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Yellen Hedges by Suggesting that Inflation Risks are "Two-Sided" Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Fri Jul 14 17 00:29 ET

Crude oil prices continued to recover with both benchmark contracts rising for four days in a row. Apart from profit-taking following the recent selloff, traders took China's import data as positive news. China has become the world's biggest oil importer, buying 8.55M bpd of oil in 1H17, up +13.8% from 2016. Meanwhile, the EIA has downgraded its forecast for US oil production in 2018, suggested in its monthly report. The front-month WTI crude oil contract rose to as high as 46.28 before settling at 46.08, up +1.3%, while the Brent contract was up +1.42% for the day. US equities and Treasury yields rose on mixed interpretation of Fed Chair Janet Yellen's testimony before the Senate. The market appeared to be more confidence after Yellen reaffirmed that the Fed would be flexible over the monetary policy as she told the officials that the "monetary policy wasn't set in stone" and the Fed would assess the low inflation readings of recent months. The gradual pace of stimulus reduction remained appropriate. Wall Street climbed to a fresh record high of 21569 before settling at 21553, up +0.1%, while the S&P 500 index gained +0.2% for the day. Treasury prices fell, sending yields higher, the first time in three days .2-year yields gained +1 point to about 1.36% while 10-year yields added +2 points to 2.34%.

Testifying before the Senate Banking Committee, Yellen indicated that risks from inflation are two-sided, and it was premature to conclude that the underlying inflation trend would continue to fall below the +2% target, despite the slowdown in the price gains in recent months. The Fed chair reaffirmed that "monetary policy wasn't set in stone" and the gradual pace of stimulus reduction remained appropriate. The IMF has downgraded US' GDP growth outlook to +2.1% for both 2017 and 2018, partly due to the loss of hope over Donald Trump's pro-growth promise. At the testimony, Yellen noted that the +3% growth aspiration is “something that would be wonderful if you can accomplish it". She added, however, that “it would be quite challenging".

On the dataflow, US PPI eased to +2% y/y in June, from +2.4% a month ago. This came in better than consensus of +1.9%. The core reading moderated to +1.9% y/y in June, from +2.1% in the previous month. The market had anticipated a lesser slowdown to +2%. Initial jobless claims fell to 247K in the week ended July 8, from an upwardly revised 250K a week ago. Today, the US would report its CPI inflation reading which probably eased to +1.7% y/y in June, from +1.9% in the prior month. The core reading might have stayed unchanged at +1.7% for the month. More macroeconomic data in the US would be released today. Retail sales probably grew +0.2% m/m in June, after contracting -0.3% a month ago. Excluding autos, the reading might have also gained +0.2%, after slipping -0.3% in May. Separately, industrial production probably expanded +0.3% m/m in June, after a flat reading in May. Capacity utilization is expected to have increased +0.2 percentage point to 76.8% in June. The preliminary reading of the University of Michigan index might have slid -0.1 point to 95 in July.

 

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