The Week Ahead – Gold and McGregor both going down

The Week Ahead – Gold and McGregor both going down

Previous week: 21 July 2017 – 25 July 2017

US Crude oil inventories—10.30 pm 23 August 2017 Wednesday

US crude inventories decreased by -3.33 million barrels on the expectation of -3.5 million drop. Baker Hughes US oil rig count decreased by 4 from 763 to 759. I believe rig count had topped, but not oil production. Oil production was 9528k barrels per day for week ending 18/08/2017, an increase from 9502 barrels per day in the previous week. Even discounting the lag time between building the oil rigs and the production of oil, it is noticed that a divergence is forming. Oil production continues to climb despite rig count petering out. Technological advancements allowed oil rigs (especially fracking) to be more efficient.

Image from Zerohedge:

Japan CPI—25 August 2017 Friday 7.30am

Core CPI y/y rose +0.5% in July while headline CPI y/y rose +0.4%. Inflation is still way below the Bank of Japan’s 2% target.

BOJ Kuroda at Jackson Hole

Kuroda reaffirmed BOJ’s commitment to uber-loose monetary policy. “I think for some time we have to continue this extremely accommodative monetary policy.” However, he did confirm that the BOJ is tapering its purchases because of the lack of available sovereign paper to buy. “Since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger,” Kuroda said. “So that in coming months there will be less and less need to purchase JGBs in order to maintain the yield curve.”

Draghi and Yellen said nothing about monetary policy in their speeches.

Donald Trump says this, Kim Jong Un says that (ongoing spat)

North Korea is now able to put a miniaturized warhead onto a rocket.

President Trump: “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen… he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before.”

KPNA: “The KPA Strategic Force is now carefully examining the operational plan for making an enveloping fire at the areas around Guam with medium-to-long-range strategic ballistic rocket Hwasong-12 in order to contain the U.S. major military bases on Guam including the Anderson Air Force Base.”

In my opinion, as much as they hate each other, neither Donald Trump nor Kim Jong Un will be willing to be the first one to strike at the other party. Donald Trump will not do a preemptive strike on North Korea even if the Pentagon said it was planning one. A preemptive strike will be seen as an offensive attack on the sovereign land of North Korea by the international community. It will also give Kim Jong Un reason to retaliate in defense. Kim Jong Un will not fire the first missile because if he does so, North Korea will be completely annihilated by the massive military might of the United States. Therefore since neither party is willing to strike first, it will be safe to assume that a nuclear war will not start in the Korean Peninsula.

When dealing with the controversial issue of nuclear weapons, the conversation will always be directed towards the final outcome of “Mutually Assured Destruction”. During the Cuban Missile Crisis where Soviet Union and United States were both increasing their nuclear stockpiles, some historians commented that the Cold War was actually one of the safest period in modern history. This was because neither party was willing to be the first one to strike the other and take on the responsibility of starting the next world war. The two parties also knew that a nuclear war would also lead to the complete destruction of both sides. Therefore by simple game theory, it is safe to assume that both parties (Trump and Jung Un) will eventually realise that no action is the best choice.

Coming week: 28 August 2017 – 01 September 2017

US Crude oil inventories—10.30 pm 30 August 2017 Wednesday

Another draw in inventories and rise in production?

US non-farm employment change, average hourly earning, unemployment rate—8.30 pm 01 September 2017 Friday

Another good jobs report out of US for President Trump?

Trade Ideas


USDJPY is now testing horizontal support trend line at 109 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. In the minutes of the July Fed meeting, several members wanted to announce a start date for Quantitative Tightening. However, most members wanted to push back making a decision on when to announce QT to the next meeting (September). Initiation of Quantitative Tightening could really commence in September given the fact that macroeconomic data out of USA had been improving with the exception of inflation. See below.

From the Fed’s July meeting: “Al­though several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.”

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. Japan’s core inflation y/y for July inched upwards to +0.5% from +0.4%. At Jackson Hole, Governor Kuroda reaffirmed the BOJ’s commitment to uber-loose monetary policy.

Macroeconomic data out of US in recent times had been improving.

  • Jobs: Unemployment rate is now at 4.3% which is below the projected natural rate of unemployment. See here Non-farm payrolls continue to grow steadily at around 150k to 220k jobs per month. However, average hourly earnings is still the laggard at 2.5% y/y growth in July.
  • Inflation: Core PCE y/y, the Fed’s favourite data point for inflation, had never been at or above its 2% target since April 2012. Despite not attaining their inflation target, the Fed did taper and stop their unconventional QE program and hiked rates nonetheless. Even though 1.5% inflation rate is still pretty far from their 2% mandated target, the Fed had never honoured their target of 2% when they decided to tighten monetary policy in the past. Why should they honour this target now? In other words, the Fed might say that they are watching inflation very closely but in actuality they do not emphasize much on the inflation target when making decisions on monetary policy. 2% inflation target is good to attain but not a hard and fast rule for the Fed when deciding on monetary policy.
  • Retail sales: Retail sales bucked the downtrend that it was on since the start of the year. In July, yoy retail sales rose +4.2%, up from +3.4% in May.

Counterargument: The recent war of words between Trump and Kim had led to safe havens like the Japanese Yen to be bought. However, the nuclear war rhetoric between DPRK and USA had died down. Also, it is my opinion, written above, that it is not in the interest of either country to strike the other first and start a nuclear war. The lack of inflation in Japan may not be all that bad for the Japanese economy. This point of view was argued by Noah Smith on Bloomberg View and is a very good read. The probability of a rate hike in December 2017 had been steady between 40% to 50% even when Fed members had been providing dovish comments.

Gold Short to watch

Gold hit resistance at $1300. The recent bullish momentum for gold was mainly due to the spat between Trump and Kim. However, the war of words had died down. It is highly unlikely that the ongoing conflict will lead to a full blown war as explained in a section above. However, the last candlestick formed on Friday appears to be bullish and caution ought to be taken when going short gold. US’s macroeconomic data had been improving in recent times as explained above. That would give the Fed sufficient reason to initiate Quantitative Tightening in September and hike rates in December.






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