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US Entangled by Domestic Politics; BOC Meeting in Focus Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Wed Jul 12 17 00:37 ET

US economic policies have been overshadowed by domestic politics since Donald Trump's inauguration as the president. The latest development is that his eldest son, Donald Trump Junior, released an email chain referring to a meeting held with a Russian government lawyer. Wall Street slipped after the news but losses were pared later in the day as the Senate agreed to delay the start of the August recess for two weeks, so as to progress with more legislation. It aims at voting on the healthcare bill next week The DJIA climbed +0.55% higher at close while the S&P 500 index was down -1.9% for the dat. Treasury prices rose, sending yields lower, ahead of Fed chair Janet Yellen's testimony. 2-year and 10-year yields dropped -2 points, ending the day a 1.375% and 2.37% respectively. Unless there is abrupt reversal of the recent growth momentum, the Fed would proceed with one more rate hike later this year. However, the monetary policy, as well as the schedule of the balance sheet reduction, in the coming year is more uncertain. Although the government decides to look through the weak inflation in the short-term, many market participants begin to worry that its weakness might persist. The US growth prospect is also questionable. Indeed, the IMF has recently downgraded US GDP growth forecasts to +2.1% for this year and 2018, from previous estimates of +2.3% and +2.5% respectively. The Fund noted that the loss of hops on Trump's pro-growth promise as the key reason for the downgrades.

Staying in North America and in monetary policy outlook, the focus is on BOC's meeting today. The market has almost fully priced in a rate hike of +25 bps at the meeting. Rate hike speculation jumped last month after Governor Stephen Poloz suggested that previous rate cuts have done their job and discussions of a rate hike is appropriate. Poloz's comments in a German newspaper, Handelsblatt, last week only intensified such hopes. While admitting that inflation has remained soft, Poloz added that, "if we only watched inflation and reacted to inflation, we would never reach our inflation target, we'd always be two years behind in the reaction". Therefore, the central bank would "look at the rest of our indicators in the models that predict inflation". Poloz also shrugged off the impacts of low oil prices on Canada's inflation outlook, noting that oil prices at levels between US$40- 50/bbl are "not a big issue" for now.

Crude oil prices continued to move below US$50/bbl despite modest recovery. The industry-sponsored API estimated that US crude oil inventory slumped 8.7 mmb in the week ended July 7. For refined oil products, gasoline stockpiled dropped -0.8 mmb, while distillate gained +2.1 mmb for the week. The DOE/EIA report probably shows a -2.85 mmb decline in crude oil inventory. Gasoline and distillate stockpiles probably gained +1.15 mmb and +1.13 mmb, respectively.


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