NYMEX crude recovered nearly $1/bbl to $28.73 highs overnight

February 11, 2016

FX News Today

Fed Chair Yellen said policy is not on a preset course and is data dependent, in her prepared testimony. She expects the economy to warrant only gradual rate increases. Some slack remains in the labor market, but it continues to show solid improvement. Job and wage gains should support spending going forward. Financial conditions have become less supportive of growth and they could weigh on the outlook if they persist, she said. Additionally, there are risks from economic developments abroad, she acknowledged. She specifically noted uncertainty over China’s FX policy and consequently the prospects for growth as a factor behind the drop in oil and other commodity prices, adding that could trigger financial stresses in vulnerable commodity exporting countries. There was one small sentence on the risks that growth could exceed expectations. Meanwhile, inflation should remain low over the near term but she held on to the view the rate will pick up to the 2% objective over the medium term. The general tone is pretty much as expected and she hasn’t given anything away over the likely timing over the next rate hike.

NYMEX crude recovered nearly $1/bbl to $28.73 highs overnight, with prices helped by reports that Iran would be willing to negotiate with Saudi Arabia to curb production. Following the IEA’s assessment of the market on Tuesday, where it said oversupply would continue through 2016, the modest rally may be short lived. Crude spiked up briefly to $29.20 from $28.10 following the EIA inventory data which showed a 750k bbl fall in crude stocks. The street had been expecting a 3.5 mln bbl increase. The market quickly sold into the rally, resulting in a return to $27.92 lows. Meanwhile, gasoline supplies, seen up 1.0 mln bbls actually rose 1.3 mln bbls, while distillate stocks were up 1.3 mln bbls, versus expectations for a 1.0 mln bbl fall. Refinery usage fell to 86.1% from 86.6%.

US MBA mortgage market index surged 9.3% in data released earlier, along with an 0.2% rise in the purchase index and a 15.8% jump in the refinancing index for the week ended February 5. The drop in the average 30-year fixed mortgage rate by 6 basis points to 3.91% certainly didn’t hurt, as it marked the lowest level since April of 2015. Rates fell last week as Chinese equities resumed their volatile ways and the PBoC was forced to intervene on the offshore yuan again. That was followed by a weak headline payrolls report, which was underpinned by its components.

Main Macro Events Today

Fed Chair Yellen’s Testifies. Yesterday there were no major tape bombs or curve balls from Fed Chair Yellen; neither in her semi-annual Monetary Policy Report to Congress, nor in Q&A. Indeed, she didn’t give anything away in terms of the timing of the next rate hike. Today markets look forward for further clarification and details on the Fed’s future policy.

RBA Governor Glenn Stevens’ Speech. In the February 2nd meeting governor Stevens was largely constructive on domestic growth, saying that the expansion in the non-mining parts of the economy strengthened in 2015 while GDP was below average. Inflation is expected to remain low over the next year or two. Accommodative policy is appropriate, he said, given these conditions.

US Unemployment Claims: are due today and are expected to remain pretty much unchanged with a small uptick to 287K from last week’s number of 285K.

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