True
to the historic pattern, the US debt ceiling was used by the party not in
control of the executive branch to exact spending concessions. Despite the
extreme partisanship, the brinkmanship tactics, and fears that this time would
be different, there was no default. As Bismarck once quipped, "Laws are
like sausages and it is best not seen them being made." Still, as a
consequence, the rebuilding of the Treasury's account and bill issuance is seen
tightening financial conditions, while the end of the moratorium on student
loan servicing and spending cuts point to a coming fiscal drag.
The
Federal Reserve's leadership seemed to have been on a purposeful campaign to
indicate that it wanted to standpat at the June 13-14 FOMC meeting and the
market accepted the push back. The odds of a hike fell from near 70% to around
25% before the May jobs report (and finished the week near 25%). For the 14th
consecutive month, job growth exceeded expectations (median forecast in
Bloomberg's survey). However, the establishment survey was considerably
stronger than the household survey (339k vs. -313k) leading to a sharp rise in
the unemployment rate (3.7% vs. 3.4%). The constructive explanation of the divergence offered by the White House was that it was a definitional issue and if the establishment survey definition held, the household survey would have shown a 394k increase. The more pessimistic explanation was the the establishment survey was flattered by the birth/death rate adjustment (the start and closure of businesses) that added about 230k to the job growth. The Fed has entered the quiet period
ahead of the next FOMC meeting so if post-jobs data guidance is to be forthcoming,
it may come from their favorite journalists.
The
week ahead highlights include Australia and Canada central bank meetings. Even
if neither hike rates, the rhetoric may turn more hawkish as officials prepare
for a possible hike in Q3. China's trade data is politically sensitive, but a
larger trade surplus is likely even though exports had been contracting on a
year-over-year basis from last October through February. After increasing in
March and April, exports likely fell again in May. Weak price pressures may encourage
speculation of a rate cut or a reduction in reserve requirements later this
month. Lastly, we note July WTI rallied from $67 on May 31 to nearly $72.20 before the weekend to adjust positions for the possibility that a few OPEC countries voluntary extend their cuts, apparently to make room for the extra production coming from , Iran, and Venezuela.
United
States: The data cycle is in between the employment and inflation. The highlights include ISM services and April consumer credit. Most
of the information from the PMI is found in the flash reading and the final
services and composite elicit little market reaction typically. The same can be
said for factory orders and the final durable goods estimate. The merchandise
trade balance, reported in late May, anticipate the deterioration of the
overall balance in April. Goods exports softened while imports rose, and
although this cut net export component to Q2 GDP, the strength of imports
suggest robust demand. On the other hand, April consumer credit may have
expanded near the Q1 average (~$21.6 bln), but it appears to be on a slowing
trend. It rose at an average of $30.4 bln in Q1 2022 and in April last year, it
rose by $28.9 bln.
Our
working hypothesis sketched out in the monthly outlook (here )that
bulk of the interest rate adjustment is behind us. It had been a key driver for
the dollar's recovery since mid-March and by implication, it too is over or
nearly so. We did not expect the Fed's Governor Jefferson, nominated to be
vice-chair would push against creeping rate hike expectations for June. But he
pushed on an open door, as it were, with the US two-year yield off around 20 bp
from its peak on May 26 before Jefferson spoke. Still, the reaction to the employment report saw the two-year yield snap a three-day slide and jump more than 15 bp to 4.50%. The two-and-a-half month high was set on May 26 near 3.64%. The post-debt ceiling resolution is seen tightening financial conditions as T-bill issuance is boosted starting this coming week. We suspect
that this year's growth is peaking here in Q2, and that the headline CPI may fall
toward 3.5% by the end of H1. The base effect will make comparisons in
H2 more difficult.
The
Dollar Index reached a 104.70, a 12-week high on May 31. It was sold to 103.75
before the jobs data. The post-jobs rally stalled near 104.10 A move above 104.20 would help lift the technical
tone. We expect the bounce to be sold especially as the May CPI moves into view
(June 13), but a marginal new high (~105.00?) cannot be ruled out.
China: China
holds the most currency reserves in the world with a little more than $3.2
trillion in April. Most of the recent month-to-month changes reflect valuation
adjustments. In May, the decline in the exchange rates of the other reserve
currencies against the dollar and the mixed performance of global bonds seems
broadly consistent with around a $50 bln decline in the dollar value of China's
reserves in May. The PRC also reports May's trade surplus. In the first four
months of this year, China recorded a cumulative trade surplus of slightly more
than $294 bln. The trade surplus in the first four months of 2022 was a little
less than $203 bln. Despite the improvement from a year ago, which was
adversely impacted by Covid lockdowns, exports and imports fell in April
(month-over-month, -6.4% and -9.8%, respectively). While the trade balance is
politically sensitive, disinflation may be more significant for the policy
outlook. China's CPI peaked at 2.8% last September and in April was at a
two-year low of 0.1%. The soft CPI is often attributed to weak demand but that
seems to be an exaggeration given the high weighting of food in the basket. Also,
the excess capacity in some industries, like autos, has spurred a bit of a
price war, which also dampens some goods price pressures. The year-over-year
measure in producer prices turned negative in Q4 22 and has accelerated to the
downside this year. In April there were off 3.6%, the most since Q1 2016. Weak
prices may fan speculation of a cut in rates and/or reserve requirements as
early as this month. Targeted fiscal measures may also be under consideration,
according to press reports.
The
dollar's gains after the jobs report suggests the yuan will begin the new week
under some pressure. The dollar rose to around CNY7.1235 on June 1, a new high
for the year, before falling to CNY7.0560 before the jobs data. It settled the week near CNY7.0880, but the dollar's subsequent price action suggest the yuan will start of the new week on a soft note. One of the best
guides for the dollar's direction against the yuan is its performance against
the euro and yen.
Japan: Japan's
retail sales appear to be doing fine and have risen for five months in a row
through April. On the other hand, real household spending has bene weaker
falling in March (-0.8%) and February (-2.4%). Nominal spending fell too (-0.6%
in March and -2.8% in February). Note that real cash earnings (labor) have been
falling on a year-over-year basis since April 2022, while nominal earnings rose
a 1.3% year-over-year in March, after a 2.0% increase year-over-year in March
2022. Real consumption rose by 0.6% in Q1, according to the initial GDP
estimate (that will be updated on June 8), which was the strongest in three
quarters. Stronger-than-expected capex in Q1 warns of the risk that Q1 GDP
could be revised higher. Japan's external account does not draw the same
attention it previously did. Japan enjoys a current account surplus of around
2% of GDP but has reported a trade deficit on a balance-of-payments basis since
August 2021 with one exception. Seasonal factors are strong in April and the
trade balance almost always (18 of 20 years) deteriorates in April from March.
The deficit stood at JPY454.4 bln in March.
If
our assessment is valid and the US interest rate adjustment is nearly complete,
then the pressure may come off the exchange rate, which has seen the yen fall
its lowest level since last November. After falling for 12 of 15 sessions
through May 26, Japanese officials stepped on a low rung of the intervention
ladder, expressing the desire that rates reflect fundamentals (whatever that
really means) and threatened "appropriate steps if needed." The
timing of Japanese officials is inspired like when they intervened within days
of the peak in the US 10-year yield late last October. After falling in the
first four sessions last week, reaching JPY138.45 on June 1, the dollar rose
back toward JPY140 after the employment data and rise in US rates. A move
above the targets a re-test on the JPY140.95 high. The next important chart area is around JPY142.50. In the bigger picture,
the dollar still appears to be carving out a top.
Eurozone: April
retail sales is the main new news on the economic front in the days ahead. Retail
sales look likely to have bounced back after falling 1.2% in March and 0.2% in
February. This coupled with another look at Q1 GDP is unlikely to move the
proverbial needle ahead of the ECB meeting on June 15. The swaps market is
pricing in slightly more than a 90% chance of a quarter point hike at the
meeting, which will also see the staff update its forecasts. The market leans
strongly toward another hike in July and it is fully discounted at the
mid-September meeting. The US two-year premium over German has risen from near
112 bp in late April to 170 bp last week and we expect it to stall shortly
(~180 bp).
The
euro rallied from $1.0635 in the middle of last week before rallying to almost
$1.0780 ahead of the employment data. The jump in US rates helped cap the euro
and send it back a to almost $1.0700. Initial resistance at the start of the new week may be encountered near $1.0730. On the downside, a break of the $1.0690 area would mean more back-and-filling is necessary to forge a solid base, which
the momentum indicators suggest is forming.
United
Kingdom: The UK has a light economic calendar in the week ahead
outside of the final service and composite PMI. The May construction PMI offers
fresh news. It has been above the 50 boom/bust level since February. It was
stuck at 48.8 last December and this January. Reports suggest the Prime
Minister is considering "voluntary" price controls and is looking at
the French arrangement (announced in March and has been extended from June to
continue through September). Under the French plan, supermarkets identify items
(staples) that will be subject to a price freeze or even cuts. Reports suggest
that often products of the store's own brand are identified.
Sterling
recovered from about $1.2310 on May 25-26 to reach $1.2545 ahead of the US
employment data. This met the (61.8%) retracement of the decline from the
year's high on May 10 (~$1.2680). The pullback ahead of the weekend snapped a
five-day advance, the longest of the year. It tested the $1.2440-50
support band. Nearby support is seen around $1.2400. The momentum indicators have turned higher and suggest that buyers may re-emerge on the pullback.
Canada: There are two
highlights in the coming week. First, on June 7, the Bank of Canada meets. It
adopted a "conditional pause" back in January and that is increasingly
being challenged by stronger than expected data and sticky inflation. Canada's
3.1% annualized growth in Q1 was the fastest in the G7. April's 0.7% rise in
headline CPI was well above expectations and brings the annualized rate in the
first four months of the year to 6.3%. In the last four months of 2022,
Canada's CPI rose at an annualized rate of almost 1%. The swaps market shows
about a 30% chance of a hike this week up from less than 10% in early May. As
recently as May 12, the market was pricing in nearly 50 bp in cuts before the
end of the year and now it is nearly fully reflected a 25 bp hike. Second, on
June 9, Canada reports May employment. The Bank of Canada meeting and statement
may make for a minimal market reaction to the jobs data. In the January through
April period, Canada created almost a quarter of a million jobs, of which 165k
were full-time posts. The unemployment rate has stood at 5.0% since last
December. At the end of 2019, it was at 5.6%. The participation rate was at
65.6% in March and April. It was at 65.8% in December 2019.
The
US dollar reversed lower from the mid-week test on CAD1.3650, the upper end of
its two-month trading range. It held CAD1.3400 before the US jobs data and
bounced to CAD1.3450. Additional resistance is near CAD1.3465, but the
CAD1.3500 area is more important. The daily momentum indicators have turned
down, though CAD1.3400 offers solid support.
Australia: The
Reserve Bank of Australia meets on June 6. Inflation and inflation expectations
were stronger than expected and have encouraged investors to look for another
hike, even if not immediately. Expectations have swung from a small chance of a
cut to about a 1-in-4 probability of a hike. Moreover, a quarter-point hike is
nearly fully discounted for the August 1 RBA meeting. In the past month, the
year-end rate implied by the futures market has risen from about 3.55% to above
4.0%. Indeed, it has risen for the past five consecutive weeks. The day after
the RBA meets, Australia reports Q1 GDP. The median forecast in Bloomberg's
survey is for a 0.4 quarterly expansion, lifted by household consumption and
net exports. Australia's trade surplus jumped to A$40.2 bln (~$27 bln) in Q1
from A$29.3 bln in Q1 22. The April trade balance will be reported June 8.
The
Australian dollar set the low for the year at the of May slightly below $0.6460.
It staged an impressive two-day rally that lifted it almost two cents. It
stalled after the US jobs report but found new bids in the knee-jerk sell-off
that to back to nearly $0.6600, the bottom of the old two-month trading range.
The momentum indicators turned higher, and the technical tone looks
constructive. A move above $0.6640 signals a re-test on the $0.6700, the middle
of the previous trading range and 200-day moving average (~$0.6695).
Mexico: Neither May's
CPI nor April's industrial production figures are likely to lead to the central
bank to reconsider the pause announced at the May meeting. Headline CPI (June
6) may slip toward 6%, which would be the lowest since September 2021. The core
rate may moderate as well. It could slow toward 7.4% from nearly 7.7% in April.
It would be the fourth consecutive monthly moderation. Although Mexico's
economy expanded by 1% quarter-over-quarter in Q1, and auto production was
strong (+44.5% in Q1 to 346.1k vehicles, the most in a quarter since Q1 19),
the monthly industrial output showed a net decline (~-0.4%) in Q1. The nearly
0.90% decline in March was the largest since September 2021. A modest recovery
should not be surprising. Separately, note that on June 4, there is an election
in the most populous state, Mexico State. In addition to its importance in its
own right, it will see a test for of the strength of the ruling Morena Party,
which was founded by President AMLO. The incumbent Gomez from the Morena Party
is running well ahead of her rival in polls.
The
dollar fell to a marginal new seven-year low against the Mexican peso after the
US jobs report, edging fractionally closer to MXN17.42. The broader recovery of
the US dollar and jump in US rates helped it recover against the peso. It settled the band of congestion seen earlier in the pre-weekend session between MXN17.50
and MXN17.55. It can rise toward MXN17.65 without improving the technical
outlook. The momentum indicators are falling since the greenback approached
MXN18.00 on May 23. The lower Bollinger Band is near MXN17.3880. The price
action suggest that new dollar lows are being greeted with some profit-taking
amid what has been a crowded trade. Surveys suggest international fund managers
are overweight Mexico, and speculators it the currency futures have the largest
net long peso position in three years. Below the MXN17.40 area, it is difficult
to see meaningful chart support until closer to MXN17.00.
Overview: Another bizarre US debt-ceiling episode is over. President
Biden will sign the bill that was approved by the Senate late yesterday. It is
a bit anticlimactic for the market, for which the US jobs data is the key focus
now. Outside of the fiscal drama, the Federal Reserve leadership has
effectively push against market expectations for a hike later this month. The
odds were around 70% earlier this week, and ahead of the jobs report, is near
30%. The dollar's three-week rally has been snapped. It is sporting a softer
profile ahead of the data and is lower against all the G10 currencies. It is
also weaker against nearly all the emerging market currencies today, with the
notable exception of the Turkish lira and Hungarian forint. The Chinese yuan is
posting its first back-to-back gain in a month and its 0.55% gain, if
sustained, would be the largest in more than two months.
Asia Pacific equities rallied, led by a
dramatic 4% gain in HK and mainland shares that trade there. All the large
bourses were higher. Europe's Stoxx 600 is up 1% and US futures have a firmer
bias. European benchmark yields are mostly 2-3 bp higher today, but Italian
bond yield is flat. The 10-year US Treasury yield is almost two basis points
higher at 3.61%. The weaker dollar is helping gold extend its recovery from
around $1932 on Tuesday to $1983.50 today. It is poised to snap a three-week
decline. Ahead of the weekend OPEC meeting, the July WTI is pushing higher.
It reached a three-day high near $71.55 before steadying. The week's low was
set Wednesday near $67.
Asia Pacific
China's Caixin services and composite PMI
will be reported early Monday in Beijing. Yesterday, Caixin's manufacturing PMI unexpectedly
ticked up. Might the service PMI surprise too? The median forecast in
Bloomberg's survey is for a decline to 55.2 to 56.4. It was at 57.8 in March,
the highest since November 2020. China may also report May reserve figures.
Based on valuation shifts, a decline of around $50 bln seems reasonable.
Early Monday, Japan and Australia's final
services and composite PMI will be reported. Japan's service PMI has risen for six consecutive months through
the preliminary May reading of 56.3, a record high. The re-opening of Japan
post-Covid and the return of tourism has given the economy an added boost. A weak
yen and a restoration of flights in East Asia are helping, as well. The flash
estimate put the composite at 54.9 (from 52.9 in April). Given the small
decline in the final manufacturing PMI (from the flash estimate), if the
services PMI is not revised higher, the composite will slip. Unlike in Japan,
Australia's manufacturing PMI was revised higher (to 48.4 from 48.0 preliminary
estimate). The initial estimate of the services PMI was that it unwound a chunk
of April's surge (from 48.6 to 53.7, the largest rise in a little more than a
year). The initial estimate showed the composite tracking the service reading,
falling to 51.2 from 53.0, which was a jump from March's 48.5. The central bank
meeting is next week's highlight for Australia. The firmer inflation has
boosted ideas that the RBA, which paused, is not done raising rates. The
futures market prices in about a 33% chance of a quarter-point hike next week.
A week ago, it was perceived to be practically no chance of a hike.
The dollar's four-day decline against the
yen is at risk today. The dollar
settled at the end of last week near JPY140.60 and recorded a low yesterday
near JPY138.45 before closing at JPY138.80. It is in a JPY138.60-JPY139.10
range today. The key driver is the US 10-year yield and its reaction to the US
jobs data. There are options for $640 mln at JPY138.25. The dollar's rally that
carried it from dip below JPY130 (March 24) to almost JPY140.95 earlier this
week looks over and we expect a bounce in the dollar (that could extend to
~JPY139.50) will be sold. After falling to a new low for the year
earlier this week (~$0.6460), the Australian dollar has rebounded smartly and
is setting a new 8-day high in the European morning near $0.6635 and piercing
the 20-day moving average. It has nearly retracement half of the decline
since the May 10 peak near $0.6820. A move above $0.6640 targets the
$0.6680-$0.6700. The generally softer US dollar spilled over to activity
against the Chinese yuan. The greenback snapped a three-day rise yesterday
with a minor 0.15% decline. The move gained steam today and the dollar is off
about 0.55% and is below CNY7.06. The dollar's pullback today is the most since
late March. For the third consecutive session, the PBOC set the dollar's
reference rate below expectations (CNY7.0939 vs. CNY7.0948, the median
projection in Bloomberg' survey.
Europe
Europe's final May PMI will be reported
early Monday. Similar to China,
but for different reasons, after a strong start to the year, the eurozone
economy appears to have stalled. The manufacturing PMI rose in
November-January, but has fallen since, and has not been able to grow (above
50) since last June. The services PMI improved from December through April
before slipping in May (preliminary 55.9 vs. 56.2). The composite spent H2 22
below 50 and reached 54.1 in April, before slipping in May. The preliminary
reading of 53.3 was a three-month low. The UK's manufacturing PMI fell for the
three months through May. It has not been above 50 since last June. The service
PMI has been climbing higher in a sawtooth pattern, alternating between gains
and losses. It rose to 55.9 (from 52.9) in April and the preliminary reading
for May slipped to 55.1. Reflecting the weakness in manufacturing, the
composite PMI pulled back more than services in May (53.9 vs. 54.9).
There is a risk that later today, S&P
could cut its rating for French credit from AA, given its negative outlook and
Fitch's downgrade to AA- in April. Fitch
cited the high government debt and the dim prospects for future reforms after
the strong (and violent) public push back against the recent pension reforms.
The question is not if S&P should downgrade France, clearly the fiscal
health has deteriorated, but whether it matters. Operationally, for the ECB,
the highest rating is what counts and DBRS and Moody's have maintained their
rating of AA. Also, the French premium over Germany on 10-year yields is
unchanged around 55 bp since Fitch's announcement. The two-year differential is
also virtually unchanged a little below 20 bp. Separately, Fitch is
reviewing UK AA- credit rating today. It has a negative outlook. S&P
has the UK as an AA credit with a negative outlook. Moody's sees it as an AA- credit
and also has a negative outlook.
The euro bottomed Wednesday near $1.0635,
and it reached almost $1.0780 today. It
is in a narrow range of about a fifth of a cent, mostly above yesterday's close
(~$1.0760). Nearby resistance is seen in the $1.0800-30 area. The daily
momentum indicators have turned higher and month-long slide (from nearly $1.11
on April 26) appears complete. A break of $1.0725 now would be disappointing. Sterling
is rising for the sixth consecutive session today to reached $1.2545. It
has retraced (61.8%) of its losses from the May 10 high (~$1.2680) to last
week's low (~$1.2310) near $1.2540 today. The five-day moving average looks set
to cross back above the 20-day moving average early next week. It is holding in
a quarter-cent range (~$1.2520-$1.2545) ahead of the US jobs report. A break of
$1.2450 would be disappointing.
America
Most of the recent string of reports,
albeit different covering different elements and time periods, were stronger
than expected, speaking to the ongoing resilience of the US labor market. Still, at the same time, below the surface, it does
appear the tightness of the labor market is easing. Job growth is slowing on a
trend basis. Year-to-date, nonfarm payrolls has risen by 1.14 mln. In the first
four months last year, the US created almost 1.94 mln jobs. Or consider that
the three-month moving average fell to 222k in April, the lowest since January
2021. If the median in Bloomberg's survey is accurate (195k), the three-month
moving average is likely to have fallen toward 200k in May. The unemployment
rate has stopped falling and has bouncing between 3.4% and 3.6% for six months.
Average hourly earnings rose by 0.5% in April. This seems a bit of a fluke and
was the highest since last July. A reversion back to the recent average of 0.3%
could see the year-over-year rate ease back to 4.3% where it was in March from
4.4% in April. The average year-over-year pace this year has been 4.5% compared
with 5.7% in the Jan-Apr 2022 period.
Amid talk of foreign central bank demand
for Treasuries drying up, we looked at the Fed's custody account for foreign
central banks. During the last
nine weeks through May 31, foreign central banks have bought US Treasuries
every week without fail. During this buying spree, the longest since April-June
2020, they have bought more than $110 bln. At $2.986 bln, the holdings are the
largest since last September. The Federal Reserve also offers custody service
for the Agency securities as well. Over the past two months, they have risen
slightly (~$2.3 bln).
The Canadian dollar is extending its gains
today. The US dollar peaked in
the middle of the week near CAD1.3650, just shy of last week's high has
approached CAD1.3405 today. Coming into today, the greenback has fallen in four
of the past five sessions. A break of CAD1.3400 could signal a test to the low
of end of this year's range (CAD1.3260-CAD1.3300). The intraday momentum
indicators suggest a bounce is likely in early North American activity and
initial resistance is in the CAD1.3450 area. Note that in a soft US dollar
environment, the Canadian dollar often lags on the crosses. Meanwhile,
the greenback made a new two-and-a-half week low near MXN17.5150. Recall
that the multi-year low was set in mid-May near MXN17.42. Mexico State, the
more populous state holds elections on Sunday. It is likely to confirm that
AMLO's Morena Party is the force to be reckoned with in next year's general
election. Mexico touches on several key investment themes, including high
interest rates and near-shoring/friend-shoring. The peso is the strongest
currency in the world so far this year, appreciating about 11.3%.
June is a pivotal month. The US debt-ceiling
political drama cast a pall over sentiment even if it did not prevent the
dollar from rallying or the S&P 500 and NASDAQ from setting new highs for
the year. It is as if the two political parties in the US are playing a game of chicken
and daring the other side to capitulate. Both sides are incentivized to take to
the brink to convince their constituents that they secured the best deal
possible. No side seems to really want to abolish the ceiling because it has
proven to be an effective lever for the opposition to win concessions over the
years. Still, a higher debt ceiling and some reduction in spending in the FY24
budget are the middle ground.
Many think that this time is different. The partisanship, they say, is so
extreme that a default is possible. They can point to severe distortions in
the T-bill market and the elevated prices to insure against a US default
(credit default swaps). Neither side can be sure it will not be blamed for a default's expected and unexpected consequences. The risk of playing
chicken is that neither driver swerves at the last minute. There are only downside scenarios in a default situation, even if it lasts for a short
term and no bond payment is missed. On the other side of the debt ceiling, bill
issuance will rise, and the Treasury will rebuild its account held at the
Federal Reserve. This could drive up short-term rates and reduce liquidity.
In addition
to fiscal policy, a monetary policy drama is also playing out. The
Federal Reserve began hiking rates in March 2022, and at the May meeting, Chair
Powell indicated that a pause was possible. Although he made it clear that it
was not a commitment, the markets saw the quarter-point move as the last. However, a combination of stronger economic data, sticky price pressures, and some hawkish comments saw the pendulum of expectation swing toward a hike at the June 13-14 meeting (60%). Moreover effective Fed funds rate (weighted average) is about 5.08%, and the
market-implied year-end effective rate is around 5.0%. It was near 4% as recently as May 4, which illustrates the extent of the interest rate adjustment. Even if the Fed
stands pat in June, we expect Chair Powell to validate market expectations that
another hike will likely be forthcoming (July).
There
continue to be worrisome economic signs in the US, including the inverted yield
curves, the precipitous decline in the index of Leading Economic Indicators, an
outright contraction in M2 money supply, the tightening of lending standards,
and a reduction in credit demand. However, at the same time, despite some
slowing, the labor market is strong, with an improvement in prime working-age
participation. Consumption rose by 3.7% in Q1 and appears off to a good start
in Q2, with stronger auto and retail sales in April. Supply chain disruptions
have improved, shipping costs have receded and are back within the 2019
range. The Atlanta Fed's GDP tracker sees growth of 1.9% in Q2, near the Fed's
non-inflation speed limit of 1.8% and though a bit faster than Q1 (1.3%).
Another
drama that has unfolded is the stress on US banks. Banks with increasing low-yielding assets did not offer competitive interest rates with
prime money market funds (only invest in US government/agency paper) and the US
bill market itself. While the banking system lost deposits, several of the
largest banks reported increased net interest income. However, even after
the deposits at small banks stabilized, pressure continued on their shares.
That selling pressure seemed to be exhausting itself. June may be a pivotal
period for this drama too. Still, many regional banks are exposed to the
commercial real estate market, which is under pressure.
Europe
avoided a tragic winter energy crisis, but the drama is that inflation is
providing sticky, and the regional economy looks as if it stalled at the end of
Q1. Indeed, revisions show that the German economy contracted 0.3% in Q1
after a 0.5% contraction in Q4 22. The eurozone and UK economies expanded by
0.1% quarter-over-quarter in the year's first three months. The eurozone
and UK appear stuck in low gear, but the market is confident of quarter-point
hikes by the European Central Bank and the Bank of England in June.
Japan has a
drama of its own. The Bank of Japan is under new management, but it turns out
that its extraordinary policy was not simply a function of former Governor
Kuroda's idiosyncrasies. Several surveys of market participants saw June/July
as the likely timing of an adjustment in the policy settings. However, Governor
Ueda's call for patience suggests little sense of urgency, and some
expectations are being pushed out to the end of Q3. The recent history of
lifting interest rates or currency caps suggests a dramatic market response
even under the best circumstances. Still, the best time to
adjust the cap on the 10-year bond is when it is not being challenged. The BOJ
is the last of the central banks with a negative policy rate. This is
increasingly difficult to justify. The swaps market is not pricing in a
positive rate until early in the second half of the fiscal year, which begins
on October 1.
Geopolitics
are always dramatic. It seems clear that US officials, including President
Biden, had recognized that bringing NATO to 's border was provocative.
After relatively mild responses to 's invasion of Georgia and the taking
of Crimea, the reaction to last year's invasion of e is a big shock to nearly
everyone. The US has led a coalition that has stymied by arming e with weapons, training, money, and intelligence.
Initially, China appeared to be a net loser of 's invasion. NATO is stronger.
US leadership was again demonstrated. Parallels between e and Taiwan were
drawn ubiquitously. There has been a rapprochement between South Korea and Japan,
and both are boosting military spending. The US secured new bases in the
Philippines. However, China is finding its own opportunities.
Just as the
US thinks is in a quagmire, China may think it has the US in one.
President Biden has cast the defense of e as the frontline of the battle
between democracy and authoritarianism. However, American public support is not
particularly strong, and continued unlimited support may become a political
issue in next year's election. Meanwhile, China has moved into the vacuum
created by the US and European sanctions. China has secured into its
sphere of influence, which Beijing could not have dreamed of before the
invasion. Using the swap lines with the PBOC has allowed several developing countries to pay for imports from China. It is similar to
producer-financed sales in market economies. China is exploiting niches that the US and Europe have created purposefully or otherwise. Even taking into
account the problematic debt that has arisen from the Belt Road Initiative, it
is creating and solidifying a trade network that may be of increasing
importance to China going forward.
The sharp
rise in interest rates in May made for a challenging time for risk assets.
Equity indices for developed and emerging market economies fell in May, but
there were notable exceptions. The S&P 500 and NASDAQ rallied to new highs
for the year. Germany's DAX and French CAC set record highs, while Japan's
Topix and Nikkei reached their best levels since 1990. Among emerging markets, Brazil (~6%), Chile (~4%), Poland (~3%), Hungary (~6%), Taiwan (~6%), and
South Korea (~2.3%) are notable exceptions.
Emerging
market currencies mostly fell in May. The JP Morgan Emerging Market Currency
Index fell by 1.3% after slipping about 0.35% in April. It is the first
back-to-back monthly decline since a four-month drop in June through September last
year. It is essentially flat on the year. Latin American currencies continue to
stand out. They accounted for four of the top five emerging market currencies
in May: Colombia (~5.1%), Mexico (~1.9%), Peruvian sol (~1.0%), and Chile (~0.4%). The South Korean won was the exception; its 1% gain put it in
the top five.
BWCI bottomed early last November near
92.80, confirming the dollar's top. It rallied into early February to peak near
98.15. The decline into March retraced about half of the rally, while the
year's low set in late May (~95.25) is within 0.75% of a critical area. This is
consistent with our base case that while there may be some scope for additional
dollar gains, it looks limited as the interest rate adjustment also appears to be complete or nearly so. In our analysis of the different currencies below, we
have tried to quantify where the base case breaks down.
Dollar: The
interest rate adjustment, where the market converges to the Fed rather than vice versa, and the knock-on effect of supporting the US dollar
unfolding broadly aligns with the view sketched here last month. The two-year
yield rose by around 65 bp in May to about 4.65%, the highest since mid-March.
The year-end policy rate is near 5% rather than 4.5% at the end of April. We
suspect that the interest rate adjustment is nearly complete, helped by what
will likely be slower economic growth after the rebound in Q2. The growth
profile may be almost a mirror image of 2022. Then, the economy contracted in
H1 and rebounded in H2. This year, the economy appears to have grown near trend
in H1 and looks set to slow in H2. The odds of a Fed hike on June 14 were around 65% before the Memorial Day holiday (May 29), and it is fully discounted for the July meeting. The Fed's economic projections
will be updated. The 0.4% median forecast for growth at the March meeting seems
too low and will likely be increased. At the same time, the 4.5% year-end
unemployment rate seems too high. Unemployment was at 3.4% in April. The median forecast bring
it down a bit. The debt ceiling wrangling does not put the US in the best
light, but barring an actual default, it will not have lasting impact. Outside
of the T-bill market and the credit-default swaps, investors took this peculiar
American political tradition in stride. Our working hypothesis has been that
the dollar was going to "correct" the selloff that began in early
March as the bank stress struck. In the last full week of May, the Dollar Index
exceeded the retracement target near 104.00. A move above the 104.70 area would
suggest potential back toward the 200-day moving average (~105.75) and the
March high near 106.00. A break below the 103.00 area would suggest a high may
be in place.
Euro: Eurozone
rates could not keep pace with the dramatic swing higher in the US. Germany's
two-year yield rose by about 20 bp in May, less than half what the US
experienced. Yet, the euro's roughly 2.75% decline in May was not only a dollar
story. The proverbial bloom came off the rose. The fact that with a combination
of preparedness and good luck (low oil/gas prices and a mild winter), the
eurozone avoided an energy crisis. The positive economic impulses carried into
February, but by the end of March, economic growth stalled, or worse. After a
second look, Germany contracted by 0.3% in Q1 (initially estimated at zero)
after a 0.5% decline in economic output in Q4 22. The European Central Bank
started later than most G10 countries to begin adjusting monetary policy, and
institutional rigidities may make price pressures more resistant. The ECB meets
on June 15 and the market is confident of a quarter-point hike that would lift
the deposit rate to 3.50%. The staff will also update its economic forecasts. The
terminal rate is seen at 3.75% in late Q3 or early Q4. On June 28, European
banks are due to pay back the ECB around 475 bln euros of loans (Targeted
Long-Term Refinancing Operations). They account for around 6% of the assets on
the ECB's balance sheet and almost 45% of the outstanding TLTRO loans. The
sheer magnitude of the maturity could prove disruptive, and some banks may look
to find replacement funding. The ECB's balance sheet has been reduced by about
3% this year and the repayment of the TLTRO would do more with a single blow. Recall
that end of the of last year, European banks returned almost 492 bln euros. The
euro overshot our $1.0735 objective. We suspect the euro's downside correction
is nearly over, but a break of the $1.0680 area may signal losses back to the
March low near $1.05.
(May 26, indicative closing prices, previous in parentheses)
Spot: $1.0725 ($1.1020)
Median Bloomberg One-month Forecast $1.0890 ($1.0960)
One-month forward
$1.0740 ($1.1040) One-month
implied vol 6.8% (7.5%)
Japanese
Yen: Rising US rates seemed to have dragged the greenback higher
against the Japanese yen. The gains in May took it a little through JPY140, the
highest level since the end of November, and beyond the halfway marker of the
drop from last October's high near JPY152. Just as there may be some more room
for the US 10-year yield to climb above 3.80%, there may be scope for the
dollar to rise further against the yen. The next important chart area is around
JPY142.50. Underlying price pressures in Japan continue to rise, and the
weakness of the yen only adds to the pressure on the BOJ to adjust its monetary
settings. The economy expanded by 0.4% in Q1, well above expectations, and in late
May, the government upgraded its monthly economic assessment for the first time
in ten months. Several surveys found many see a window of opportunity in June
or July for the BOJ to adjust monetary policy. Most of the speculation has
focused on yield-curve-control (YCC), which caps the 10-year yield at
0.50%. We do not think it will be abandoned entirely, and targeting a
shorter-dated yield may be considered. It could lift the overnight target rate
to zero from -0.10%. If experience is any guide, when it comes, the timing will
likely surprise, and it is bound to be disruptive. It will likely weaken the
correlation between the exchange rate and US yields. Lastly, there is much talk
about a snap election in Japan over the summer as Prime Minister Kishida looks
to secure his mandate and support for him, and the cabinet has risen recently.
He hosted the G7 summit and brandished leadership. Politically, it may be the
most opportune time before September 2024 LDP leadership contest, while the
economy is relatively strong, the stock market is near 30-year highs, and he is
perceived favorably.
Spot: JPY140.60 (JPY136.30)
Median Bloomberg One-month
Forecast JPY133.45 (JPY133.05)
One-month forward
JPY139.95 (JPY135.75) One-month implied vol 10.8% (9.5%)
British
Pound: May was a month of two halves for sterling. In the first half of
the month, it extended its recovery off the for the year set on March 8 near
$1.1800. Sterling peaked on May 10 at around $1.2680, its best level since June
2022 and an impressive recovery from last September's record low of about $1.0350.
In the second half of May, sterling trended lower and fell back to almost $1.2300.
Our base case is that the move is nearly over, with the $1.2240 area likely to
hold back steeper losses. However, if this area goes, another cent decline is
possible in this benign view. Stubborn inflation and a firm labor market have
produced a dramatic interest rate adjustment in the UK that may lend sterling
support. The year-end policy rate is seen above 5.50%. This is a 70 bp increase
since the middle of May. The two-year and 10-year Gilt yields were mostly flat
in the first half of May and soared around 75 bp in the second half. The
10-year breakeven (the difference between the inflation-protected security and
the conventional bond) rose a little more than 10 bp in the last couple of
weeks. The Bank of England meets on June 22, the day after the May CPI is
published. The market is debating whether a 25 bp or 50 bp hike will be
delivered. We lean toward the smaller move unless the incoming data surprises.
Spot:
$1.2345 ($1.2565)
Median Bloomberg One-month
Forecast $1.2400 ($1.2480)
One-month forward
$1.2355 ($1.2575) One-month implied vol 8.0% (7.6%)
Canadian
Dollar: The Canadian dollar fell by about 0.60% against the US dollar in
May, making it the best performer in the G10. The Swiss franc was second with
twice the loss. After testing April's low (~CAD1.3300) in early May, the US
dollar recovered and set the month's high (~CAD1.3650) in late May. While interest
rate developments can help explain the broader gains in the greenback, the
exchange rate with Canada seems to be more sensitive lately to the general risk
environment (for which we use the S&P 500 as a proxy) and oil. The price of
July WTI collapsed from around $76.60 at the end of April to a little below $64
on May 4. It worked its way back up to almost $75 on May 24 before stalling.
There has been a significant interest rate adjustment in Canada over the last
few weeks. The 2-year yield rose by nearly 60 bp. At the end of April, the
market was pricing in a cut before the end of the year and now it is fully
discounting a hike. The Bank of Canada meets on June 6. The swaps market has a 33% chance of a hike and a hike is fully discounted by the end of Q3. At the end of April, a June hike was
seen as less than a 10% risk. A move above CAD1.3700 could signal a return to
this year's high set in March near CAD1.3860.
Spot: CAD1.3615 (CAD 1.3550)
Median Bloomberg One-month
Forecast CAD1.3405 (CAD1.3475)
One-month forward CAD1.3605 (CAD1.3540) One-month implied vol 6.0% (5.8%)
Australian
Dollar: The surprising quarter-point hike by the Reserve Bank of
Australia saw the Australian dollar fray the upper end of the $0.6600-$0.6800
range that has dominated since late February. Disappointing employment data,
concerns about the pace of China's recovery, and the sharp selloff of the New
Zealand dollar (following the central bank's hike that could be the last one)
weighed on the Australian dollar. It recorded the lows for the year slightly
below $0.6500. There is little meaningful chart support ahead of $0.6400, but a
move back above $0.6600 would suggest a low is in place. The squeeze on households can e expected to increase in the coming months as mortgages taken on in the early days of the pandemic will begin to float at higher rates. The RBA meets on June
6 and there seems to be little chance of a hike, though the market is not
convinced that the tightening cycle is finished. A small hike (~15 bp) is
possible in Q3. The first estimate of Q1 GDP is due the day after the RBA meeting, but we assume officials will have some inkling. Although there is some talk of the risk of a contraction, it likely grew slowly.
Spot:
$0.6515 ($0.6615)
Median Bloomberg One-month
Forecast $0.6785 ($0.6710)
One-month forward
$0.6525 ($0.6625) One-month implied vol
10.3% (10.1%)
Mexican
Peso: Between the central bank's pause and the broader dollar's
strength, the peso fell on profit-taking after it reached a new seven-year
high in the middle of May. However, the considerations that have driven it
higher remain intact, suggesting its high is not in place. Those forces include
the attractive carry (11.25% policy rate) and a relatively low vol currency
(especially among the high-yielders), the near-shoring and friend-shoring that
has seen portfolio and direct investment inflows, and, partly related, the
healthy international position, with record exports and stronger worker
remittances. The dollar fell to almost MXN17.42 in mid-May and its bounce
stalled near MXN18.00. A break of the MXN17.60 area may signal a retest of the
lows, but in the medium term, there is potential toward MXN17.00. While
Mexico's government has not facilitated an investor-friendly environment, the
market appears to be rewarding the strong and independent central bank and
Supreme Court.
Spot:
MXN17.6250 (MXN18.00)
Median
Bloomberg One-Month Forecast MXN18.1675 (MXN18.26)
Spot: CNY7.0645 (CNY6.9185)
Median Bloomberg One-month Forecast CNY6.8625 (CNY6.8570)
One-month forward CNY7.0500 (CNY6.9060) One-month implied vol 5.4% (4.9%)
OANDA Senior Market Analyst Craig Erlam joined Jonny Hart and Trader Nick to discuss the US jobs report and what it means for the markets and interest rates. They also talked about oil prices ahead of this weekend’s OPEC+ meeting and previewed the week ahead.
OPEC+
Oil prices are rallying at the end of the week, perhaps a sign of nerves appearing before the OPEC+ meeting this weekend. While there seems to be a widely held view that the group won’t announce any further cuts, it’s worth noting that the same was true at the last meeting when it announced cuts of roughly another million barrels.
And while there have been comments to suggest the alliance isn’t likely to cut output this weekend, it’s hard to ignore the warnings from the Saudi energy minister to “watch out”, threatening more “ouching” for short speculators. This may be playing into the mind of traders fearing another surge on the open next week.
US
The US Federal government will not run out of cash and can pay its bills on Monday. Now that the debt ceiling drama is over, the focus shifts back to how resilient this economy is and will the disinflation process resume.
Economic data for the week will focus on the service sector, trade deficit, and jobless claims. The ISM services index is expected to show service sector activity improved from 51.9 to 52.5. Trade data should show the deficit widened. Jobless claims are expected to surge at some point and that will lead to cooling wage pressures and support the case that disinflation trends are firmly entrenched.
The Fed's blackout period is here, so appearances will stop until the June 14 FOMC decision.
Eurozone
Next week offers plenty of economic data but nothing that will move the needle as far as the ECB is concerned. ECB speak may be of more interest ahead of the next meeting on 15 June when the central bank may hike rates for the final time. The inflation data for May was surprisingly good but the next few months may be less so given some of the more unfavourable base effects.
UK
There's very little on the agenda next week with the final services PMI the only notable release. All the focus now is on the inflation data and BoE rate decision a couple of weeks after.
The n central bank is expected to leave rates unchanged on Friday. The decision comes hours before the release of the May CPI inflation data which is expected to be marginally higher than the previous month at 2.4%.
South Africa
GDP data is released on Tuesday and will tell us whether the economy is already in recession after an aggressive tightening cycle. The data has been very volatile in recent quarters.
Turkey
With the Presidential election behind us, focus switches back to the economy and the CBRT's ongoing unorthodox monetary policy approach. Next week we get inflation data which is expected to slip back below 40% but remain extraordinarily high.
Switzerland
A couple of economic releases of note next week, CPI for May being the standout. Inflation is expected to slip back to 2.2% which remains above the SNB target but only marginally so. Markets are pricing in a more than 80% probability of a hike at the next meeting on 22 June.
China
With another month of weak official NBS Manufacturing PMI data for May, market participants will turn their attention towards the Caixin Services PMI (consists of more data from small and medium enterprises) out on Monday; the forecast is pegged at 55, a dip from 56.4 in April. If it turns out as forecast, it will mark two consecutive months of growth slowdown from March's 28-month high of 57.8.
On Wednesday, we will have trade and foreign exchange reserves data for May. Another month of lackustre trade numbers is expected, exports growth is seen slowing further to 7% year-on-year from 8.5% in April while a slight improvement is anticipated in imports to narrow its contraction to -5% year-on-year from -7.9% printed in April. If these trade data come in as forecasted, it is likely to cement a weakening global and internal demand environment.
A further decline in the respective input and output prices sub-components of the latest NBS Manufacturing and Non-Manufacturing PMIs data for May has increased the risk of a deflationary spiral taking shape in China. The paramount focus will be on May's consumer inflation and PPI (factory gate prices) to be released on Friday. Another month of weak readings are expected, 0.2% year-on-year for consumer inflation rate vs. 0.1% in April and -2.8% year-on-year for PPI vs. -3.6% in April.
If this latest set of key economic data continues to come in below expectations it points to a further growth deceleration in China. Policymakers may need to rethink their current targeted expansionary and accommodative fiscal and monetary policies stances.
India
The services PMI will be out on Monday and is forecast at 60.5, a dip from 62.0 recorded in April which was the strongest reading since June 2010.
India's central bank, the RBI, will release its latest monetary policy decision on Thursday, the consensus is expecting no change in the benchmark policy repo rate at 6.5% after a surprise pause in April that came after six consecutive interest rate hikes.
On Friday, we will get industrial production for April where a slight dip to 1% year-on-year is being forecasted from 1.1% in March, its lowest growth since October 2022.
Australia
Several key data and events to focus on. On Monday, Melbourne Institute (MI) will release its latest monthly inflation gauge report for May where it is expected to show an increase to 0.4% month-on-month after a dip to 0.2% in April, a four-month low.
Australia's central bank, the RBA, will release its latest monetary policy decision on Tuesday. No change is expected leaving the cash rate at 3.85% after a surprise hike of 25 basis points during the prior meeting in May that pushed up borrowing costs to their highest level since April 2012.
Q1 GDP growth will be released on Wednesday, expected to be 0.3% quarter-on-quarter vs. 0.5% in Q4 2022 and 2.4% year-on-year vs. 2.7% in Q4 2022. To round off the week, trade data for April will be released on Thursday; a decline is forecast for its trade surplus to A$11.7 billion from A$15.27 billion recorded in March, its largest surplus since June 2022.
New Zealand
A quiet week where we will have two key data to focus on; Q1 manufacturing sales on Tuesday where the forecast is set for a return to growth at 1.5% year-on-year from a contraction of -9.9% recorded in Q4 2022.
On Friday, we will have manufacturing PMI for May where a slight improvement is being forecasted at 49.9 vs. 49.1 printed in April.
Japan
Several key data to focus on to determine whether the ongoing growth recovery is sustainable following robust surveys on the manufacturing and services sectors for May.
On Tuesday, we will have household spending for April where an improvement is being forecasted; -0.9% year-on-year from -1.9% in March, -0.2% month-on-month from -0.8% in March. Data on average cash earnings will also be released on the same day, forecast is set for a slight improvement to 0.9% year-on-year for April from 0.8% recorded in March.
On Wednesday, the preliminary reading for the leading economic index for April is expected to show an improvement at 98.2 from 97.7 in March.
On Thursday, the current account for April, finalised Q1 GDP, and bank leading for May will be released. A slight improvement is forecast for bank lending at 3.3% year-on-year in May from 3.2% in April. If it turns out as forecasted, it will be a retest on its 22-month high of 3.3% in loans growth recorded in February.
Singapore
Two key data to focus on. Firstly, retail sales for April where a further decline in growth is being forecast; 3.1% year-on-year vs. 4.5% in March and 0.5% month-on-month from 2.2% in March.
Secondly, foreign exchange reserves data for May is forecast to be almost the same at S$416 billion from S$416.3 billion recorded in April; its largest figure since June 2022.
Economic Events
OPEC+ production meeting: Expected to keep output at current levels or slightly lower them.
Economic Data/Events
US factory orders, ISM services
China Caixin services PMI
Eurozone Services PMI, PPI
Singapore retail sales
ECB President Lagarde appears at European Parliament's Committee on Economic and Monetary Affairs
Apple's Worldwide Developers week-long conference begins
Week-long maintenance starts for the Turkstream pipeline, which carries n gas to Turkey and southeastern Europe
Economic Data/Events
RBA rate decision: Expected to keep rates steady at 3.85%
Australia current account
Eurozone retail sales
Germany factory orders
Japan household spending
Mexico international reserves
Poland rate decision: Expected to keep rates steady at 6.75%
South Africa GDP
Spain industrial production
Thailand CPI
Economic Data/Events
US trade, consumer credit
BOC rate decision: Expected to keep rates steady at 4.50%
Australia GDP
Chile copper exports, trade
China forex reserves, trade
France trade
Germany industrial production
Greece GDP
UK PM Rishi Sunak visits President Biden in Washington
EIA crude oil inventory data
OECD releases latest global economic outlook
ECB's Holzmann presents the Austrian financial stability report
RBA Gov Lowe delivers a speech at Morgan Stanley Australia Summit in Sydney
RBA Deputy Governor Bullock speaks at Australian Banking Association Annual Conference
Economic Data/Events
US wholesale inventories, initial jobless claims
Australia trade balance
Bulgaria GDP
Chile CPI
Eurozone GDP
India rate decision: Expected to keep rates steady at 6.50%
Japan GDP
Mexico CPI
Peru rate decision
Saudi Arabia GDP
South Africa manufacturing production, current account
Bank of Italy reports on balance sheet aggregates
Economic Data/Events
Canada unemployment
China aggregate financing, PPI, CPI, money supply, new yuan loans
Italy industrial production
Japan M2 money stock
Mexico industrial production
rate decision: Expected to keep rates steady at 7.50%
CPI
Turkey industrial production
Sovereign Rating Updates
Greece (Fitch)
Spain (DBRS)
Oil
Crude prices are having a strong finish to the week after the US jobs report showed the economy is not ready to head into a recession. Oil was heavier throughout the earlier part of the week on disappointing Chinese data and expectations that OPEC+ would not be able to deliver more production cuts despite the Saudi warning to short-sellers.
With oil at uncomfortable levels for most energy production countries, no one wants to be short crude going into a weekend OPEC+ meeting. It seems the oil market is doubtful a consensus for another output cut can be reached between the Saudis and ns, but traders should never underestimate what the Saudis will do and leverage during OPEC+ meetings.
Gold
Gold is tumbling after a resilient labor market delays calls for a recession. Gold was almost in the clear as a couple of Fed doves had markets convinced that policymakers would skip a June rate hike. If the data cooperated, some traders were making the case that they might even be done. The US economy is too resilient and that should keep the risk of more Fed tightening on the table.
The problem for gold is that even once markets are convinced the Fed is done, we will still have to see how much dollar strength we see as the Treasury refills its coffers over the next several months. There is too much money on the sidelines that still will prefer dollar-denominated assets.
Bitcoin
Bitcoin is holding steady after a busy week filled with a debt limit deal, a complicated jobs report that showed both robust hiring and surging layoffs, and as lawmakers inch towards figuring out how to regulate crypto. A new bill, the Securities Clarity Act, is being discussed could provide guidance that clarifies if some tokens are unregistered securities.
A red-hot labor market remains and that should keep the pressure on the Fed, which will also delay second half of the year recession calls. The May jobs report showed robust hiring, a significant increase in layoffs, and easing wage growth. The last Fed messaging we got before the blackout period (officially starts tomorrow) was positioning the central bank for a June 'skip', but that might be hard to do if the ISM Services index impresses and the May inflation report does not show the disinflation process is firmly in place.
US stocks are holding onto gains after a complicated jobs report showed hiring isn't ready to cool, layoffs are rising, and wage pressures seem to be easing. Traders expecting a “good news” is “bad news” reaction to this payroll report need to dig deeper into the BLS report. NFP day is not just about the headline number, but also about the other components and what that says about the overall economy. We are almost at the midpoint of the year and this economy is not showing strong signs that the second half of the year recession is coming. Corporate America would have you expecting significant weakness would be here given all the pre-layoff announcements and warnings about a challenged consumer that is tapping their savings and driving up their credit card bills. With too much strength still coming from the service sector, this economy doesn't appear poised to breakdown quickly enough to trigger a recession this year unless we are given a fresh shock. A resilient economy and consumer is short-term good news for the stock market.
US Data
US employers added 339,000 jobs in May, well above the consensus estimate of 195,000, the whisper number of 225,000 and the highest economist forecast of 250,000. Robust hiring in May also included an additional net revision of 93,000 jobs for the prior two months. The April report was bumped up from 253,000 to 294,000.
The Fed might choose to focus on the other parts of the NFP report which showed the unemployment rate posted a hefty increase from 3.4% to 3.7% as 440,000 workers became unemployed. Average hourly earnings came in mostly in-line, with the year-over-year reading ticking lower to 4.3%.
The Fed has almost locked themselves into a corner with a skip for the June meeting, but it should be very clear that they are not done raising rates.
A debt ceiling fiasco has been averted late in the day and markets are ending the week on a positive note, as traders turn their attention to the US jobs report.
Rarely do you have a situation in which everyone appears to be in agreement but we’ve seen over the last few weeks that no one at any stage thought a US default was a realistic possibility. Brinkmanship in Washington is part of the theatre of the negotiation but the idea that Congress would ever intentionally allow the US to default is ridiculous.
Still, there does seem to be some sense of relief in the markets that any risks, however minuscule, have been cast aside leaving investors to focus on what really matters at this stage; inflation, interest rates, and the economy.
Will we finally see signs of weakness in the US labor market?
The US jobs report was always the main event this week and depending on the numbers, we may well see that play out in the markets. We’re hearing some positive noises from the Fed in recent days around the prospect of a pause in order to allow more time for the data to moderate and be fully analyzed but even so, another red hot jobs report today may be impossible to ignore.
For the Fed to feel confident that inflation is heading back to 2% and sustainably, we need to see some weakness in the labor market. That means much fewer new jobs for a period, more modest wage growth, and in all likelihood a slight increase in unemployment. Higher participation wouldn’t hurt either.
We’re not going to get all that today but an NFP closer to 100,000 and wage growth of 0.3% or lower may give policymakers the confidence to pause in two weeks, assuming the inflation data the day before doesn’t bring any further nasty surprises.
It could be a lively end to the week for bitcoin
It’s been an interesting week for bitcoin which started with a rally to $28,000 before slipping back to $27,000, roughly where it was sat this time last week. Any theories that it could benefit from US debt ceiling talks failing have been cast aside for now and it’s the jobs report that will likely determine how the week ends for the cryptocurrency. A move back below $26,000 could be a real blow, with that level having held when tested on a couple of occasions last month.
For a look at all of today's economic events, check out our economic calendar: www.marketpulse.com/economic-events/
Oil edges higher ahead of OPEC+ meeting this weekend
Oil prices are edging higher into the end of the week, perhaps a sign of nerves appearing before the OPEC+ meeting this weekend. While there seems to be a widely held view that the group won’t announce any further cuts, it’s worth noting that the same was true at the last meeting and then the group announced cuts of roughly another million barrels.
And while there have been comments to suggest the alliance isn’t likely to cut output this weekend, it’s hard to ignore the warnings from the Saudi energy minister to “watch out”, threatening more “ouching” for short speculators. This may be playing into the mind of traders fearing another surge on the open next week.
Will the jobs report push gold back above $2,000?
Gold has had a few good days this week, buoyed by an easing of yields which may be related to the debt ceiling deal but I expect it probably has more to do with the Fed commentary on the merits of pausing in June, alongside much better eurozone inflation data.
Whether that will be enough to see it break back above the $2,000 psychological barrier will probably depend on how much of a helping hand it gets from the jobs data shortly. A weak report could push yields lower and give gold another boost while another hot set of numbers could bring an abrupt end to this recovery rally.
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The Australian dollar is on a tear. AUD/USD jumped 1% on Thursday and has added another 0.86% today and is trading at 0.6629.
The US dollar retreated against the majors on Thursday, as news of a debt ceiling agreement raised risk appetite. The markets are breathing a sigh of relief, as the dangerous game of brinkmanship between the Republicans and Democrats is over, as the Senate approved the measure with lightning speed on Thursday.
The Australian dollar also received a helping hand from Chinese manufacturing data. Caixin Manufacturing PMI showed a slight improvement to 50.9 up from 49.5, which was also the consensus. Importantly, this shows slight expansion, after the official Manufacturing PMI pointed to contraction, falling from 49.4 to 48.8. The 50.0 level separates contraction from expansion.
Will nonfarm payrolls surprise the markets?
In the US, it should be an interesting end to the week, with the release of nonfarm payrolls. The ADP employment report, which precedes nonfarm payrolls, was strong, coming in at 278,000, down slightly from 291,000 and crushing the consensus of 170,000. Investors don't consider the ADP all that reliable, but there are other indications that the US labour market remains resilient, such as Thursday's solid unemployment claims report. Nonfarm payrolls are expected to fall from 253,000 to 190,000, which would be the smallest gain since December 2020.
If nonfarm payrolls mimic the ADP and surprise on the upside, that could cement a rate hike at the meeting on June 14th. The Fed would like to take a pause, but that will require evidence that the employment market is showing signs of cooling off.
Market expectations for Fed rates have been swinging wildly in recent weeks, from pause to hike and back to pause. A surprise from nonfarm payrolls could cause yet another swing in market expectations.
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AUD/USD Technical
