woods yet.
The USA is currently finding that on home soil, a battle is waging between two camps: those who believe that the deficit should be cut and those who believe that continued spending is essential for economic growth. This scenario has already been played out in the UK with the new coalition government winning and slashing government budgets everywhere. Although the USA has seen its unemployment decreased by 1%, wage growth is still slow and is not matching inflation and so consumer spending is still slowly reducing in the face of world events and is not likely to recover for some time.
Mimicked the world over, the scenario of how to carefully combat stagflation is discussed while events in the Middle East and North Africa continue to causing a deterring situation to be much more complicated as it goes on.
The two biggest issues are oil and food; two sets of prices which have unlimited power for damage to any stable government let alone those countries prone to upheaval. As Libya hang on the brink of Civil war with Qaddafi and the rebels desperately fighting for control, oil production has been reduced in world supply by almost a million barrels, forcing prices higher and having substantial knock on effects around the world. Saudi Arabia have stated that they are willing and ready to pick up the slack in supply, however speculators are pushing prices even further as the knock on effect feared at the start of the year is being clearly seen.
The Middle East counts for over 30% of the worlds oil supply and with continued whispers urging protests in the worlds largest oil supplier and the Saudi King being overly generous with its new £36bn spending spree in welfare (to appease the population), speculators and traders are very concerned.
Oil price closed out at 104.71 at the end of trading last week and is set to push higher. If Oil continues to rise with the same momentum and push past 104.71 and find buying support at this level, then 114.22 is the next significant selling level and a bullish target.
If 104.71 finds heavy selling with either profit taking or demand decrease then 100.06 is the next likely support level, followed by 98.31 and 94.62.
So where next? Oil is not likely to come down to the levels that the world has been used to. The fact is that supply is simply not coping with demand. The emerging markets and consumption of raw materials are simply going to continue and even if production is able to substantially increase overnight, there is still the issue that the world does not have an endless supply. It is more likely that Oil price will eventually stabilise around a higher price and the rest of the world economy will catch up to cope with the new high.
Emerging economies are open for business and those industries that have adapted to supplying the demand globally are doing better than those relying on domestic consumers at home. This in itself sums up the whole scenario in a nutshell in that prices will continue to rise and those economies that are exporting will find themselves better positioned to deal with it.