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  • Trump announcement due today on Iran nuclear deal
  • Markets are nervous about investor demand for larger refunding size
  • U.S. JOLTS job openings expected to remain strong 
  • Italy may be headed to snap elections

 

 

Trump announcement due today on Iran nuclear deal — President Trump yesterday said he will announce his decision on the Iran nuclear deal today at 2PM ET.  Mr. Trump could announce that he is deferring the deadline by another few weeks or months to give more time for talks.  At this point, however, it seems much more likely that Mr. Trump plans to withdraw from the deal.

If he does leave the agreement, Mr. Trump could soften the blow by saying that the U.S. is withdrawing from the deal but that he is delaying the reimposition of sanctions to give more time for negotiations.  Alternatively, Mr. Trump could announce only minor sanctions that effectively terminate U.S. participation in the Iran deal but are soft enough to leave the door open to negotiations before sanctions later ratchet up.  Mr. Trump might also take the toughest possible stance by reinstating all the previous Iran sanctions, or even announcing more sanctions than existed before the Iran nuclear deal.

Mr. Trump’s decision depends heavily on whether the administration sees some hope for eventually reaching an acceptable nuclear deal with Iran or whether the Trump administration wants to move straight to trying to strangle the Iranian economy with very tough sanctions, with the idea of encouraging social unrest and regime change.  Trump attorney Rudy Giuliani over the weekend said that the administration favors Iran regime change, although the State Department on Monday said that Mr. Giuliani does not speak for the administration on foreign policy.

The crude oil market already has a U.S. withdrawal from the Iran agreement at least partially baked into crude oil prices.  If Mr. Trump announces the U.S. withdrawal from the agreement, the bullish reaction of oil prices will depend largely on the extent of any new sanctions.  If Mr. Trump announces no new sanctions or only mild sanctions, then the bullish reaction in the crude oil market will be limited.  However, if Mr. Trump announces tough new sanctions right off the bat, then oil prices are likely to rally sharply due to the prospect that Iranian oil exports will drop off fairly quickly, thus further tightening global oil supplies.

The reaction of the oil markets will also heavily depend on Iran’s response to a U.S. withdrawal.  Iran might initially respond in a dovish manner by saying that it will continue to conform to the nuclear deal, trying to encourage Europe, China, and Russia to help soften the blow of U.S. sanctions.  However, if Iran lashes out by canceling its participation in the agreement and ramping up its nuclear fuel processing and/or kicking out nuclear inspectors, then oil prices are likely to soar since a U.S. drumbeat for war will quickly follow.

The market’s reaction to a U.S. withdrawal will also depend on whether other OPEC members jump on the opportunity to ramp up production to offset the loss from Iranian oil exports.  OPEC members and Russia could decide to suspend their production cut agreement to offset any losses of Iranian oil production and exports.  Saudi Arabia, as the world’s traditional swing producer, could also decide by itself to ramp up its production to help offset the loss of Iranian crude oil.

Iran’s oil production has recovered by roughly 1 million bpd to the current level of 3.750 million bpd from the levels near 2.75 million bpd seen during the pre-2015 sanctions regime.  Meanwhile, Iran’s oil exports have recovered to nearly 2.5 million bpd, up by more than 1 million bpd from the 1.0-1.2 million bpd level seen in late 2015.

The reimposition of tough sanctions on Iran could potentially push Iranian production and exports down by some 1 million bpd to pre-sanction levels, which would be difficult for the global oil markets to offset, particularly because of the sharp drop in Venezuela’s production due to its economic crisis.  Venezuela’s production has fallen by 1 million bpd to the current level of 1.55 million bpd from levels near 2.5 million bpd seen just two years ago.  Moreover the U.S. is considering slapping an import embargo on Venezuelan oil as a sanction for Venezuelan President Maduro’s plan to hold sham presidential elections on May 20.

 

 

Markets are nervous about investor demand for larger refunding size — The Treasury today kicks off this week’s $70 billion refunding operation with the sale of $31 billion of 3-year T-notes.  The Treasury will continue the refunding operation by selling $25 billion of new 10-year T-notes on Wednesday and $17 billion of new 30-year bonds on Thursday.  This week’s $70 billion refunding operation is up by $4 billion just from the last refunding in February because of the Treasury’s need to finance a larger federal budget deficit.

The benchmark 3-year T-note closed yesterday at 2.631%, which is only -2.6 bp below the last Wednesday’s 9-1/2 year high of 2.657%.  The 3-year T-note has risen very sharply by about 120 bp since last September due to passage of the tax cuts, rising inflation expectations, and the Fed’s rate-hike regime.  The 12-auction averages for the 3-year are as follows:  2.93 bid cover, $68 million in non-competitive bids, 4.4 bp tail to the median yield, 26.2 bp tail to the low yield, and 57% taken at the high yield.  The 3-year is the second least popular security among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of only 54.0% of the last twelve 3-year T-note auctions, which is well below the average of 64.6% for all recent coupon auctions.

 

U.S. JOLTS job openings expected to remain strong — The market consensus is for today’s Mar JOLTS job openings report to show an increase of +48,000 to 6.100 million, partially offsetting Feb’s sharp -176,000 decline to 6.052 million.   Despite Feb’s decline, U.S. job openings are still in very strong shape near the 12-month average of 6.0 million and only modestly below the record high of 6.231 posted in Sep 2017.

 

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