The Week Ahead – Marx and Markets

The Week Ahead – Marx and Markets

Previous week: 31 July 2017 – 04 July 2017

US Crude oil inventories—10.30 pm 02 August 2017 Wednesday

US crude inventories decreased by -1.53 million barrels on the expectation of -3.1 million drop. Baker Hughes US oil rig count decreased by 1 from 766 to 765. This would be the third decrease in rig count in the past 6 weeks. Has the rig count establishing a top? Oil production was 9430k barrels per day for week ending 14/07/2017, an increase from 9410 barrels per day in the previous week.

The question now is whether the rig count will start to decline in lagged response to the drop in oil price from $55 to $50 a barrel. The next question is whether this reduction in rig count will depress the rate of oil production in the United States. It is not a given that a drop in rig count will translate to a direct decrease in oil production. Rigs are now more efficient.

http://www.zerohedge.com/news/2017-08-04/rig-count-drops-3rd-time-6-weeks-us-shale-heavyweights-boost-production

http://www.zerohedge.com/news/2017-08-02/wti-slides-after-disappointing-crude-draw-production-surge

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

Bank of England Inflation Report, Monetary Policy Summary, Official Bank Rate, Carney Speaks—7pm 3 August 2017 Thursday

The Bank of England kept its bank rate unchanged at 0.25% (vote was 6 to maintain to 2 to increase), £10 billion of corporate bond purchases (unanimous), and £435 billion of government bond purchases (unanimous). Saunders and McCafferty were in the minority hawkish camp that favoured an increase of bank rate. Andrew Haldane, was NATO (No action, talk only) as what I predicted. He voted in favour to keep rates unchanged. So much for his bravado speech that even convinced the great Financial Times to classify him as a hawk (4/5 dove hawk ratio). Words don’t matter in the case of Haldane until he actually votes “increase”. His voting record puts him deep in the dovish camp. Silvana Tenreyro had her first vote on monetary policy for the Bank of England. She did not disappoint the status quo doves. Though reporting on her was woefully lacking, I dug through her voting record while she was at the Bank of Mauritius. It showed that she was a consistent dove. Just like a well-oiled machine, she voted for higher stock prices no increase in bank rates.

 

Name Edmund’s Prediction for 3rd Aug meeting Voting result for 3rd Aug meeting
Mark Carney Maintain Maintain
Ben Broadbent Maintain Maintain
Sir Jon Cunliffe Maintain Maintain
Andrew Haldane Maintain Maintain
Ian McCafferty Increase Increase
​Michael Saunders Increase Increase
Silvana Tenreyro Maintain Maintain
Dr Gertjan Vlieghe Maintain Maintain

 

http://www.zerohedge.com/news/2017-08-03/pound-plunges-after-boe-votes-6-2-keep-rates-unchange

Key sentences from BOE’s Monetary Policy Summary:

  • At its meeting ending on 2 August 2017, the MPC voted by a majority of 6-2 to maintain Bank Rate at 0.25%.
  • The MPC’s overall assessment of the outlook for inflation and activity in the August Inflation Report is broadly similar to that in May.
  • In the MPC’s central forecast, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption. Growth then picks up to just above its reduced potential rate over the balance of the forecast period. 
  • The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices. Conditional on the current market yield curve, inflation is projected to remain above the MPC’s target throughout the forecast period. This overshoot reflects entirely the effects of the referendum-related falls in sterling. As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period. As slack is absorbed, wage growth is projected to recover. In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt. Consequently, inflation remains at a level slightly above the 2% target.

Paraphrasing of BOE’s language: a) Brexit caused the British Pound to weaken. b) The weakened British Pound led to imports being more expensive (imported inflation). c) Imported inflation (not good) led to headline inflation to increase to levels above their 2% target. d) Effect of imported inflation caused by weakened currency will diminish over time. e) Domestic inflation (good) by removing “slack” (output gap between current output and maximum potential output) will take precedence over imported inflation. f) Therefore headline inflation will stay above the 2% target for the next couple years.

  • As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.

Paraphrasing the BOE’s language: We, the Bank of England, are making a very big assumption on all our projections and policies. That assumption is for a “Smooth Brexit”. Tories lost the majority in the recent snap general elections and had to form coalition with the party from Northern Ireland. Despite the weakened bargaining power of Theresa May, we at the BOE still expect a smooth Brexit. Brexit negotiations are nothing but smooth at the moment.

  • Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.

Paraphrasing BOE’s language: If we, the BOE, “attempt” to decrease inflation (via hiking rates), we will (negatively) cause unemployment to increase and income growth to decrease. This “attempt” will have consequences (“cost”) (and therefore we should not attempt to offset inflation).

The tradeoff between unemployment rate and inflation rate is described by the Phillips curve. From the writing above and their oral statements to the press, the language had been that the Bank of England put their 2% inflation target in low regard. Instead, they—through their speeches—have a hard upper bound of 3% and will be willing to tolerate an inflation rate that stays above 2% for extended duration of time (because boosting the sluggish UK GDP growth is more important). GDP growth takes precedence over inflation rate although not explicitly and formally communicated.

  • Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.

Paraphrasing BOE’s language: They gave themselves an out. First, they are saying that despite their projections that GDP will continue to be “sluggish”, if the economy trends in this predicted “sluggish” manner, they will still raise rates and at a pace faster than what the market expects of them. Second, the BOE is saying that the market’s prediction is wrong. The market is saying that the BOE will start raising rates soon. (Past) Actions (by the BOE) speaks louder than words via their statements and interviews. With the BOE MPE filled with doves (6 doves vs 2 hawks and soon to be 7 to 2), their official voting record shows that “MAINTAIN” will be the way to go for the foreseeable future. Also, according to the image below, the market had been wrong about rates. The BOE MPE is more dovish than what the market expected them to be.

Image from ResolutionFoundation. https://twitter.com/resfoundation

http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/mps/2017/mpsaug.pdf

http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/aug.pdf

UK GDP growth forecasts was revised downwards (sluggish) in the August’s Inflation Report versus that of May while CPI forecasts stayed relatively the same (>2% target for the next couple years).

RBA Monetary Policy Statement—9.30am 04 August 2017

Article written by MacroBusiness would give a good summary on the Monetary Policy Statement by the RBA. Nothing burger.

RBA Statement on Monetary Policy – August 2017

http://www.rba.gov.au/publications/smp/2017/aug/pdf/statement-on-monetary-policy-2017-08.pdf

Non-farm employment change, unemployment rate, participation rate, average hourly earnings—8.30pm 04 August 2017 Friday

Quoting The Donald @realDonaldTrump: “Excellent Jobs Numbers just released – and I have only just begun. Many job stifling regulations continue to fall. Movement back to USA!”

Name Actual Expectation Last (June)
Non Farm Employment Change 209K 182K 231K (revised from 222K)

May: 145K (revised from 152K)

Unemployment Rate 4.3% 4.3% 4.4%
Average Hourly Earnings m/m +0.3% +0.3% +0.2%
Labour Force Participation Rate 62.9% 62.8%


Coming week: 07 August 2017 – 11 August 2017

US Crude oil inventories—10.30 pm 26 July 2017 Wednesday

Another draw in inventories and rise in production?

RBNZ Official Cash Rate, Rate Statement, Press Conference—5am 10 August 2017 Thursday

Expectation is for no change in cash rate (1.75%).

US CPI m/m

Inflation in US is trending downwards and further away from Fed’s 2% target. Quoting @ReutersJamie, “US core inflation 1.5% in June. That’s 62 months in a row below the Fed’s 2% target, and 100 months out of 105 months since Lehman.” Well, the Fed is no longer data dependent. A “target” is defined by Oxford Dictionaries as “an objective or result towards which efforts are directed.” 100 out of 105 months off target since Lehman seemed to me that the Fed is either a) woefully incompetent in attaining their goals and/or b) not even directing effort to even try. It begs the question on why they even set a target when they almost never will hit this target on a consistent basis.

Image from @ReutersJamie via Twitter

Trade Ideas

Nasdaq-100 long

Nasdaq-100 is taking support at 5900 which previously was resistance. The bullish narrative goes on.

 

USDJPY long

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. However, OPEC compliance had been falling according to Bloomberg survey

Image from ZeroHedge

A very well articulated article titled “OPEC’s Game-Theory Dilemma” by a well respected man Mohamed A. El-Erian dated 2nd August 2017. Notable quote: “To win the price-setting game, oil producers need to address two related issues: They must maintain prices at a relatively high level without losing more market share to nontraditional producers, and they need to retain unity amid geopolitical tensions and disparities in domestic economic and financial situations.”

http://www.zerohedge.com/news/2017-08-04/rig-count-drops-3rd-time-6-weeks-us-shale-heavyweights-boost-production

https://www.bloomberg.com/view/articles/2017-08-02/opec-s-game-theory-dilemma

Silver short

Silver had hit key resistance zone at $17. If by some chance, though slim, there is another opportunity to sell at $17, it would be a good opportunity.

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.

The Communist Manifesto

Having just finished reading The Communist Manifesto written by Karl Marx and Friedrich Engels i included some quotes below that may be of interest.

  • ‘By bourgeoisie is meant the class of modern Capitalists, owners of the means of social production and employers of wage labor. By proletariat, the class of modern wage-laborers who, having no means of production of their own, are reduced to selling their labor power in order to live.’
  • ‘The history of all hitherto existing society is the history of class struggles. Freemen and slave, patrician and plebian, lord and serf, guild-master and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted, now hidden, now open fight, a fight that each time ended, either in a revolutionary reconstitution of society at large, or in the common ruin of the contending classes.’

 

The Week Ahead - Long Kiwi The Week Ahead - Long QQQQ