Daily Comment (July 10, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Monday!  It’s officially mid-summer as baseball’s All-Star Game will be held tomorrow.

Global markets are rather quiet this morning.  Here are the headlines:

G-20: The U.S. is becoming steadily isolated in the world as per the design of the Trump administration (and, to be fair, this process predated this administration).  For example, the final communiqué noted free and fair trade, but there is really no way to accurately describe fair trade.  Fair trade is a euphemism for trade barriers.  We have been discussing this issue for nearly a decade—the U.S. public is tired of the burdens of hegemony and this weekend’s meeting is further evidence that the administration is responding to that fatigue.  Although there is brave talk among the rest of the group about making policy, in reality, without the U.S., the world order would have to be restructured and there is no power on earth that can fill that role at this time.  Our initial take on the meeting with Putin was a draw; the Russians appear no closer to getting sanctions lifted and President Trump faces a new controversy over Russian involvement in the presidential election.  On the other hand, his pre-meeting speech in Poland appeared to be a hit.  It should be noted that there has always been tension over how one defines “the West.”  It is either an intellectual concept or a matter of national origin.  In the former definition, anyone from anywhere who agrees with free markets, open borders, deregulation and globalization is a member.  The latter requires the social and cultural membership in the European project.  Although the first definition is usually considered the dominant one, the latter one has never gone away.  It is now becoming stronger and thus the idea of stronger nationalism is becoming more important.  That issue was evident in the meeting.

Yellen this week: On Wednesday and Thursday, Chair Yellen will speak before Congressional committees in what we used to call the Humphrey-Hawkins Testimony.  We expect her to lay the groundwork for balance sheet reduction and at least one more hike this year (and maybe two).  This could be her last testimony of this kind as her term will be near expiration during the next one.

Oil prices remain soft: Oil prices failed to hold early overnight gains as OPEC indicated it will not consider further cuts at its meeting on July 24.  There is talk about capping Nigerian and Libyan output.  As we noted last week, the data suggest that prices are a bit cheap here but we aren’t looking for anything beyond a trading range market for now.

IS loses Mosul: Iraqi and allied troops have mostly eliminated IS fighters from Mosul.  Although a great victory, pictures suggest it came at a horrific cost.  IS still controls areas in the region but it has lost a major urban center and is thus becoming a smaller threat.  On the other hand, the vacuum that the IS collapse will bring is perhaps an equally vexing problem.  The next battle for the region will involve powers filling these gaps that used to be under IS control.

Grains up on dry, hot weather: The mercury is expected to top out at 97° today, with drought conditions in place in the spring wheat areas.  This is boosting grain prices.  This time of year, prices tend to swing every four hours as the NWS releases new maps.  Still, this hot weather will likely have some negative effect on crop yields; how much damage is dependent on how long the hot weather lasts.

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