Daily Comment (July 13, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] It was another quiet overnight session.  Equities continue to be well bid; as noted above, so far, earnings are coming in better than expected.  Of course, as our AAW discusses this week, the data we track daily comes from Thomson-Reuters, meaning that they are probably overstating the strength of earnings in the current situation.

In London, we are awaiting two events.  First, Theresa May will be appointed PM today, and second, the BOE is expected to cut rates tomorrow by 25 bps.  We view May’s appointment as an important signal for policy; this will be the topic of next week’s WGR.  On the BOE, we believe Governor Carney is quite worried about the economic impact of Brexit and thus will err on the side of excessive stimulus.  The sharp drop in the GBP is a form of monetary support so adding rate cuts to the recent depreciation should offer the U.K. economy some significant help.

The other stimulus situation we are following closely is Japan.  Bloomberg is reporting that the Abe government is considering at least partial direct BOJ funding of fiscal stimulus, colloquially known as “helicopter money.”[1]  By directly funding fiscal spending, the public debt load does not rise.  The downside is that this leads to a permanent rise in the money supply and will almost certainly lift inflation and weaken the JPY…which, of course, is exactly what Abenomics is trying to accomplish.  As we noted in the reports in the footnote, we expected that the first developed world nation to experiment with direct funding of fiscal spending would be Japan.

The IEA released its monthly report on the oil markets and, unlike recent comments, the study was less upbeat on prices.  The OECD group is concerned that global demand is showing signs of slowing as the Chinese economy slumps.  Although oil inventories have fallen, product stockpiles are high and rising and, at some point, refiners will be forced to cut production which will reduce oil demand.  The IEA did note that non-OPEC production is falling but also reported that OPEC output has reached an eight-year high, boosted by rising Saudi production.  The Saudi plan for OPEC (read: Saudi Arabia) to lift market share continues to play itself out in the oil markets.

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[1] See WGRs: The Geopolitics of Helicopter Money, Part 1 (5/2/16), Part 2 (5/9/16), and Part 3 (5/16/16).