Daily Comment (July 13, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Here’s what we are watching today:

Yellen, Round 2:  There was nothing in Yellen’s testimony that differed from her opening statement which the markets took as dovish.  Our comments yesterday appear to be mostly confirmed; the FOMC is shifting to emphasizing balance sheet reduction and less focus on rate hikes, which is being taken as bullish by financial markets.  Upon further reflection, the FOMC seems to be tying rate changes to inflation and balance sheet contraction to the economy.  If this is the case and inflation remains below target but labor markets continue to be tight, balance sheet reduction could begin as early as autumn.  If this impression is what the Chair wanted to signal, we shouldn’t see any deviation from yesterday’s discussion.  On the other hand, if the market’s impression was flawed, the Chair may signal otherwise.  Although it’s rare for this adjustment to occur, Chair Greenspan did make that change when he felt the markets overestimated his position.  We don’t expect that today.

IEA bearish:  The IEA reported that OPEC compliance declined to 78% in June, down from a remarkable 95% in May.  The violators were Algeria, Ecuador, Gabon, Iraq, the UAE and Venezuela.  Saudi Arabia, Kuwait, Qatar and Angola remained compliant.  Because of this increase in cheating, the IEA suggests rebalancing will be further delayed.

SOS Tillerson in the Gulf:  The SOS left Qatar this morning on his way back to the U.S. after a tour of the region.  Tillerson is trying to calm tensions between Qatar and the rest of the Gulf Cooperation Council (GCC) nations.  We do note that Tillerson and Qatari officials signed an agreement on counterterrorism earlier in the week in a bid to respond to the GCC’s claim that Qatar was soft on terrorism.  The GCC indicated that the agreement “wasn’t enough” which suggests terrorism has little to do with the current disagreement; we suspect this is mostly about Al Jazeera.  The other GCC nations strongly dislike the news channel because it is an independent source of news that these nations can’t control.  It appears to us that the Saudis, after a warm set of meetings with President Trump, felt they had the backing of the White House to bring Qatar to heel.  Although the president seems to have sided with the Saudis, Tillerson and the rest of the national security apparatus appear to want this issue smoothed over.

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