Some Bond Thinkers Taking a Different View of El Nino

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Like ski resort operators, the bond market can find the bad side of warm winter weather.

Worried that this year's

El Nino

, the intermittent meteorological phenomenon that sends temperatures climbing during North America's winter, will ruin crops like cocoa and coffee, bond traders have been chattering about potential inflation that would arise from such a scenario. On some trading desks, weather forecasts have been circulating -- along with the more conventional charts and economic analyses -- for the past six months.

But as the winter months approach, some have begun wondering whether the focus might not be on the wrong commodities. After all, a warm winter should mean slumping demand for oil, needed to fight the cold in the northern parts of the country.

How real are the prospects? "The winter season is going to be absolutely critical to determining oil prices," says Paul Ting, oils analyst at

Merrill Lynch

. "If we have a warm winter, coupled with higher inventories, it's going to push prices lower."

The prospects of a warmer winter caused by El Nino, literally the "Christ Child," are very real, according to meteorologists. Winter temperatures can rise above the average by as much as three degrees Celsius (or 5.4 degrees Fahrenheit), according to a

map

designed by Matt Sittel of

Florida State University

and posted by

National Oceanic and Atmospheric Administration

on the World Wide Web.

Warmer weather would not only vex snowboarders, but it would also force the price of already accumulating oil inventories to fall. Inventories, currently running about 20% above last year's levels, normally rise as winter approaches, as oil companies begin stockpiling to meet expected need.

With energy prices accounting for 7.1% of the

Consumer Price Index

, lower oil prices could have a dramatic -- and positive -- impact on America's already impressive inflation figures.

Indeed, oil has proved significant in the past. American CPI surged about 2 percentage points as oil prices more than doubled in the run-up to the

Gulf War

.

Other commodities, like cocoa and coffee -- widely fingered as potential culprits for El Nino-produced inflation -- have had almost no impact on inflation numbers, even as prices rose in recent years.

How big an impact El Nino will have on inflation -- and, by extension, the bond market -- is anyone's guess. Economists say the correlation of meteorological pattern to financial markets is attenuated at best. And most investment and trading professionals have heard this story before.

Like the rain the weather pattern often brings, "this has been in the air for a while," says Fred Sturm, chief economist at

Fuji Securities

.

This story was originally published Sept. 9, 1997.