Daily Comment (June 14, 2017)
by Bill O’Grady, Kaisa Stucke, and Thomas Wash
[Posted: 9:30 AM EDT] There is breaking news at the time of this writing. A gunman shot at Congressional members and staffers at a baseball practice in suburban Virginia. The Congressional baseball game is one of the few bipartisan social events in Washington. Although the situation is evolving, early reports indicate at least five people were shot. The most notable is Steve Scalise (R-LA), the GOP House Whip, who was reportedly shot in the hip. Scalise is the third-highest ranking member of the House GOP leadership. His injuries are not considered life threatening. Although not confirmed at this time, there are reports the shooter was also shot and has been “neutralized” and is in custody.
Today is FOMC day. The Fed concludes its policy meeting with near certainty that the central bank will raise rates. This is a meeting with a press conference, new economic forecasts and a new dots plot. We don’t expect the Fed to change the dots plot too much; if so, the last plot implied one more hike this year, assuming a 25 bps hike today. Although we don’t expect details on shrinking the balance sheet today, we may hear more about that in the press conference. The FOMC is striving for transparency to preclude adverse market effects. Fed funds futures put the odds of a hike today at 92.7%. The odds of an additional hike in September are only 21.7% and, assuming no change until year’s end, a December move is currently priced at 34.3%. In fact, we don’t get a greater than 50% likelihood of a rate increase until the June 2018 meeting. Thus, anything suggesting a higher probability of a rate hike this year might be taken as hawkish.
CPI and retail sales for the U.S. came in soft (see below for details); the dollar rolled over on the news and interest rates declined. Gold prices also rose, but the yellow metal may also be reacting to the aforementioned shooting.
Oil prices are coming under pressure again this morning. The proximate cause was a report from the American Petroleum Institute (API) that crude oil inventories rose last week. The API report, based on a non-compulsory survey, comes out the evening before the official data from the DOE. The two series can disagree but inventory increases this time of year are unusual and thus bearish. However, on a longer term basis, the International Energy Agency (IEA), a division of the OECD, indicated today that the current inventory overhang will persist this year despite OPEC efforts to cut output. Rising production from Brazil, the U.S. and Canada are partially offsetting OPEC cuts. The IEA indicated that OECD stocks of oil rose 18.6 mb in April and are 292 mb above the five-year average. The IEA estimates that oil stocks won’t fall to their five-year average until March 2018 and this only occurs if OPEC maintains its production constraint. Industry reports suggest that U.S. production growth will stall the closer oil prices get to $40; although such a drop is possible, we expect a weaker dollar to mitigate downside risk in oil prices. We will have our usual recap of the oil data in tomorrow’s Daily Comment.
The debt ceiling is a looming threat; as we have noted in earlier reports, the Treasury is suggesting that the government will enter a partial shutdown by the first half of September without action taken to raise the debt ceiling. This issue has become an inter-party conflict within the GOP as the Freedom Caucus is proposing a $1.5 trillion increase in the ceiling, $1 trillion less than what the White House is requesting. The lower ceiling would lead to the exhaustion of borrowing capacity soon after the mid-terms. The White House would like to avoid further drama with a higher ceiling. We would expect a compromise, although the more entrenched positions become the longer we may go before a deal is reached. What is significant in this problem is that the battle is occurring within the GOP and highlights divisions within the party. The debt ceiling could be a further distraction from the president’s agenda and consume precious political capital.