The Fed stutters
The US Federal Reserve Bank yesterday released minutes of its August monetary policy meeting: a 0.25% interest rate hike is signalled for September. Markets have reacted with confusion. Was the tone hawkish or dovish? Our view is that the lack of new evidence to increase the pace of hikes indicates a dovish Fed. US forward rates have come off their high; EUR/USD’s pullback is a function of trading dynamics rather than a shift in USD sentiment.
Markets will now shift their attention to the Jackson Hole monetary conference, Fed Chair Jerome Powell’s speech there and any reaction from President Trump. Trump continues to ask for easier monetary policy. He worries that tighter policy will kill the fiscal boost from his trade policies. In normal circumstances, Trump’s remarks would be ignored, but in light of Turkey’s President Erdogan interventions, markets are sensitive to central bank independence. Honestly, there is a huge difference between Erdogan’s actions and Trump’s talk. We don’t expect Trump to act on impulses, besides, he has bigger worries with the Mueller investigation and convictions of Manafort and Cohen. Should the Democrats win November elections, we believe they will try to impeach Trump.
Oil up as US-China talks resume
Crude oil prices are bouncing from recent low, benefitting from a weakening dollar and from China’s threatened 25% duties on US gasoline, diesel and other refined products. As a Chinese delegation started discussion with US trade representatives in Washington on Wednesday, market sentiment is improving, pushing oil upward since the beginning of the week. US crude inventories drop in the week ending August 18 also support the trend: API and EIA estimates at -5.17 million barrels and -5.84 million (consensus: -1.50 million and -1.86 million) confirm a large US inventory draw.
Medium-term, US sanctions against Iran, the third largest OPEC producer, are supporting the idea of lower supply across the board. Iran’s largest oil client, China, is not expected to back the US, while India and Turkey (second and fourth largest Iran clients) will probably follow China. The US Department of Energy, in anticipation of Iran sanctions, will offer 11 million barrels from the Strategic Petroleum Reserve between 1 October and 30 November.
Trading at USD 67.70 per barrel, West Texas Intermediate crude is expected to decline slightly in the short-term, heading along 67.30.
