Crude prices traded slightly higher following yesterday’s slide as OPEC hinted that production cuts will go as planned, shrugging off President Trump’s request for OPEC to ease efforts. US stocks were slightly lower, while the dollar declined after Fed Chair Powell’s testimony solidified the Fed’s dovish stance, while providing not much new information regarding what the next policy move might be and an update on when they will stop the balance sheet unwind. Economic data from the US also painted a picture that consumer confidence is improving while housing continues to be soft. Momentum for the Asian trading session is likely to be limited, but the narrative of supportive central banks appears to be firmly in place.
Fed Chair Powell’s first day of testimony went as planned, with financial markets learning nothing new. Powell confirmed patience, which means we will likely need to get through the first quarter of economic data before assessments of the economy will not be heavily influenced by the government shutdown and trade war concerns.
Slow inflation and lingering global growth concerns will likely outweigh the strength in the labor market, thus keeping the Fed cautious for the first half of the year. Market participants will clearly focus on conclusion of the March 20-21st Fed meeting that will come with updated projections. The Fed will need to show their hand and either downgrade their projections for future rate hikes from 2 to either one or nil. The Fed fund futures market currently has no hikes priced in for 2019, but we should not necessarily expect the Fed follow , as we are starting see some Fed members like Lorretta Mester display support of restarting rate hikes if the economy strengthens.
As peak earning season winds down, headlines become sparse and the overall view of the economy is unlikely to be swayed. Both Home Depot and Macy’s delivered disappointing guidance for 2019, highlighting a disappointing slowdown that likely will see first quarter remain soft and hopes for a pickup in the second half. Shares of Macy’s were higher on the news of a restructuring plan, while Home Depot traded lower as their results were dampened by poor weather.
West Texas Intermediate crude finished the day higher but appears to remain vulnerable as the effects of the OPEC and friend’s production cuts could be overdone. Russia appears to be falling short of holding up their end of the production cuts and if that is confirmed oil prices could continue a corrective move lower. Russian Energy Minister Novak refuted earlier reports that Russia only cut production by 114,000 barrels from December, much lower than the 150,000 promised in the OPEC and partners agreement. If compliance of the cuts are compromised and US delivers more builds with their weekly crude oil inventories, oil may see the bearish correction accelerate.
The soap opera that is US politics will have a cluster of headlines that will likely dominate the papers but is not expected to deliver any major surprises. Michael Cohen is expected to deliver documents that he believes will implicate the President in criminal conduct and financial improprieties. Cohen has plead guilty to nine felonies including lying to Congress. While the accusations are serious, the markets will most likely pay greater focus to the Mueller report which could come out after the President returns from his trip to Vietnam.
The Mueller report will become a key story for financial markets but the base case remains that that the President will not be impeached. Even if the House votes against the President, the Senate would still need to decide whether to convict President Trump.
Regarding the Trump-Kim summit, the bar is very low for the second meeting. Both sides will try to agree upon what are denuclearization terms and North Korea will want to know what easing of sanctions they could expect if they complied. Talks have been deadlocked and their is probably less than a 10% we see anything constructive come out of these meetings. With satellite imagery suggesting North Korea has continued building warheads following the first summit, it will be difficult for the US believe in any promises from North Korea.
Gold was unable to muster up a significant rally despite a clear confirmation that the Fed will maintain their dovish pivot that was delivered in January. Lackluster moves were the theme of the day and the precious metal may need to see global growth concerns return in order for the bullish trend continue.