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The last trading day is 29 December 2017. Fed funds may be volatile but it often falls on the last day of the year. For the sake of this exercise, let's assume that the effective average on 29 December is half the average of 56 bp. Since it is a Friday, that rate applies to the weekend as well. On these assumptions, the average for the month is a fraction more than 1.03%. Before the weekend, the December 2017 Fed funds futures contract closed at 1.04%.

In her press conference, Yellen will likely deflect any discussion of the new Administration's policies. However, she can be counted to offer a vigorous defense of the Fed's independence against encroachments. Given two current vacancies, the expiration of several governor terms in 2018, the new Administration will have the opportunity to change the Federal Reserve significantly without going through the politically and economically sensitive course of direct confrontation.

Outside of the new Administration's possible economic policies, the reversal of Saudi Arabia's oil strategy may be another factor behind the rise of inflation expectations. Although an agreement within OPEC and between OPEC and non-OPEC producers is also difficult the achieve, the real challenge is the enforcement, as no such mechanism exists. While everyone is well aware of that, our point is that sequence is important and it is too early to worry about violations.

Like many, we seem to have underestimated the Saudi's resolve. Shortly after securing an agreement from non-OPEC members to cut output, Saudi Arabia indicated it was prepared to cut output more than agreed last week. It suggested it would cut output below the psychologically important 10 mln bpd threshold. Not is OPEC not dead, but Saudi Arabia's leadership is significant. Although non-OPEC members will cut 558k barrels, less than the 600k asked for, but it is still the most ever. It is also impressive, that despite Kazakhstan new large oil field coming on line, it also participated by a small cut (20k bpd).

The optics are good and this will likely lift oil prices further. Over the coming months, we suspect there is scope for oil to rise 12%-25% ($57-$65 a barrel basis the January futures contract). That said, the closer one examines the details, the less impressive it looks.  Consider Russia will account for 300k bpd reduction, more than half of the non-OPEC contribution. Russia had boosted its output in recent months as an agreement was distinct, even if unlikely, possibility. There was a post-Soviet Union record 11.247 mln bpd in October. It says that it will cut 200k barrels by March and another 100k bpd in six months.

Saudi Arabia's agreement with OPEC would have brought its output back to its average earlier this year. Several other countries, including Mexico are simply formalizing a natural decline. Important non-OPEC producers, including those in the US, Canada, and Brazil will be the beneficiaries, as free-riders. US capacity, especially the shale component, is very flexible and there are reports of that many wells have been drilled, but the wells have been capped. Consider it a free natural underground storage facility.  

Also, recall that important technological advances have been made over the past two and half years (yes, Professor Gordon, the innovations are not as significant as the internal combustion engine) that lowers the cost of getting that marginal barrel of shale. Assuming that some US producers are skeptical of the implementation of the oil agreement, there may be incentives to boost output quickly to take maximum advantage of what could be a small window of opportunity.

Given last week's ECB meeting and the approaching holidays, European economic data, including the PMIs may not be particularly important. Given the disappointing German and French industrial production figures last week, the risk is on the downside for the aggregate report after a 0.8% contraction in September.

Just like there is no agreed upon definition of QE, there is no agreed upon definition of tapering. Context is important and intent matters. Draghi said it is not tapering as in the beginning of a gradual slowdown of purchases as an exit strategy rather than an abrupt end.  At this point, there are only guesses as to why the ECB reduced its monthly purchases. However, this is a one-off adjustment, unless circumstances change. Moreover, the end date, year from now is soft. The ECB will most likely buy bonds well into 2018.  

The ECB did not begin an exit strategy, which is what many of those who want to insist on calling what it announced as tapering seem to think. The easing of the deposit floor limit on purchases and widening the range purchases suggests a sustainable course. The adjustments to the securities lending may also help minimize disruptions.  The ECB has also not exhausted scope for additional technical adjustments. The decision not to lift the security ownership cap hit Portugal because it is near its cap.

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