The Week Ahead – Seasons Greetings

The Week Ahead – Seasons Greetings

Previous week: 18 December 2017 – 22 December 2017

US Crude oil inventories—11.30 pm 06 December 2017 Wednesday

US crude inventories decreased by -6.5 million barrels on the expectation of -3.15 million decrease. Baker Hughes US oil rig count stayed constant from 747 to 747. Oil production was 9789k barrels per day for week ending 15/12/2017, an increase from 9780k barrels per day in the previous week, pushing all time high production rate higher. The rise in rig count seemed to be attributed to the strong correlation to the price of oil. Oil production in US is now at an all-time high. The head on battle between US and OPEC continues.

http://www.zerohedge.com/news/2017-12-20/wtirbob-algos-confused-crude-draws-gasoline-builds-production-jumps-again

https://www.investing.com/economic-calendar/baker-hughes-u.s.-rig-count-1652

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

Bank of Japan monetary policy statement, policy rate, press conference

The Bank of Japan kept all their monetary policies unchanged, as expected. However, the key points were in the text. The text in the December meeting is almost exactly as the text in the meeting in September.

Key sentences:

  • On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations have remained in a weakening phase.
  • The year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations.
  • It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.

https://www.boj.or.jp/en/announcements/release_2017/k171221a.pdf

In the notes, uber-dove Mr G. Kataoka continues to advocate for further easing of monetary policy by buying more JGBs so that JGBs with maturities 10 years and longer will have a lower yield than currently. The first reason he gave was that he prefers hitting the 2% core CPI target by fiscal year 2018 instead of FY 2019 as predicted by the central bank. Second, he thinks that the possibility of hitting 2% eventually is low and hence if there was any delay in attaining the 2% target, the BOJ ought to step in to ease monetary policy further.

First, the current discussion had not been about further easing but about tightening monetary policy. Two forward guidance hints were made by Governor Kuroda through his recent speeches. The hints are as follows: 1) Discussion of reversal rate 2) Talks about exiting QQE by withdrawing and not ramping up stimulus. Second, the BOJ can increase the pace of QQE in theory but not in practice. As reported by Reuters, “[t]he central bank held 40.9 percent of all government debt at the end of September, also the highest on record.” The BOJ holds 40.9% of the sovereign bond market. How much more can the central bank increase its holdings such that liquidity does not dry up and that the JGB market can still functions freely through the price discovery mechanism?

The central bank can theoretically buy up the whole market till they own 100% of it. However, their act would essentially kill off the Japanese sovereign bond market. Also, the central bank will be seen as monetizing the giant national debt of Japan. Not that there aren’t already seen as doing it. Hence, as much as the BOJ may eventually want to increase the rate of buying of JGBs if inflation lags, they cannot. Having cornered the JGB market, they have cornered themselves. Reducing the rate of purchasing in my opinion is more likely than increasing the rate of purchasing of JGBs.

https://www.reuters.com/article/us-japan-economy-boj/bank-of-japans-record-third-quarter-jgb-holdings-cast-doubt-on-unwinding-qe-idUSKBN1EE0JB?il=0

https://www.boj.or.jp/en/announcements/release_2017/k171221a.pdf

Catalonia regional elections, 2017

Having fired the whole parliament of Catalonia, Spanish Prime Minister Mariano Rajoy called for elections to re-elect the members of parliament with the objective of taking away the majority from pro-independent parties. Well, what a genius he was. From Telegraph: “The secessionist parties defied consistent poll predictions of a hung parliament to secure an absolute majority of 70 seats out of 135, and 47.5 percent of the popular vote. Meanwhile the unionist bloc took 57 seats, with 43.4 percent of the vote.” Not only did pro-independent parties regained their majority in parliament, albeit losing 2 seats, their total popular vote was higher than those of the pro-unionist parties. This elections was a proxy on the central question of independence. It is clear that as of today that support for independence is greater than for support for being part of the union. To add insult to injury, the turnout was 81.9% which was an increase of 7.0% from the 2015 regional elections. Low turnout is no defense for unionists. The world is shifting to the right but Rajoy does not realise that. To add one more point, several politicians from pro-independent parties were not even physically in Catalonia to campaign for the elections. They were either exiled in Belgium or locked up in jail. Yet they pulled off a mighty victory over disillusioned Rajoy’s agenda.

http://www.telegraph.co.uk/news/2017/12/21/catalans-turn-record-numbers-vote-critical-regional-election/

Donald and his plan to cut taxes just overcame its second hurdle (ongoing till end of year)

Passage of tax bill step 1: The House of Representatives passed its tax bill with 227 yeas and 205 nays.

Passage of tax bill step 2: The real battle all along resides in the upper chamber; the Senate. The Senate passed the Tax Cuts and Jobs Act with 51 Yeas and 49 Nays, almost along party lines. The only nay vote from the republicans came from Bob Cockster Cocker Corker from the Great State of Tennessee.

https://www.nytimes.com/interactive/2017/12/01/us/politics/senate-tax-bill-vote.html?smid=tw-nytimes&smtyp=cur

Passage of tax bill step 3: Now that both houses of congress have passed their version of the tax bill, the two tax bills will now need to be reconciled and the final bill will probably be on President Donald John Trump’s desk by Christmas. For details on what is in the bill, refer to the two hyperlinks below. The first is the full text of the bill and the second is the highlights of the tax cut bill.

http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf

https://waysandmeansforms.house.gov/uploadedfiles/12.15_tcja_policy_highlights.pdf

The Senate voted 51 to 48 along party lines with John McCain being absent due to medical reasons. All republican senators voted for the bill, except John McCain while no democratic senators voted for the bill. The House of Representatives voted 224 to 201, mostly along party lines. 224 republican representatives voted for the bill with 12 voting against. These 12 are from high tax states and with State and Local tax deduction capped at $10000, their constituents will essentially have a tax increase. No democratic representatives voted for the bill.

https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017

Passage of the bill step 4: President Donald John Trump signed the bill into law. First major legislative victory for the president and the GOP. CNN, one of the networks that Trump labelled as FAKE NEWS, published a very inspiring article on how the party fell in line throughout the entire passage of the bill.

http://edition.cnn.com/2017/12/20/politics/republican-tax-bill-behind-the-scenes/index.html

Coming week: 25 December 2017 – 29 December 2017

US Crude oil inventories—12 am 29 December 2017 Friday

Another draw in inventories?

Wishing all our readers a festive holiday and prosperous new year.

 

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