Markets were mixed as President Trump urged in a virtual speech to Davos for OPEC to lower crude prices and said he will push for interest rates cuts. Trump also reiterated his threat to use tariffs to bring manufacturing back to the US.
Every President has advocated for lower oil prices and interest rates however the markets ultimately dictates the appropriate level.
The Federal Reserve is already suggesting the overnight rate will decline between 50 and 75 bps by year’s end, however, the markets are suggesting only a 28-bp decline.
Will or can OPEC increase production? The IMF states Saudia Arabia requires $90 barrel oil to balance its budget. Will domestic producers increase production, especially following years of an extremely hostile bureaucratic atmosphere amplified by the demand from investors to increase production judicially so not to destroy cashflows?
Jaw boning is easy but facing economic reality is difficult.
As noted several times, expectations are high, perhaps setting the new Administration up for failure.
Yesterday the 10-year TIP Treasury bond auction was not encouraging as the yield was the highest since the start of 2009. Some have argued this is a liquidity issue, however the results nevertheless suggest the highest real yields in nearly a generation are not exactly attracting a huge amount of demand.
Is this result of the potential inflationary impact of tariffs not yet enacted? How much is it the result of the President demanding shorter term rates which may increase inflationary pressures? Is it the result of the country’s massive debt and potentially crushing interest coverage?
Probably all of the above.
Partially because of the poor TIPs auction, longer dated Treasuries sold off causing a moderate steepening in the yield curve.
What will happen today?
Last night the foreign markets were up. London was down 0.38%, Paris up 0.67% and Frankfurt up 0.15%. China was up 0.70%, Japan down 0.07% and Hang Seng up 1.86%.
Futures are flat. The 10-year is off 1/32 to yield 4.65%.
