Previous week: 24 July 2017 – 28 July 2017
UK Prelim GDP q/q—4.30 pm 26 July 2017 Wednesday
UK Q2 2017 GDP growth q/q was +0.3%, in line with expectations. On a year on year basis, it grew at +1.7%. Q1 q/q was revised down from +0.3% to +0.2%. In my opinion, the economic growth in UK is still very weak, and therefore policymakers at BoE should start to lean towards not removing life supports by hiking overnight rate by a 0.25%. Also, inflation fears were abated when just month’s CPI saw a drop +2.9% to +2.6%. Hard data points towards the BoE voting in favour of status quo.
According to Financial Times, “Today’s second quarter GDP estimate was just below the Bank of England’s expectations of 0.4 per cent growth but was in line with an average forecast from private sector economists.”
US Crude oil inventories—10.30 pm 26 July 2017 Wednesday
US crude inventories decreased by -7.2 million barrels on the expectation of -3 million drop. Baker Hughes US oil rig count increased by 2 from 764 to 766. Oil production was 9410k barrels per day for week ending 14/07/2017, a decrease from 9429 barrels per day in the previous week.
However the production drop last week was caused by a drop in production in Alaska. Quoting Zerohedge, “Production has trended higher with rig counts for months. Crude production slipped a bit last week, but that’s due to a drop in Alaska output, as Lower 48 output topped 9mm barrels last week for the first time since July 2015…” Lower 48 means the contiguous United States or also known as continental US or the 48 states excluding Alaska, Hawaii and other territories.
The question now is whether the rig count will start to decline in lagged response to the drop in oil price from $55 to $44 a barrel. The next question is whether this reduction in rig count will depress the rate of oil production in the United States.
FOMC Statement, Federal Funds Rate—2am 27 July 2017 Thursday
No change to Federal Funds Rate as expected. The implied probability of a hike going into this July meeting stood at 0%. However, some insights could be gathered.
Key sentences from July Statement:
- The Committee expects to begin implementing its balance sheet normalization program relatively soon
- On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent.
Juxtaposed to June Statement:
- The Committee currently expects to begin implementing a balance sheet normalization program this year
- On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent.
Regarding timing to initiate of Quantitative Tightening, the Fed language changed from “this year” to “relatively soon” which basically means the same thing. In Yellen’s recent testimony to Congress, she said that “because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” Therefore expectation now is for the Fed to initiate Quantitative Tightening in September and another quarter point hike in Federal Funds Rate in December.
Regarding inflation, the Fed is now more saying inflation is weaker now as compared to a month ago.
US Advanced GDP q/q—8.30pm 28 July 2017 Friday
US GDP grew at 2.6%, in line with expectations at +2.7%. Revisions were made to previous quarters. The revisions made were just hilarious.
“Repeal and Replace” of Obamacare is dead and President Trump is willing to approve sanctions on Russia
It seems like the Republicans do not have the motivation to coalesce and vote along party lines to pass this important piece of legislation. If they can’t get healthcare done, don’t expect them to get behind tax cuts or build that big beautiful solar paneled wall along the southern border (which Mexico will pay for it). Partisan brinksmanship have got to stop. Bipartisanship where the left work together with the right is the only way to make any substantive progress.
President Trump, by signing the Russia sanction bill, is saying that he not beholden to Putin. Putin does not have Trump under his thumb. Trump will not kowtow to Putin. Putin, it is now your move. What say you?
Coming week: 31 July 2017 – 04 August 2017
US Crude oil inventories—10.30 pm 26 July 2017 Wednesday
Another draw in inventories and rise in production?
Bank of England Inflation Report, Monetary Policy Summary, Official Bank Rate, Carney Speaks—7pm 3 August 2017 Thursday
The expectation seemed to be for no rate hike. A simple majority is needed to set policy. If there is a tie, the Governor gets the casting vote. Sir David Ramsden will only be joining the MPC on the 4th of September.
Changes made to the 9 member Monetary Policy Committee
- Sir David Ramsden fills empty position that was vacated by Charlotte Hogg whom resigned. Her only vote on interest rates was to maintain bank rate at +0.25%. Sir David, according to the article by The Telegraph, is said to be a dove. He will only join the MPC in September the 4th.
- Kristen Forbes, a hawk (according to voting record), will be replaced by Silvana Tenreyro, a dove. Kristen Forbes had voted to increase the bank rate by a quarter point in the past three meetings (March, May, June 2017)
Edmund’s Whip Count:
Mark Carney: Voting record (0 for increase, 44 to maintain @ 0.50% or 0.25%, 1 to reduce to 0.25%) showed that Carney is a very consistent dove.
Quoting The Guardian with regarding to what Mark Carney said recently: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional. The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand, including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations. These are some of the issues that the MPC will debate in the coming months.”
Though some comments on potential rate hike, I do not think he will hike the bank rate given the fact that CPI had fallen to +2.6% in the most recent month. MAINTAIN
Ben Broadbent: Voting record (0 for increase, 69 to maintain @ 0.50% or 0.25%, 1 to reduce to 0.25%) showed that Mr Ben is a very consistent dove. Since June 2011, he had never voted in favour to raise rates. You cannot get more dovish than Mr Ben. Quoting The Telegraph, ‘”In my opinion, it is a bit tricky at the moment to make a decision (to raise rates). I am not ready to do it yet,” Mr Broadbent told The Press and Journal during a trip to the Scottish city of Aberdeen.’ Mr Ben, according to voting record with addition to his recent comment, will vote MAINTAIN.
Sir Jon Cunliffe: Voting record (0 for increase, 40 to maintain @ 0.50% or 0.25%, 1 to reduce to 0.25%) showed that Sir Jon is a very consistent dove. No recent comments made. Financial Times gave Sir Jon a 1/5 on the dove/hawk rating. He will vote MAINTAIN.
Andrew Haldane: Voting record (0 for increase, 33 to maintain @ 0.50% or 0.25%, 1 to reduce to 0.25%) showed that Andrew Haldane is a very consistent dove. However recent comments showed that he is willing to raise rates in the second half of 2017.
“A partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead,”
“Certainly, I think such a tightening is likely to be needed well ahead of current market expectations. How soon is ‘relatively soon’? I considered the case for a rate rise at the MPC’s June meeting. I felt then there were strong grounds for holding back until later in the year.”
Mr Haldane might have an inclination through speech to hike rates. However, he hadn’t officially voted to hike. His official voting record is consistently in the dovish column. Not once had he voted to hike. Financial Times gave him a score of 4/5 on the Dove-Hawk rating which I disagree. Mr Haldane will vote MAINTAIN.
Ian McCafferty: Voting record (12 for increase, 42 to maintain @ 0.50% or 0.25%, 1 to reduce to 0.25%) showed that Sir Jon is a very consistent hawk. Ian McCafferty, unlike Andrew Haldane, had voted “increase” several times in the past. 12 to be precise. His last vote in June (previous meeting) was to increase the bank rate. He will vote INCREASE.
Michael Saunders: Voting record (1 for increase, 6 to maintain @ 0.50% or 0.25%, 0 to reduce to 0.25%) showed that Mr Saunders is a possible hawk. His recent comments, though his interview with the Guardian, explained his decision to vote “increase” in June (previous meeting). One notable quote from the Guardian is “We are not constrained from adjusting interest rates during the Brexit period. There’s no sense that policy has to stay on hold just because Brexit negotiations are under way.” To read further, please do read the article by the Guardian. Micheal Saunders will vote INCREASE.
Silvana Tenreyro: Her voting record in the Bank of Mauritius (yes, I really did dig through the Bank of Mauritius’s website and compiled her voting record one meeting at a time (2012 to 2014) because I felt that reporting on her was woefully lacking) showed she is a very consistent dove. She also signed a petition that criticizes Brexit further implying she is a dove.
She, being a dove, replacing Kristin Forbes, a hawk, in the BOE shifts the leanings of the MPE further to the dovish camp. She will vote MAINTAIN.
Dr Gertjan Vlieghe: Voting record (0 for increase, 17 to maintain @ 0.50% or 0.25%, 2 to reduce to 0.25%) showed that Dr Vlieghe is a consistent dove. He was the only member in the MPE to have voted for a reduction in bank rate in the meeting dated 14 July 2016. That meeting was less than a month after the historic Brexit vote. Most of the members of the MPE wanted to wait for more data to trickle in before deciding to reduce the bank rate.
In a recent interview with The Independent dated 03 July 2017, Dr Gertjan Vlieghe laid out his opinion on interest rates.
Quoting from the Full Transcript of the interview with The Independent dated 03 July 2017:
Question: Given you voted for rate cut in July 2016 – going out on your own against the rest of the Monetary Policy Committee – you’ve obviously got a reputation as a dove. Are you still towards that end of the spectrum?
Answer: I went back and looked at the last time I spoke on the record, which was April, and I haven’t really changed my mind since then about anything.
The point I made in April was that this is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk. I thought that the consumption slowdown, which initially didn’t materialise after the referendum even though we thought it would, that it was starting to happen around the turn of the year.
I thought that it would, if anything, be more likely to deepen than improve and that I was still very cautious about the outlook for investment. One of the things that we thought would happen…was that there might be a pullback in investment. In the end there wasn’t, but some of the feedback I got from going around the country and talking to lots of companies was that it wasn’t that they weren’t worried about a potentially big change in their business environment but that it’s basically too far away and [they] can’t sit on [their] hands for that long.
But now that the deadline’s approaching, it’s less than two years, it might start to come into firms’ planning horizons, so I do think that’s a meaningful downside risk and already a headwind to investment. I haven’t really changed my mind. I think the consumption slowdown is here, it’s not over.
I don’t there’s going to be a sufficient offset from investment and net exports to compensate for that. But of course if the data turns out stronger I do agree that a higher rate is warranted but my central forecast is that’s not going to happen in the near term.
Dr Gertjan Vlieghe will vote MAINTAIN.
|Name||Edmund’s Prediction for 3rd Aug meeting|
|Sir Jon Cunliffe||Maintain|
|Dr Gertjan Vlieghe||Maintain|
With a vote tally of 6 to 2 in favour of maintain, my prediction is that there will be no rate hike for meeting dated 03 August 2017.
Non-farm employment change, unemployment rate, participation rate, average hourly earnings—8.30pm 04 August 2017 Friday
Nasdaq-100 is taking support at 5900 which previously was resistance. The last two daily candlesticks are bullish pinbars with long wicks at the bottom which indicates that buyers are supporting price under 5900.
Jeff Bezos, the richest man for a couple hours, must be elated with this chart.
Silver short to watch
Silver is coming up to a key resistance zone at $17. If the Federal Reserve is dead serious in their policy stance of implementing Quantitative Tightening (even if hard economic data had been weak) in September, the US dollar should start to strengthen.
USDJPY long to watch
USDJPY is now testing support trend line at 110 area which is an area of interest for a buying opportunity.
There is a divergence in monetary policy between the Federal Reserve and the Bank of Japan. The Fed had been and is planning to continue to tighten their monetary policy by hiking Federal Funds Rate and initiating Quantitative Tightening. The Bank of Japan having admitted to failing to make progress in attaining their inflation target of 2% (The BOJ pushed back the expected date at which 2% inflation target will be met to FY 2019) will have no choice but to loosen its already uber-loose monetary policy further if it is to reach its inflation target.
WTI to watch
WTI is coming up to resistance. However, inventories in US keep showing a drawdown.