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Was Powell’s Speech a Bullish Gamechanger?

What’s in Today’s Report:

  • Was Powell’s Speech a Bullish Gamechanger?  No.
  • Oil Update – Another Bearish Report
  • The Unexpected Winner from Powell’s Speech (Yield Curve)

Futures are modestly lower on digestion of yesterday’s rally combined with worries about potential auto tariffs.

Rhetoric on U.S. auto tariffs continues to get louder and there is a growing fear they will be enacted this year.  That is not the consensus expectation at this point, but it’s not an insignificant (and it would be a new negative for stocks).

Economic data o/n was better than expected as Japanese Retail Sales, German Unemployment and EU Economic Sentiment all beat estimates.

Today focus will be on economic data, and the most important report will be the Core PCE Price Index (E: 1.9%).  That number needs to stick near 2.0% yoy to allow the Fed to continue to tilt dovish.  Other notable data today includes Jobless Claims (E: 219K) and Pending Home Sales Index (E: 0.3%).   There are also three Fed speakers today, (Mester and Evans (2:00 p.m. ET), Kaplan (3:00 p.m. ET)) although none should move markets given the Powell comments.

Finally, we can expect more preview articles about the Trump/Xi meeting but the bottom line is the market expects (and has priced in) a “truce” that sees no new tariffs and a period of intense negotiation.

Oil Outlook: Getting More Bearish, March 15, 2017

Oil Rig - Oil Report was BearishWhy the Monthly OPEC Report Was Bearish Oil

An excerpt from today’s Sevens Report—get a free 2-week trial of the report with no commitments.

Oil remains the big story, as its early morning sell-off to multi-month lows prompted a pullback in stock futures, and ultimately the major US equity indices opened lower. WTI futures finished the day down 1.43%, only slightly above where they opened ahead of the late-November OPEC meeting, where members agreed to collectively cut output.

OPEC released its monthly oil market report yesterday, and the big catalyst in the data was a self-reported increase in February oil production by the de facto leader of the cartel, Saudi Arabia. According to direct communication, Saudi Arabian oil output rose 263.3K b/d to 10.01M b/d. The dip below the psychological 10M mark in early 2017 helped futures stay afloat above $50, as Saudi Arabia was showing their commitment to price support by cutting below their allotted quota (which in fairness they are still below). While data gathered by secondary sources showed another drop of 68.1K b/d to 9.80M b/d in Saudi production, the markets focused on the bearish direct communication data, as it suggests that Saudi Arabia’s commitment to oil cuts may be becoming exhausted.

Another notable takeaway from the release was that OPEC only projects that US oil supply will grow at 340K b/d in 2017. Still, at the current pace (which we will admit does not seem sustainable through the medium term), US producers have already brought 318K b/d online in 2017. Today’s EIA report very well could show an increase through that annual expected rise of 340K b/d.

Bottom line, the rapid increase in US production in recent months has been the biggest long-term headwind for the oil market, as it has offset the efforts of the global production cut agreement while simultaneously causing angst within the ranks of OPEC (namely the Saudis) as they start to see market share slip away.

Without the full commitment of Saudi Arabia to the global production cut agreement, the deal loses a lot of its luster, as they are the key player who has always taken on the bulk of the cuts and taken the near-term hit in market share for the longer-term benefit of the entire cartel. Meanwhile, “compliance cheating” by other members is historically high, and the chances that compliance remains as high as it is right now if Saudi Arabia begins to increase production are essentially zero.

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