- U.S. June retail sales expected to extend May’s recovery but further improvement is questionable
- Claims report expected to show further improvement in U.S. labor market
- President Trump reportedly decides against sanctions on Chinese officials for Hong Kong
- ECB expected to leave policy unchangedÂ
- OPEC+ sticks to its plan for tapering production cuts
U.S. June retail sales expected to extend May’s recovery but further improvement is questionable — The market consensus is for today’s June retail sales report to show an increase of +5.0% m/m, adding to May’s sharp recovery of +17.7% m/m. Today’s expected increase would mean that retail sales would have to rise by only another +3.9% to match the record high level seen in January before the pandemic hit.
The sharp recovery in retail sales seen in May-June, after the overall plunge of -22.9% seen in March-April, is certainly a step in the right direction for the U.S. economy. However, the question is whether retail sales this summer will drop off after pent-up demand was met in May-June and as fiscal stimulus measures start expiring. The $600 per week unemployment bonus expires at the end of July and it remains to be seen whether it will be renewed by Congress. Also, companies are likely to boost layoffs once their PPP money runs out. The renewed shutdowns in some states of bars, restaurants and other public places will also lead to increased layoffs and will reduce consumer spending.
Claims report expected to show further improvement in U.S. labor market — The market consensus is for today’s weekly initial unemployment claims report to decline by -64,000 to 1.250 million, adding to last week’s -99,000 decline to 1.314 million. Meanwhile, weekly continuing claims are expected to fall by another -562,000 to 17.500 million, adding to last week’s -698,000 decline to 18.062 million.
Today’s expected drop in both initial and continuing unemployment claims would be a welcome sign of further recovery in the U.S. labor market. However, there could be some backsliding in July as layoffs increase from companies that run out of PPP money and from bars, restaurants and other facilities that are forced to shut back down by state authorities worried about the pandemic’s resurgence.
The U.S. labor market, in any case, has a long way to go before recovering. The number of people that are currently on the unemployment rolls is still 16.4 million above the pre-pandemic level in late-February. The unemployment rate in June fell to 11.1% from April’s peak of 14.7%, but that was still higher than the worst level of 10.0% seen during the Great Recession.
President Trump reportedly decides against sanctions on Chinese officials for Hong Kong — Bloomberg on Wednesday reported that President Trump does not want to escalate tensions with China by sanctioning Chinese officials for the Hong Kong security bill, even though Mr. Trump just signed the legislation authorizing that move. Bloomberg noted, however, that Mr. Trump might move ahead with those sanctions at some point in the future even if he doesn’t do it now. Bloomberg said that White House officials had already drawn up a list of officials that could be sanctioned under the new legislation, which include Hong Kong Chief Executive Carrie Lam and Vice Premier Han Zheng. Sanctioning those top officials could be highly inflammatory.
Bloomberg on Wednesday also reported that President Trump at a White House meeting on Monday rejected the idea of trying to break Hong Kong’s dollar peg as retaliation for China’s new security law on Hong Kong. The markets could react very negatively to any such move since it could destabilize the Asian financial markets or even cause runs on Hong Kong banks.
The markets welcomed Bloomberg’s reports on Wednesday suggesting that President Trump is not looking for a major escalation of U.S./Chinese tensions regardless of his hawkish rhetoric in public.
ECB expected to leave policy unchanged — The ECB at its meeting today is unanimously expected to leave its key interest rates unchanged with the deposit rate at -0.50% and the refinancing rate at zero. The ECB is also expected to leave its QE programs intact with the Asset Purchase Program (APP) at 20 billion euros/mo and the Pandemic Emergency Purchase Program (PEPP) at a total of 1.350 trillion euros through 6/30/21.
The ECB on at its last meeting on June 4 surprised the market with a larger-than-expected expansion of its QE program. The ECB increased the size of its PEPP program by +600 billion euros from the previous level of 750 billion euros, which was more than the consensus of +500 billion euros. The ECB also extended the program from the end of 2020 until at least June 2021.
The ECB still has about $1 trillion left of capacity in its PEPP program, which means that the ECB will be able to continue the current level of securities purchases until at least spring 2021. The ECB has so far expanded its balance sheet by a massive +1.6 trillion euros (+35%) from the pre-pandemic level seen at the end of February.
OPEC+ sticks to its plan for tapering production cuts — The OPEC+ monitoring committee at its meeting on Wednesday met market expectations by approving the recent plan for the OPEC+ production cuts to taper to 7.7 million bpd in August from 9.6 million bpd in July. However, OPEC+ will actually allow production to rise by about 1 million bpd because Saudi Arabia and Russia are insisting that previous quota cheaters (Iraq, Nigeria, and Kazakhstan) cut their production by an extra 842,000 bpd in August to make up for their previous quota-busting production.
OPEC+ is hoping that a 1 million bpd rise in oil production in August will not destabilize the oil markets and will not cause a new sell-off. OPEC+ is relying on improved demand as the world economy slowly recovers.
