The Fed: How soon is "fairly soon"?

The Fed: How soon is "fairly soon"?

The FOMC continues its oracular pronouncements; OPEC swaps customers; Brexit fans get a hard answer; more French election shuffles

“[It’s] whether or not our country wants to import our labor or whether they want to import their food”
Zippy Duvall, president of the American Farm Bureau Federation, on the impact of workers' wages on U.S. agriculture

The Fed: How soon is "fairly soon"? The minutes of the FOMC's February 1 meeting, along with the recent remarks by some voting members of the Fed's decision-making panel, provoked the usual guessing game about the date of the next rate hike. The fed funds futures market reacted by shifting the weight of its implied probabilities; if correct, the odds are 36%for a hike on March 15 and 60% for May 3.1 The phrases that got the most attention: a hike could happen "fairly soon", during "an upcoming meeting".  Fed Chair Janet Yellen went out of her way, however, to characterize a March hike as "live".

Global oil: Customer loyalty? OPEC's coordination with non-member producers to trim supply has had some early success. But that hasn't changed the dynamics of short-term demand; instead, it's caused a shift in who buys what from whom. That's a particular challenge for OPEC suppliers in the Persian Gulf, for whom preserving market share has been a top priority. Gulf suppliers, the most disciplined in terms of cutting production, have seen long-treasured customers in Asia diversifying their supplier lists for the first time in years.

One example: South Korea buying Russian Urals crude. Perhaps more threatening: China seeking west Canadian supply, or Singapore accepting Brazilian supply along with the occasional shipments of American shale oil. Gulf suppliers have been fighting back by offering to supply their Asian customers in full in March, and by trying to hold the line on price increases. That's only making the problem worse, as price spreads between suppliers have reached new lows, further reducing the incentive to stay loyal.

Brexit: Axis of "No" In the run-up to the UK's self-declared March deadline for invoking its split from the EU under Article 50, Prime Minister Theresa May said she wants to start negotiations on a post-Brexit trade regime at the same time as the details of the divorce are being negotiated. But the EU wants a two-stage process, with trade terms settled after Brexit is executed. What little hopes there were for a parallel track was all but dashed when Germany joined Italy in backing EU negotiator Michel Barnier in requiring assurances from the UK on the terms of the divorce before trade talks could begin.

The two main issues are politically charged. Brussels is requiring the UK make up for its lost contribution to the EU; the estimated bill is roughly €60 bn at present. Second, the EU wants clarity on "citizens' rights", which refers to EU citizens' ability to work in the UK, as well as their ability to immigrate at will. Concessions on either issue by the UK before Brexit is in full force seem unlikely in the current political climate.

France: Steeplechase Another twist in the run-up to the April 23 presidential election and its presumed May 7 runoff: French centrist François Bayrou stepped aside, throwing his support behind 39-year-old fellow centrist Emmanuel Macron, who is still recovering from having called France's colonial rule in North Africa as a "crime against humanity", an unpopular view among nationalist voters. Macron's hold on his supporters is considered weak by at least one poll; the candidate's response: "If I were a bubble, I would have exploded already."




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