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Daily Agenda: OPEC Output Soars as Rally Stalls

Oil cartel pays price to win share; German Bunds hit negative yields; Japan lowers GDP and inflation projections; Mayalasia cuts rates.

A report issued today by the International Energy Agency estimated that production levels among members of the Organization of the Petroleum Exporting Countries reached an eight-year high of 33.2 million barrels daily in June. OPEC’s Saudi-led group had driven production levels higher, while U.S. production had declined to less than 12.5 million barrels per day. While OPEC has proven it can successfully defend its global market share, the cost has not been insignificant, particularly after the oil rally stalled in recent weeks. Currently, increased contango for futures curves for both West Texas Intermediate and Brent grade crude makes the case that a market glut remains a problem for producers. Critically, trade data released overnight by China’s General Administration of Customs included a steeper than anticipated 8.4 percent year-over-year decline in June. This news, following yesterday’s S&P Global Platts estimate that Chinese oil demand declined by 2.7 percent in May versus the same month in 2015, suggests that sluggish demand in the largest developing economy may contribute to an overhang in energy commodity markets for the foreseeable future.

German Bund auction garners negative yield. For the first time in history, investors bid German sovereign ten-year Bunds to a negative yield in an auction by the Deutsche Bundesbank. More than € 4 billion worth of ten-year debt was snapped up by investors at the lowest price of 100.48. With unprecedented monetary policy in play at the European Central Bank and ongoing fears that the exit of the U.K. from the European Union will disrupt regional growth, Bunds remain the most favored safe harbor for European investors.

Japan guides lower. On Wednesday Japan’s Cabinet Office adjusted the official 2016 gross-domestic-product forecast sharply downward to 0.9 percent from 1.7 percent. Critically, consumer inflation forecasts were also significantly reduced. The dual impact of a resilient yen and sluggish domestic demand continue to bedevil both the Abe administration and the Bank of Japan. Many analysts now anticipate that the Bank of Japan will announce an expanded quantitative-easing program at the next policy meeting later this month.

Malaysia cuts rates. In a move that surprised markets, Bank Negara Malaysia reduced its benchmark rate by 25 basis points to 3 percent. In the accompanying statement, central bank policymakers indicated that fears over the effect of the U.K.’s departure from the European Union as well as still-sluggish demand signals from emerging Asia had prompted the decision.

CBO predicts higher debt levels. An annual report released yesterday by the Congressional Budget office concluded that total U.S. federal debt may reach 122 percent of GDP by 2040 based on the current trajectory of spending, low growth levels and lower tax revenues. The report also suggests that sustained low interest rates will reduce the impact of this rising debt by lowering carrying costs.

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