NO CHANGE IN THE MONETARY TIMETABLE

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By: Kent Engelke | Capitol Securities

As expected, the Federal Reserve raised its benchmark lending rate a quarter of a point and continued to project two more increases this year. A minority had thought that the committee would suggest three increases as possible in 2017 given sentiment and employment levels.

Because the monetary timeline was left unchanged, stocks advanced and Treasuries surged. The dollar fell and oil rallied.

Commenting on the Treasury market, was the advance fueled by short covering, the result of the committee leaving its 2017 and 2018 forecasts unchanged? All must remember that over 90% of the trading in the Treasury market is the result of algorithmic or technology based activity.

One can make the case because of the strong advance in Treasuries, more than a minority expected the Fed to change its monetary policy timetable and expectations.

As also indicated, oil gained over 2.25%, the result of a falling dollar and inventory levels. Inventories have been growing over the preceding weeks, growth I believe was the result of OPEC’s decision to pump all out in the months leading to the January 1 production cut.

I had verbally commented that inventories may be on the verge of declining because it historically takes about 45-60 days to ship the oil once pumped, thus suggesting the current production glut is in its final hours. The International Energy Agency (IEA) echoed a similar view Tuesday evening.

I also verbally remarked about falling super oil tanker rates, down about 45% from January 1, the result of empty tankers sitting idly with no charter rates. For about 30 months, tanker rates were achieving consecutive record highs, the result of strong demand from OPEC countries. Are falling tanker rates a harbinger of falling inventories? Logic and history suggest yes.

What will happen today?

Last night the foreign markets were up. London was up 0.92%, Paris was up 0.67% and Frankfurt was up 0.84%. China was up 0.84%, Japan was up 0.07% and Hang Sang was up 2.08%.

The Dow should open nominally higher. Oil is up on inventory drawdowns, the FOMC’s dovish message and a pro-European victory in the Netherlands. The 10-year is off 8/32 to yield 2.52%.

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