A post-election Fed vs. a pre-election ECB; South Korea business as unusual; a no-drama jobs report; Saudi shuts out the "shale boys"
“The toughest thing in the world… is drilling a ninth well when you’ve drilled eight straight dry holes. But what other choice is there?”
South Korea: Business as unusual South Korea has had more than its share of economic, political and geostrategic trauma in recent months. The latest event: Friday's removal of President Park Geun-hye as a result of her December impeachment, one of several results of a widespread corruption scandal. Despite appearances, including the deaths of at least two protestors, this is been only a slight positive for financial markets; since Park's third apology in early December, the Kospi Index (equities) has risen nearly 6%; on the day of the removal, stocks rose 0.30%.
More attention is being paid to the possibility of foreign policy changes if the opposition party takes power; the opposition platform includes engagement with North Korea, reduced tension with China and a potential policy rift with the U.S., a long-standing and stalwart ally since the end of the Korean war.
The Fed and the ECB: Two roads diverge Mario Draghi's press conference highlighted the European Central Bank's belief that the region still needs monetary support – and the premium that it appears to place on not adding to the already highly charged election campaigns in France, the Netherlands and Germany later this year.
But politics appears not to be a factor for the Fed, whose decision to raise its target rate to 1.0% this week appears all but certain, barring any disruption in the flow of positive economic data or major market surprise. Instead, investors are focusing on how many additional hikes there may be during the year's six remaining FOMC meetings, debating about whether there will be more or fewer than 3 hikes. Even after the February jobs report, the futures markets offer little guidance; it currently signals that another hike following this week's decision won't occur until June – and even then, the implied odds are 50-50 for either June or July.
US jobs: No drama; now what? The February jobs report met or slightly exceeded expectations; private-sector payrolls grew by 227k, manufacturing payrolls grew 28k; average hourly earnings rose 0.2% since January and 2.8% year-on-year; labor force participation up a hair to 63.0% from January's 62.9%; the unemployment rate fell to 4.7%. Market response was muted; the yield on ten-year Treasuries swung just over 3 basis points and so far is staying very close to its recent high of 2.6%. U.S. equity futures traded up slightly; the trade-weighted U.S. dollar traded down about -0.2%, suggesting that this week's widely-expected FOMC rate hike is already in the price.
OPEC: U.S. shale in the crosshairs It's not just the rise in U.S. oil inventories that drove the price of the near WTI future down over 5 percent to about $50 last Wednesday. Saudi Arabian Energy and Industry Minister Khalid Bin Abdulaziz Al-Falih was in Houston last week at an industry conference, and made it clear that his country wouldn't adjust its own output to make up for increased U.S. output and exports of shale oil. That's a clear line in the sand; so far this year, Saudi Arabia has been more than willing to restrict its own exports to preserve OPEC's discipline and support crude oil prices. Clearly, that generosity doesn't extend to the so-called “shale boys”.