March 15, 2017

Markets Today: My [oil] delirium weighs on bonds

What was meant to be a quiet night ahead of key risk events (US FOMC and Dutch elections today) turned out to be rather more exciting.

The WTI Oil price fell 1.4%, on the back of an OPEC report that stated Saudi Arabia increased oil production in February with oil now back to late November 2016 levels at $47.85 a barrel. US Treasury yields initially fell up to 4.0 bps on the news driven by the inflation component, while the S&P500 fell 0.4% weighed down by energy stocks (‑1.0%).

OPEC reported Saudi Oil production rose 263.3k barrels a day in February to 10.001m. While the production figure is still below Saudi Arabia’s agreed OPEC-cut agreement target of 10.058m, it does mark a notable departure from recent rhetoric of being willing to cut beyond what is required to support the agreement. It also plays with the grain of comments by the Saudi Energy Minister Al-Falih that non-OPEC producers should not expect Saudis to take on the bulk of cuts or assume that they will extend the production cuts past May. Can OPEC keep the oil price in their stated $50-60 a barrel range – or will US shale oil producers play with their delirium given their breakevens sit at $40-50. For those contemplating, today’s title “My Delirium” by LadyHawke may help.

US Treasury yields fell 2.9 bps to 2.60% (although was initially 4bps lower on the news) with the inflation component driving the moves – down 2.6bps. Bund yields were similarly lower, down 2.6 bps to 0.45%. Movements in Australian CGS differed to the US moves the previous day and were also down 1.4 bps to 2.92%.

The US dollar rose 0.3% across the board with much of the move happening yesterday afternoon. The big move overnight was the Pound which initially fell up to 0.9% (though pared losses to -0.5%) alongside news that the UK Parliament signed off on Brexit bill yesterday which gives PM Theresa May the ability to formally start the Brexit process (unlikely to trigger before March 27) and news that the BoE Deputy Governor resigned for failing to disclose a conflict of interest. The Pound currently sits at 1.2219.

Aside from moves in the Pound and US Treasuries, the overnight session was fairly muted with little in the way of economic data. China monthly activity indicators overall came in slightly stronger than expected except for Retail Sales – but that was due to a decline in automobile sales which may be attributable to a sales tax increase on cars in 2017. US data was largely as expected, though the PPI beat expectations up 0.3% m/m against expectation of a 0.1% outcome – a signal inflation is picking up in the US.

Domestically, the RBA hinted it was going to tighten macro-prudential measures, with Assistant Governor Michelle Bullock noting “we are continuing to monitor their ongoing effects and are prepared to do more if needed”. With the RBA Board already questioning the efficacy of current measures (the downgrading of the effectiveness to “some” strengthening in the March Board statement), it is probably an indicator that more is to come. For rates, this would argue the case for more macro-prudential measures to deal with risks in the housing market rather than any near-term contemplation of rate hikes as some had been advocating.

Coming Up

A huge day coming up for markets with the FOMC rate decision (5.00am AEDT) and Dutch elections taking centre stage. There are also a number of key data releases, including the US CPI and Retail Sales, along with UK Employment figures. Downunder we get Westpac Monthly Consumer Sentiment and Car Sales (neither really market moving) while across the Ditch NZ has the Current Account Balance.  Finally, the IEA Oil Market Report for March has the potential to move oil especially given last night’s moves.

The US FOMC decision is at 5.00am AEDT, with this month’s meeting including an update of the Fed’s dot points and a press conference by the Fed chair. Virtually all economists (96% on Bloomberg) expect the Fed to lift rates by 25bps and the OIS market prices a 93% chance. What is more uncertain and has the potential to move markets is the timing and magnitude of future rate hikes as embodied in the Fed’s dot points. The current medians have interest rates at 1.4% in 2017 (3 hikes), 2.1% in 2018 (3 rate hikes), 2.9% in 2019 (3 rate hikes) and a long-run value of 3.0%. Given the distribution of responses, the risk is the median could shift for 2019 since it requires only one Fed member to change their dot (but unlikely for 2017 and 3/17 dots would have to change to impact on 2018) which will be important for long-term rates. Finally, the balance sheet is likely to become more of a discussion point with many in the Fed stating it was appropriate to consider reducing the balance sheet (via stopping reinvestment) once rates were a comfortable distance from the lower bound – Kaplan and Harker suggested a figure of 1% earlier in the year and the Fed funds rate after tomorrow will sit at 0.75-1.00%.

Polls close in the Dutch election at around 7.00am AEDT Thursday and we are likely to get results throughout the day. While markets aren’t necessarily focused on how easily a government will be formed from the disparate parties that make up Dutch politics, it is focused on how well Geert Wilders’ Euroskepic Freedom Party (PVV) does. Recent polling puts the Freedom Party at 15.7% of the vote which would give it 20-24 seats (similar to the 2010 election) – anything higher would likely start to weigh on European markets and cause some reassessment of how Le Pen would go in the upcoming French Presidential election (currently a 30% chance).


On global stock markets, the S&P 500 was -0.35%. Bond markets saw US 10-years -3.65bp to 2.60%. In commodities, Brent crude oil -0.47% to $51.11, gold-0.4% to $1,198, iron ore -0.1% to $88.14, steam coal -0.2% to $80.90, met.coal -0.3% to $159.25. AUD is at 0.7564 and the range since yesterday 5pm Sydney time is 0.7540 to 0.7579.

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