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Crude Oil Prices Remain Firm; BOC Rate Hike Bets Heightened Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Jan 09 18 01:13 ET

Extending another leg of rally, the front-month WTI crude oil contract was only 3 cents below the 2015-high of 62.59 earlier in Asia today. The corresponding Brent contract has also risen to almost the highest level in three years. While US output remained a concern, traders put their focus on the civil protest in Iran and the economic crisis in Venezuela, as well as OPEC's production cut commitment. Gold and silver prices eased a tad amidst USD's recovery. The benchmark Comex gold and silver contract slipped -0.13% and -0.82% respectively. In the Wall Street, DJIA took a breather after soaring to fresh highs and ended the day -0.05% lower. The S&P 500 index remained strong and settled +0.17% higher. US Treasury has scheduled to sell US$56B of coupon-bearing bonds this week, starting with a US$ 24B auction of three-year notes on Tuesday. 2-year yields slipped -2 points to 1.96% while 10-year yields were largely flat at about 2.48%. Following the strong employment report last Friday, Canadian bonds weakened, sending yields higher as bets for a BOC rate hike next week heightened.

As we are waiting for the US CPI report later in the week, inflation expectations improved as driven by strong oil prices. This should help reinforce hopes for further Fed funds rate hike this year. Yet, dovish Atlanta Fed president Raphael Bostic, voter this year, suggested that he is "comfortable continuing with a slow removal of policy accommodation". Yet, he cautioned that it "doesn't necessarily mean as many as three or four moves per year". He noted his main concern is that the market might have "anchored" the expectation that inflation would fall short of the +2% target. The market has continued to price in about 62% of a rate hike in March.

Hopes for a BOC rate hike, by +25 bps, at next week's meeting has surged to 85%, thanks to the Business Outlook and Senior Loan Office surveys for 4Q17 and the strong job market data which has already sent the loonie to a 3 months' higher last week. Canadian government bond prices generally weakened across the yield curve, sending 2-year yields lower 1.784% and 10-year yields down to 2.159%. The Business Outlook survey revealed that a net 56% of firms admitted "some" or "significant" difficulty in meeting additional demand. This marks the highest reading for a decade. Meanwhile, firms' capex and hiring intentions strengthened in 4Q17. However, inflation expectations remained subdued, a net 56% of respondents expecting inflation to stay at or below 2% over the next 2 years, compared with 59% in the previous survey.

On the dataflow, the Sentix investor confidence index for the Eurozone surprisingly improved to 32.9 in January, from 31.1 previously. Meanwhile, other confidence barometers showed improvement in December. the region's retail sales grew +1.5% m/m in November, after a -1.1% contraction in October, The market had anticipated a +1.3% gain for the month. On the flip side, factory orders for Germany, the biggest Eurozone economy, contracted -0.4% m/m in November, compared with consensus of a flat reading and a +0.5% gain in October.

For the day ahead, Swiss would release a number of macroeconomic data. Unemployment rate probably stayed unchanged at +3% in December. Retail sales for November probably contracted -2.5% y/y in November, after a -3% decline a month ago. SNB's FX reserve for December would also be released. Separately, the country's headline CPI steadied at +0.8% y/y in December.

 

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