Ole Hansen
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Article / 03 August 2016 at 9:44 GMT

Daily Shot: Another slide in oil Team / Saxo Bank
  • A change in bond buying by the ECB could lead to moral hazard
  • Rate hike chance for the US this year is down to 40%
  • US inflation remains benign
  • NYMEX crude futures are trading clearly below $40/bbl
  • Bitcoin fell more than 20% on Tuesday
By Walter Kurtz*

Much is spoken about the trouble European banks are in (see for example today's From the Floor). Now, instead of talking more about commercial banks, let's look at the European Central Bank. Its balance sheet continues to expand to new highs. Many anticipate the ECB to announce a change in the bond purchases proportions - increasing Italian and Spanish debt buying. Can this introduce a moral hazard, reducing pressure on these governments to control spending?
ECB balance sheet separator

1. In the United States, futures markets are telling us there is less than a 40% chance of a rate hike this year. The chart below shows the probabilities of different outcomes over time (courtesy of our friends at Bloomberg LP).  
US rate hike ahead?
2. Fed's Kaplan said the FOMC wants to see materially more than 125k new jobs created per month. This Friday's employment report will be critical (180k new payrolls expected). 

3. The US consumer is still keeping the economy afloat as consumer sales beat forecast. 
4. US inflation (as measured by the PCE index) remains benign. 
PCE separator
1. Switching to the energy markets, NYMEX crude futures are trading comfortably below $40/bbl. 
NYMEX crude futures
2. Crude oil imports have risen by less than production has fallen. Should we start seeing inventories easing soon? 
crude imports
3. The recent peak in crude prices coincides with the bottom for the US oil rig count (discussed Monday). 
crude prices
4. US average retail gasoline price continues to decline which should be helping US households. 
US retail gasoline
5. The next two charts from Credit Suisse show that the gasoline glut is a supply issue. 
gasoline glut
6. Ethanol futures are following corn and gasoline prices lower.
In asset management, here is an excellent visualization from the WSJ on what it takes to get a 7.5% (targeted) return. This trend is a serious challenge for insurance firms who have much higher capital charges for holding some of the riskier assets. Clearly, it is also a significant problem for pension funds with minimum asset return requirements needed to meet their obligations. 
7.5% return, but how
College endowments are posting the worst returns since 2009 as a result of the recent weakness in international markets (and in some cases poor performance in alternatives).
college endowment
Finally, bitcoin traders hit their panic button on Tuesday as the cryptocurrency fell below $500 (a 20%+ decline). A major bitcoin exchange was breached and the rumor is that some 100k bitcoin (about $54mm) was stolen (h/t ‏@raoul_wade). A buying opportunity? 
Turning to Food for Thought, we have 4 items today:

1. According to McKinsey, France narrowed its wage gap while in the US and the Netherlands "inequality" has grown. Of course, French unemployment rate is 10.5% while it is 7% in the Netherlands. 
wage gap internationally
2. Union membership declined globally except in Italy and it remains exceptionally high in Sweden
Union membership globally
3. The percentage of households with flat or falling income.
falling incomes
4. Nations with the best and worst literacy and numeracy rates. 
 — Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.


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