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  • Oil prices shake off Trump’s exit from the Iran nuclear deal
  • Treasury needs to sell even more 10-year T-notes today
  • April U.S. PPI expected to ease slightly
  • Weekly EIA report

 

 

 

 

Oil prices shake off Trump’s exit from the Iran nuclear deal — June WTI crude oil prices on Tuesday closed sharply lower by -$1.67 (-2.36%) at $69.06 even after President Trump announced in the early afternoon that the U.S. is withdrawing from the Iran nuclear deal and reinstating sanctions on Iran.  The markets had generally expected that exit, thus leading to some buy-the-rumor, sell-the-fact price action.  The dovish reaction was also sparked by the fact that the sanctions will take up to 90 days and 180 days to go into effect, depending on the sanctions in question.

There were other bearish factors that helped push crude oil prices lower on Tuesday including (1) the EIA’s hike in its U.S. oil production forecast, (2) the stronger dollar, and (3) expectations for today’s EIA report to show a +1 million bbl rise in U.S. crude oil inventories.

The reaction to the Trump exit was also muted because Iran’s initial response was dovish.  Following Mr. Trump’s announcement, Iranian President Rouhani said that Iran will discuss the possibility with Europe, Russia and China of simply keeping the agreement in place without U.S. participation.  However, Mr. Rouhani said that if that avenue did not produce results within a matter of weeks, that Iran was ready to restart unlimited uranium enrichment.  Meanwhile, European leaders voiced their support for continuing the Iran nuclear agreement even after the U.S. exit.

Even though the oil market initially took the exit decision in stride, Mr. Trump’s exit from the Iran agreement and the snap-back of sanctions is still a major bullish long-term factor for oil prices.  Iranian oil exports will be falling in coming months and the U.S. will likely ramp up its threats against Iran, even including military threats.  Israel and Iran have already exchanged military blows in Syria and it might not take much to set off a war against Iran.

The markets will now assess the extent to which sanctions will cause a drop in Iran’s oil production and exports.  That depends in part on whether Iran’s traditional oil customers such as China and India make it easy for Iran to keep selling oil despite U.S. sanctions.  Iran’s oil production has recovered by roughly 1 million bpd to the current level of 3.750 million bpd from pre-sanction levels near 2.75 million bpd.  Meanwhile, Iran’s oil exports have recovered to nearly 2.5 million bpd, up by more than 1 million bpd from pre-sanction levels near 1.0-1.2 million bpd.

 

Treasury needs to sell even more 10-year T-notes today — The Treasury today will sell $25 billion of new 10-year T-notes, which is up by $1 billion from Feb’s size of $24 billion and up by $2 billion from the $23 billion size seen during 2016-17.  The Treasury will conclude this week’s $70 billion refunding operation on Thursday by selling $17 billion of 30-year bonds.

The 10-year T-note yield closed yesterday at 2.97%, which was only 6 bp below the late-April 4-1/4 year high of 3.03%.  The 10-year yield has risen sharply by roughly 100 bp from last September’s 1-1/3 year low near 2.00% due to (1) the passage of the tax-cut in December, (2) rising inflation expectations, and (3) expectations for more aggressive Fed rate hikes during 2018-20.  The current 10-year breakeven inflation expectations rate of 2.17% is just 2 bp below the late-April 3-3/4 year high of 2.19%, illustrating that inflation expectations are currently running above the Fed’s +2.0% inflation target.

The 12-auction averages for the 10-year are as follows:  2.43 bid cover, $18 million in non-competitive bids, 5.0 bp tail to the median yield, 16.6 bp tail to the low yield, and 42% taken at the high yield.  The 10-year is of average popularity among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of 63.1% of the last twelve 10-year T-note auctions, which is mildly below the median of 64.6% for all recent coupon auctions.

April U.S. PPI expected to ease slightly — The market consensus is for today’s Apr final-demand PPI report to ease slightly to +2.8% y/y from March’s +3.0% and for the core PPI to ease to +2.4% from March’s +2.7%.  Despite those declines, today’s expected PPI report of +2.8% headline and +2.4% core would still be well above the Fed’s +2.0% inflation target.

The markets will be pleased if the U.S. inflation statistics can ease a bit in April after reaching new highs in March.  In March, the headline CPI reached a 12-month high of +2.4% y/y and the core CPI reached a 13-month high of +2.1% y/y.  In March, the PCE deflator reached a 12-month high of +2.0% y/y and the core PCE deflator matched a 6-year high of +1.9% y/y. 

Market-based inflation measures are also strong.  The current 10-year breakeven inflation expectations rate of 2.19% is mildly above the Fed’s 2.0% inflation target.  The good news for the credit markets, however, is that the FOMC at its meeting last week referred to its +2.0% inflation target as “symmetrical,” which was a clear message that the Fed will tolerate above-target inflation figures for at least some period of time.

 

Weekly EIA report — The market consensus is for today’s weekly EIA report to show a +1.0 million bbl rise in U.S. crude oil inventories, unchanged gasoline inventories, and a -1.5 million bbl decline in distillate inventories.  U.S. crude oil inventories are -2.3% below the 5-year seasonal average, which is near the recent 9-1/2 year low of -3.3% below average.  Meanwhile, U.S. oil production in last week’s EIA report rose by +0.3% w/w to a new record high of 10.619 million bpd.

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