Up and down: The Fed and crude oil

Up and down: The Fed and crude oil

The Fed hiked its target rate, but its inflation bogey remains elusive; crude oil fell further on bulging inventories; Greece got a lifeline; formal Brexit negotiations finally begin.

"The economy is doing very well, is showing resilience"
Fed chair Janet Yellen

Crude oil: Wednesday's child Crude oil markets have had reason to fear the middle of the week of late; the US Energy Information Administration (EIA) releases its figures for petroleum production and inventories each Wednesday. This past week was no exception, with the EIA reporting US crude oil production rising to an average of 9.33 million barrels (bbl) per day and gasoline inventories rising 0.87%. Despite the build, refineries are running "hot", at a utilization rate of 94.4%.

On the demand side for gasoline, the onset of the summer driving season in the US appears to be offering little help, despite relatively low and stable gasoline prices. Explanations vary, but one thing is clear; crude oil markets didn't like it. West Texas Intermediate (WTI) crude fell some 4% on the news; on Friday June 16, it was trading at $44.85, having recovered slightly from its downdraft on Wednesday. Brent crude also traded down some 4% on Wednesday, and recovered a bit more on Friday, to $47.50.1

The Fed hike: Pulling back the curtain There was little surprise in the FOMC's decision to raise its target rate band to 1.00% to 1.25%, a 25 basis point (bp) rise.  But tension had been building on the day of the announcement; weak consumer price inflation, weaker-than-expected job growth and little change in workers' wages had given naysayers enough ammunition to sow doubt. That discomfort carried through after Chair Janet Yellen's press conference despite the hike, with some observers believing the Fed was getting ahead of the economy by raising rates while growth was relatively muted. 

But despite the lack of surprise on rates, there was a significant reveal: a change in the Fed's approach. For the first time, it revealed some concrete data about its plans to reduce its $4.4 trillion balance sheet. The program: allow up to $6 billion in Treasury securities and $4 billion in mortgage bonds to mature without reinvesting the funds – a "rolloff" – and to have those amounts rise each quarter. The upper limit to the quarterly rolloff would be $30 billion per month for Treasuries and $20 billion for mortgage-backed securities. The program would begin  "relatively soon", which was heard by many to mean September or October, economic conditions permitting.

Brexit: Let the talks begin If all goes according to plan, the UK's Brexit Secretary David Davis will be in Brussels on Monday the 19th to start formal negotiations with the European Union's (EU) chief negotiator Michel Barnier. The UK will be negotiating without the strong consensus Theresa My had hoped to secure with the June 8th general election; that failed bid means Mr. Davis' positions may shift as he proceeds with the talks. Another potentially disrupting influence: Mrs. May's Conservative Party hasn't yet cemented a deal with the Northern Irish Democratic Unionist Party to form a ruling coalition.

Greece: IMF to the rescue The latest round of brinkmanship was over Greece's ability to pay off its bonds in June; it ended with €8.5 billion of credit provided by the 18 other states in the eurozone – and with the International Monetary Fund joining the rescue team after a two-year absence. On Greece's side, the deal acknowledges the relevance of its recent round of austerity measures. As has been the case in previous last-minute deals, the devil's in the details and the bailout talks haven't yet ended, leaving uncharitable observers suggesting that this most recent agreement merely kicks the can further down the road.



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