The Short View: Weather troubles - By John Authers, FT Investment Editor

The Short View: Weather troubles - By John Authers, FT Investment Editor
Copyright The Financial Times Limited 2007
Published: January 11 2007 18:30 | Last updated: January 12 2007 02:48


The first shoots of spring were to be seen in New York last weekend. The warmest January day on record prompted trees to burst into blossom. And it played havoc with the markets.

Weather is difficult to predict. Most in the markets know they are unqualified even to try – so Wall Street increasingly puts meteorologists on the payroll. The world’s first derivatives markets, in agriculture, effectively grew up to control weather-related risks.

But extreme weather can mess up the most expertly designed economic models, and provide the economists who designed them with an excuse to continue with calls that otherwise would look wrong.

The mild US winter has been a key factor in this year’s sliding oil price, now down 15 per cent in only seven trading days. Last week saw the lowest level of US fuel consumption since April 2004, with Americans using neither heating nor air-conditioning. This far outweighed news of escalated troubles in Iraq and its implications for supply.

Warm weather also permits much more activity in the housing market than normal for midwinter, so maybe it can explain why US housing’s problems are not yet having the knock-on economic effects many had predicted. It might also explain the startling resilience of US employment. If this is the case, economic growth is not as strong as it seems, and headed for a sharp fall.

Extreme weather in world financial centres can create misperceptions. Denver has a vibrant fund management community, but it is a much smaller financial centre than New York. It has suffered an appalling winter. Were the two cities’ roles reversed, the mild winter in the north-east might have less impact on prices. There may be an overreaction to the warm winter because it is so apparent in New York.

If the markets of 2007 keep up their form of the first two weeks, they will be much harder to forecast than the weather. The Bank of England shocks more or less everyone by raising base rates, and the FTSE 100 responds by going up more than 1 per cent? It sounds even more improbable than flowering cherries in New York in January.