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FOMC delivers a hawkish hold. On Thursday, the FOMC expectedly kept its policy on hold. However, the Fed seems to be on track for a 25bp rate hike at the 18-19 December meeting. The FOMC statement noted that “economic activity has been rising at a strong rate” and “job gains have been strong”, with the unemployment rate declining. The FOMC “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity”ю Although the Fed acknowledged that business fixed investment has “moderated from its rapid pace earlier in the year”, the central bank still sees risks to the economy as roughly balanced.

A split Congress and its implications. The US midterm elections, held on Tuesday, yielded a split Congress, proving that the consensus view was right. The Democrats flipped the House, while the Republicans retained the Senate. The immediate reaction of the equity markets was positive. Incidentally, a post-election rally has been the consistent outcome since 1946. As for the practical implications, the Democrats are now likely to proceed with more investigations against President Donald Trump, and we cannot rule out impeachment procedures being initiated. Trump is secure in the Senate however where a two-thirds majority is required for impeachment. As far as the US economy is concerned, the fiscal stimulus peaks this year in terms of its impact on US GDP and through the course of 2019, the impact gradually fades. This, together with the effects of a tighter monetary policy, points to slower GDP growth in 2019 after a bumper year in 2018, where there have been GDP growth rates of 3-4%.

Iranian sanctions waivers. On Monday, the US formally imposed sanctions on Iranian crude exports. However, the US granted eight countries (China, India, Italy, Greece, Japan, South Korea, Taiwan and Korea) temporary waivers, damping concerns over a supply crunch and sending oil prices to their lowest in three months. China and India are Iran’s two top oil clients. The US Secretary of State Mike Pompeo said that the move was aimed at keeping crude prices stable and dismissed suggestions that the US was being lenient to Iran or that the White House failed to take a hard line without European backing. Pompeo noted that the above-mentioned countries had already agreed to significantly reduce Iranian oil imports in the coming weeks. Furthermore, top European oil companies are rejecting the EU efforts to protect Iranian crude exports from US sanctions, as there are no guarantees that they would be shielded from the US penalties. The EU together with Russia and China plan on setting up a special payments channel for Iran to facilitate trade with the country, circumventing the US restrictions.

Italian budget concerns continue. On Thursday, the European Commission released downbeat forecasts for Italy. The report shows economic growth of 1.2% in 2019 vs. Italy’s forecast of 1.5% and budget deficit widening to 2.9% in 2019 and 3.1% in 2020, violating the bloc’s limit of 3%. This triggered a strong response from Rome. Italy’s Economy Minister Giovanni Tria brushed off the numbers as coming from an “inadequate and partial analysis”, ignoring “clarifications provided by Italy”. The minister reiterated that the government was committed to respecting a maximum deficit of 2.4% for 2019. This signals further deadlock between Rome and Brussels ahead of the deadline for Italy to submit its revised budget plan by 13 November.

9 November 2018

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Oil Sector – US crude oil production hike, of 8 November, by Dmitry Loukashov et al

Morning Miner - 7 November, by Dmitry Glushakov at al

Morning Miner - 9 November, by Dmitry Glushakov at al

Week Endnotes

Also in the news

According to the US Energy Information Administration (EIA), the US crude oil production estimate for the week ending 2 November increased 0.4mmb/d week over week to 11.6mmb/d, the highest level ever. Therefore, according to the EIA data, the US has become the largest crude oil producer in the world, outpacing Russia. Crude production in Russia reached 11.36mmb/d in October.

China's final 2018-19 winter steel capacity cuts roughly match last years' figure of 40mnt, according to SBB, with less strict curbs in the major steelmaking hubs compensated by new areas. This is largely below our updated expectations incorporating flexible cut rates in different regions, as some mills were given exemptions as they meet ultra low emission standards. We think this might further pressure steelmaking margins in the short term, and hence decrease the high quality iron ore premium.

China car sales fell 12% YoY to 2.4mn units in October, according to CAAM, the second consecutive month of a double-digit drop. In 10mo18, sales are already flat YoY, which undershoots our estimates for FY18. However, we think car sales dynamics in China largely depend on whether the country introduces car purchasing tax cuts from 10% at present to the 5% that the authorities considered earlier. PGM demand, as such, might come below our FY18 forecasts as automotive demand for catalysts from China accounts for ca. 30% of global palladium demand and ca. 3% of platinum demand. However, we think that the palladium market is still in deep deficit and do not expect even such a slowdown to lower it significantly. Meanwhile, China new EVs sales were up 51% YoY in October, according to CAAM, largely maintaining the growth pace of the last several months. In 10mo18, EV sales gained 77% YoY, ahead of our FY18 forecast.

9 November 2018

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