Monthly Archives: November 2016

OPEC’s game of ‘Deal or No Deal’ could push oil prices below $30

Oil1
03-Nov (CNBC) — NBC used to air a fast-paced television game show called “Deal or No Deal.”

The oil markets have been playing a version of that with OPEC and certain non-OPEC members who, in a desperate attempt to save their economies, are trying to forge a deal on limiting oil production.

As is usually the case, when Saudi Arabia speaks, the oil market listens, and, in a departure from their previous position of engaging in a bare-knuckle brawl for global market share, they have been leading the charge to reign in oil production.

Oil prices had rallied on their attempts, recently nearing the $52 level for West Texas Intermediate.On Thursday WTI was trading at about $45 per barrel.

… Because of all this, WTI oil prices are set to trade back down to the mid-$30, at least, putting the February low of $26.05 back in-play, into year-end.

2017 is looking like another challenging year for the energy industry.

[source]

PG View: That could translate into another challenging year for inflation expectations as well . . .

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U.S. services ISM fell to 54.8 in Oct, below expectations of 56.0, vs 57.1 in Sep; prices rose to 56.6.

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U.S. factory orders +0.3% in Sep, above expectations of +0.2%, vs positive revised +0.4% in Aug.

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Gold drops below $1,300 as stocks stabilize

03-Nov (MarketWatch) — Gold futures on Thursday pulled back from their highest finish in a month as the dollar and stocks, hit this week by U.S. election uncertainty, nursed their losses.

Gold futures pushed below the key $1,300-an-ounce level intraday. The metal had held this closely watched line despite volatile after-hours trading on Wednesday when the U.S. Federal Reserve left interest rates unchanged but said the case for an increase in rates “has continued to strengthen.”

By market reckoning, that leaves open the door for a rate hike in December. Gold tends to lose demand to interest-bearing investments in a rising-rate climate, although other factors, including political jitters, continue to underpin precious metals.

“The market will probably only be willing to fully price in the rate hike if [Democratic nominee Hillary] Clinton wins the election,” said commodities analysts at Commerzbank, led by Carsten Fritsch, in a note. “In this case, gold could come under pressure again. At present, the Fed fund futures put the probability of a December rate hike at somewhat more than 60%.”

[source]

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Market update: Gold price rallies ahead of US election


03-Nov (WGC) — Yesterday, the gold price broke above US$1,300/oz for the first time since early October, as the surprise announcement last Friday October 28th by the FBI relating to Clinton’s email probe, injected a new wave of uncertainty into the presidential election.

As investors fly to quality, gold surges

• The US presidential election has tightened up again, pushing investors to hedge risk through high quality, liquid assets such as gold.

• The gold price broke its 200-day moving average (US$1,275/oz) and breached the key US$1,300/oz level yesterday where many call options were likely executed.

• The gold price posted its strongest two-week gain since the surprise result of the British referendum in late June, when gold also fulfilled its classic safe-haven role.

• The fact that the gold price has fallen only slightly below US$1,300/oz, despite a more hawkish-than-expected statement from the Federal Reserve yesterday signaling that they will likely increase interest rates before the end of the year, is also very significant and shows the degree of momentum in investor demand for gold.

• We expect that both the presidential and congressional elections results will be supportive of gold regardless of the outcome, given the high uncertainty in the direction of policy and the possibility that the results may be contested.

• In our view, rising nationalist movements and political uncertainty around the world, as well as the prevalence ineffective monetary policies, make gold a valuable hedge and key component to investment portfolios long term.

[source]

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Morning Snapshot: Gold Choppy, Straddling $1300

03-Nov (USAGOLD) — Gold has been rather choppy thus far today. Probes back above $1300 in overseas trading have proven unsustainable thus far, but there seems to be buying interest on the dips.

The BoE held steady on policy today as was expected, but they dropped their dovish guidance. That put a bid under sterling, which is helping to keep the dollar on the defensive.

U.S. data was mixed. Preliminary Q3 productivity came in at a strong +3.1%, well above expectations of +1.8%. However, unit labor costs were below expectations and initial jobless claims for last week were higher than expected.

Focus now shifts to tomorrow’s jobs report and of course Tuesday’s election. Both the short term bias and the trend for the year remains positive.

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U.S. Q3 productivity (prelim) +3.1%, well above expectations of +1.8% vs positive revised -0.2% in Q2; ULCs +0.3%, on expectations of +1.2%.

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BoE held steady on policy, as was widely expected. Dovish guidance was dropped, inflation report suggests potential to 2.8% by early 2018.

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Gold lower at 1291.75 (-7.62). Silver 18.12 (-0.443). Dollar soft. Euro lower. Stocks called mixed. U.S. 10-year 1.82% (+1 bp).

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Gold slips back below $1300 into the close, likely on profit taking.

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Gold maintaining gains above $1300 as Fed policy comes in as expected.

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Fed Sets Up Possible December Move While Leaving Rates on Hold

The-Great-and-Powerful-JanetYellen
02-Nov (Bloomberg) — Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington. The decision was 8-2.

Fed officials revealed growing confidence that inflation is on track to reach their 2 percent target. The central bank said Wednesday that the pace of price gains “has increased somewhat since earlier this year” and that market-based measures of inflation compensation “have moved up.” The committee also omitted previous language saying inflation would probably “remain low in the near term.”

The decision to forgo a rate increase had been widely expected owing to the proximity of next week’s U.S. presidential election and the lack of a scheduled press briefing after this meeting. Now the focus will shift to the FOMC’s gathering in December, provided the outlook for the economy and inflation isn’t thrown into doubt over the next six weeks.

[source]

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Fed holds pat, in line with expectations; case for a rate hike “continued to strengthen.” George and Mester dissent. Rosengren

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

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The Daily Market Report: Gold Charges Higher on Reinvigorated Haven Demand


02-Nov (USAGOLD) — Gold surged back above the $1300 level for the first time since October 4, buoyed by a safe-haven bid as next week’s U.S. presidential election have gone up for grabs. The market volatility associated with this new reality, may very well impact rate hike expectations for the remainder of the year.

The Fed will announce policy at 2:00ET today. They’re very unlikely to announce any changes at this point. They will likely express continued optimism that the economy is moving in the right direction and therefore tighter policy may be warranted ahead of year-end. However, they will likely leave themselves with their “data dependent” out . . . just in case.

Oil prices continued to tumble today after the EIA announced the biggest crude stock build EVER. WTI fell back to the $45 level, the lowest price in more than a month. Commenting in a Reuters article, James L. Williams, energy economist at WTRG Economics said, “This is very, very, very bearish.”

As we noted earlier in the week, if there was a reason for the Fed not to raise rates in December, it is the persistent absence of inflation. A renewed plunge in energy prices into year-end would totally derail the notion that inflation is perking up, and likely derail the rate hike expectations as a result. You can anticipate renewed rumors about an OPEC production freeze or cut in an effort to stop the hemorrhaging.

Pretty much all of the early-October losses in gold have now been retraced. You may recall that that sharp sell-off was triggered by hopes that a palatable deal was going to be struck between Deutsche Bank and the U.S. Justice Department over their mortgage-backed-securities dealings. Hopes for such a deal and/or a capital raise are fading according to ZeroHedge, resulting in DB stock coming under renewed pressure.

Shares of what ZeroHedge calls ‘the most systemically dangerous bank in the world’ have fallen more than 11% recently. DB is so incredibly dangerous because of their massive derivatives book, with considerable contagion risk.

So, on top of the latest election uncertainty, we have the reemergence of risks associated with DB. This should provide a tailwind for gold into election day, and quite possibly beyond.

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Oil hits $45 as US crude stockpiles show largest jump on record

02-Nov (Reuters, via CNBC) — Oil prices tumbled 3 percent on Wednesday after a record weekly build in U.S. crude stocks added to worries of all-time highs in OPEC production that suggested little could be done to rein in a global glut.

The U.S. government’s Energy Information Administration (EIA) said crude inventories rose by 14.4 million barrels for the week ended Oct. 28, versus analysts’ expectations for a build of 1 million barrels. It was the biggest ever rise in U.S. crude stocks in a week, overwriting a 2012 record.

This is very, very, very bearish. Nothing else in the report matters,” said James L. Williams, energy economist at WTRG Economics in London, Arkansas.

[source]

PG View: If energy prices resume their downtrend, it’s going to derail any hope of hotter inflation into year-end…and possibly the rate hike as well. More production freeze/cut rumors in 3, 2, 1 . . .

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Gold trades above $1300 for the first time since 04-Oct. Pretty much all of that early-October retreat has now been retraced.

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Fed Doesn’t Aim to Push Inflation Beyond 2%

yellen
02-Nov (WSJ) — Fed Chairwoman Janet Yellen set markets abuzz last month when she said running a “high-pressure economy” might help undo some of the economic damage wrought by the Great Recession.

Some investors wondered whether she meant the Fed was now seeking to push inflation above its 2% target. Her remarks came the same day Bank of England Gov. Mark Carney said the central bank was willing to let inflation temporarily overshoot its 2% goal to prevent the jobless rate from rising sharply, and three weeks after the Bank of Japan said it would aim to exceed its 2% inflation target.

But Ms. Yellen wasn’t suggesting the Fed follow suit, nor do the central bank’s projections imply a similar strategy.

She effectively expressed sympathy for the idea of letting short-term interest rates and the jobless rate stay low for a while to explore the costs and benefits to the economy. That would cause inflation to accelerate, but not rise above 2%, according to the Fed’s forecast. Inflation has run below that level for more than four years.

Her remarks reflect the debate Fed officials are having at their two-day meeting, which concludes Wednesday. They are likely to leave their benchmark federal-funds rate unchanged in a range between 0.25% and 0.5% and signal they could raise it next month.

[source]

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The Federal Reserve to Pensions: Suspend Disbelief Indefinitely

by Danielle DiMartino Booth
02-Nov (MoneyStrong, via LinkedIn) — Dissent is in the air. Soybean-export driven economic growth has given hawkish Federal Reserve policymakers a fresh raison d’etre to dissent in favor of an interest rate hike at today’s meeting. Hike today or be buried in regret for having been behind the curve. It’s true that (measured) inflation does indeed appear to be emerging from an extraordinarily long hibernation.

But it sure would be nice to hear news of a different kind of dissent, one cast on behalf of those whose voices have been lost, that of savers and especially those of public pensioners.

Setting aside the corruption of the pension system for a moment in this overheated political season, some brave soul among current Fed leaders should long ago have raised their hand to protest the ravages that will be suffered one day as a direct result of Fed policy keeping rates too low for too long for several generations, and worse, forcing pension managers too far out on both the liquidity and risk spectrum.

…if you assume your investments are going to return less, you (the state/school district/municipality) have to write bigger checks to ensure the pension has adequate funds to satisfy what retirees and future retirees have been (over)promised. The fact that interest rates have declined precipitously, even using the ridiculously high rates allowed by law, you start to see what’s got all those analysts over at Moody’s so worried.

Add up all our great states and Moody’s math comes up with $1.75 trillion in what will be pension underfunding by the time we’ve said adios to fiscal year 2017. That represents a 40 percent jump from fiscal year end 2015. On a fundamental level, it is poor investment returns and insufficient contributions that have landed pensions in this pickle. “Poor” might be a bit kind considering the median return for state pensions in the last fiscal year was 0.52 percent, again, compared to a 7.5-percent assumption.

[source]

PG View
: A 40% increase in the underfunding of pensions is astonishing and will be a millstone around the neck of our economy for decades to come.

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Gold hits 1-month high on U.S. election worries


02-Nov (Reuters) — Gold rallied to a one-month high on Wednesday as intensifying concerns over the outcome of the U.S. election knocked stocks and the dollar lower and burnished the appeal of precious metals as a haven from risk.

Investor anxiety over the election after the renewal of an FBI probe into Democratic candidate Hillary Clinton’s emails knocked European stocks to near four-month lows and sent the dollar to its lowest since early October.

That helped push gold back towards the $1,300 an ounce mark.

Spot gold was up 0.6 percent at $1,295.98 an ounce at 1030 GMT, while U.S. gold futures for December delivery were up $9.20 an ounce at $1,297.20.

“The election polls are the main driver for this increase in the gold price. If there is a President Donald Trump, there could be a change in policy,” LBBW analyst Thorsten Proettel said. “That would increase uncertainty among market participants.”

[source]

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Morning Snapshot: Gold Attempts to Regain $1300 as Rebound Continues

02-Nov (USAGOLD) — Gold is well bid to begin the U.S. session after posting solid follow-through gains overseas. The yellow metal is once again setting fresh 4-week highs, attempting to regain the $1300 level as investors seek a safe haven amid rising uncertainty as to who will be the next U.S. President.

The Fed concludes their 2-day meeting today and will announce policy at 2:00PM ET. No change is expected this close to U.S. elections, but there is hope that the statement will clarify the Fed’s intentions for later in the year. I think they will express optimism, but leave themselves room to backtrack if markets are roiled by the election or incoming data over the next 6-weeks.

The ADP employment survey came in at +147k, below expectations of +165k. This may temper October nonfarm payroll expectations somewhat. The big jobs report comes out on Friday; and as always will greatly influence rate hike expectations.

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