- Weekly global market focusÂ
- FOMC expected to leave policy unchanged
- U.S. May unemployment report shows stronger-than-expected labor market
- OPEC+ finalizes agreement to extend 9.7 mln bpd production cut through July
- Fed again tapers Treasury security buying this week as Treasury sells 3-year, 10-year and 30-year securities
Weekly global market focus — The U.S. markets this week will focus on (1) the pandemic statistics and the pace at which the U.S. economy can fully reopen, (2) US/China tensions, which could surge anew this week over Hong Kong, Chinese tech companies, the pandemic, and/or the phase-one-trade deal, (3) any further street unrest in the U.S. that impacts the U.S. economy or the political outlook, and (4) oil prices after the OPEC+ production cut extension into July was finalized on Saturday.
The European markets this week will focus on ECB President Lagarde’s comments today at a Parliamentary hearing and comments by other ECB officials during the week. The markets are waiting for details on a meeting that is expected by the end of June between UK Prime Minister Johnson and EU Commission President Ursula von der Leyen to see if they can break the deadlocked Brexit talks. No progress was made in last week’s round of Brexit talks.
The Asian markets will focus on US/China tensions and China’s inflation and credit data on Tuesday evening. China this past weekend reported that May exports rose +1.4% y/y, which was down from April’s +8.2% but was better than expectations of -3.2%. However, May imports fell -12.7% y/y in a sign of weak domestic demand.
FOMC expected to leave policy unchanged — The FOMC at its 2-day meeting on Tuesday and Wednesday is expected to leave its main policy variables unchanged. The market is expecting the FOMC to leave its current fed funds target range of 0.00%/0.25% in place until at least 2023. The main news will be the Fed’s new set of macroeconomic forecasts, which were suspended during the pandemic crisis.
The FOMC this week is expected to start a discussion on the possibility of adopting a yield-curve control policy where it pegs the 2-year or 5-year T-note yield at a certain yield level as a means to maintain an upward sloping and prevent longer-term yields from rising and hurting the economy. However, no decision on a yield-curve strategy is expected to be announced this week.
The Fed this week may be able to get its long-awaited Main Street Lending program going, which will provide funding to medium-sized companies that were hit hard by the pandemic. Fed Chair Powell on May 29 said that the Main Street Lending program was just “days” away from being launched.
U.S. May unemployment report shows stronger-than-expected labor market — The stock market was encouraged by last Friday’s May U.S. unemployment report, which was substantially stronger than expected. The report raised hopes that employees will be called back to work faster than earlier thought, which should help consumer spending and the economy to rebound faster.
May payrolls rose by +2.509 million jobs, which showed a substantially stronger labor market than the market consensus for a decline of -7.5 million jobs. While the rise in payroll jobs was welcome, the May payroll job level was still down by a net 19.6 million from February’s record high.
Meanwhile, the May civilian unemployment rate fell by -1.4 points to 13.3%, which showed a stronger labor market than the consensus for a +4.4 point increase to 19.1%. However, the Labor Department said in a side note that the U.S. unemployment rate was actually 3 percentage points higher than reported due to a misclassification error. That news reduced some of the optimism about Friday’s unemployment report.
OPEC+ finalizes agreement to extend 9.7 mln bpd production cut through July — After a week of difficult negotiations, OPEC+ at its virtual meeting on Saturday ratified an extension of its May-June production cut of 9.7 million bpd for one month through the end of July. The original OPEC+ agreement anticipated tapering the production cut to 7.7 mln bpd for 2H-2020 and then to 6 mln bpd from January 2021 to April 2022.
Saudi Arabia and Russia went ahead with the July extension after they were able to strong-arm OPEC cheaters into agreeing to not only comply with their original production cuts, but also to cut production even more deeply in coming months as payback for their previous miss. Those countries included Iraq, Nigeria, Angola, and Kazakhstan.
The extension of the 9.7 million bpd production cut through July, combined with the rebounding global economy, should help to underpin oil prices. However, there is still downside pressure on oil prices since (1) there is a massive global oil inventory surplus to work off, (2) some U.S. shale oil producers are restarting production due to the rebound in oil prices, and (3) the OPEC+ 9.7 million bpd production is still scheduled to be trimmed to 7.7 million bpd effective Aug 1.
Fed again tapers Treasury security buying this week as Treasury sells 3-year, 10-year and 30-year securities — The Treasury last Friday announced that it will reduce its daily purchases of Treasury security purchases this week to $4 billion from $4.5 billion last week. The Treasury has been slowly reducing its daily Treasury security purchases as the markets stabilize from the pandemic-induced crisis seen in Feb-April.
The Treasury today will sell $44 billion of 3-year T-notes, kicking off this week’s $52 billion auction package. The Treasury will sell $29 billion of 10-year T-notes on Tuesday and $19 billion of 30-year T-bonds on Thursday. The Treasury is not holding an auction on Wednesday due to the FOMC’s meeting announcement on that day.
