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by Charalambos Pissouros

Weekly Outlook: July 01 – July 05: OPEC, RBA, and Riksbank Meetings; US Employment Data

Following the meeting between the US and Chinese Presidents at the G20 summit, where the two leaders decided to put fresh tariffs on hold and return to the negotiating table, attention now is likely to turn to the OPEC+ meeting, scheduled for Monday and Tuesday. With regards to central banks, the RBA and the Riksbank decide on monetary policy this week. The former is expected to cut rates again, while the latter is forecast to stand pat. The US employment data could also attract special attention as investors try to figure out when the Fed may start reducing rates, and if so, how aggressively.

On Monday, the highly anticipated meeting between major OPEC and non-OPEC oil producers, known as the OPEC+ group, begins. OPEC members will discuss output policy today, while on Tuesday, their non-OPEC allies will join in. Although prices rebounded strongly recently due to geopolitical tensions in the Middle East, we believe that OPEC should look beyond this recovery, given that in a still oversupplied market, the “black liquid” could resume its prevailing downtrend as soon as tensions fade.

Over the weekend, Russian President Vladimir Putin said that his nation agreed with Saudi Arabia to extend the previously agreed production cuts by six to nine months. What’s more, on Sunday, Saudi Energy Minister Khalid al-Falih said that the current deal would most likely be extended by nine months and that no deeper reductions are needed. Given that an extension is already communicated and thereby expected, we don’t expect oil prices to gain notably if this is the outcome. On the contrary, if the extension is just six months, we see the case for prices to slide somewhat. We believe that for the “black liquid” to gain notably and sustain a recovery, a positive surprise is needed, namely, a larger-than-anticipated extension, or deeper output curbs.

As for Monday’s data, we get the final manufacturing PMIs for June from several European nations and the Eurozone as a whole, but as it is the case most of the times, expectations are for the final prints to confirm their preliminary estimates. The bloc’s unemployment rate for May is also coming out and is expected to have held steady at 7.6%.

We get the June manufacturing PMI from the UK as well, while on Tuesday, the nation’s construction index is due to be released. On Wednesday, we get the services PMI, which is the most important in our view, as the service sector accounts for around 80% of the UK GDP. All three indices are expected to have risen somewhat.  That said, although the services print would rise further above the 50 zone, which separates expansion from contraction, both the manufacturing and construction numbers are anticipated to have stayed below that equilibrium.

UK PMIs

Following the April monthly GDP figure, which showed that the economy contracted 0.4%, the NIESR projected a 0.2% contraction for Q2, while the BoE revised its estimate for the quarter lower, to stagnation from a +0.2% qoq growth. Thus, if the PMIs forecasts are met, they may alleviate some concerns with regards to the performance of the UK economy during the second quarter, but they are unlikely to suggest a decent growth rate, like the one we saw in Q1. Even that was the result of stockpiling due to Brexit uncertainty.

Later in the day, the US final Markit manufacturing PMI and the ISM manufacturing index, both for June are due to be released. The final Markit print is expected to confirm its preliminary estimate of 50.1, while the ISM manufacturing index is anticipated to have slid to 51.3 from 52.1.

On Tuesday, during the Asian morning, the RBA is scheduled to decide on interest rates. At their latest meeting, policymakers decided to cut rates to a record low of +1.25% and, according to the meeting minutes, they remained willing to do it again. Since the gathering, GDP data showed that the economy accelerated somewhat in quarterly terms, but the yoy rate slid to +1.8% from 2.3%. Yes, this is still above the RBA’s forecast of +1.7% for the first half of this year, but in order for the yearly rate to stay near that projection, the economy would have to grow +0.9% in Q2, a low-probability scenario in our view, given the escalation in trade tensions during the quarter. With regards to the labor market, although job gains accelerated in May, this was mainly due to part-time jobs, while the unemployment rate held steady at 5.2%, above the 4.5% mark, which the RBA believes would start generating inflationary pressures.

ASX 30-day interbank cash rate futures

The data kept the door wide open for further cuts by the Bank, with the ASX30-day interbank cash rate futures implied curve currently suggesting a 70% probability for the next one to take place at this meeting. Thus, a cut by itself is unlikely to prove a major market mover in our view. We believe that, if indeed the RBA cuts rates as it is largely expected, investors are likely to quickly turn their attention to the accompanying statement for clues as to whether more cuts are on the cards, and if so, when the next one may come. The aforementioned ASX curve suggests that another one may be on the cards at the turn of the year, in December or January.

As for Tuesday’s data, apart from the UK construction PMI which we already talked about, the agenda includes Eurozone’s PPIs for May, Germany’s retails sales for the same month, and Canada’s RBC manufacturing PMI for June. Eurozone’s PPI is expected to have slowed notably in May, to +1.6% yoy from +2.6%, but we don’t expect something like that to prove a market mover. After all, we already got preliminary data on consumer prices for June, which showed accelerating underlying inflationary pressures. Germany’s retail sales are expected to have risen 0.5% mom in May after sliding 2.0% in April, while no forecast is currently available for Canada’s RBC PMI.

On Wednesday, the central bank torch will be passed to the Riksbank. At its latest meeting back in April, the world’s oldest central bank kept its repo rate unchanged at -0.25% and decided to push back the timing of when it expects interest rates to rise further, noting that this could happen “towards the end of the year or at the beginning of next year”. Since that meeting, Swedish data were mainly on the bright side, with GDP slowing by less than anticipated in Q1 and inflation accelerating. It is worth mentioning that the core CPIF rate, which excludes the volatile items of energy, ticked up to +1.6% yoy in April from +1.5% in March, and then rose to +1.7% in May.

Riksbank interest rates Sweden

Seen in isolation, the data suggests that the Bank could keep its forward guidance unchanged at this meeting. However, bearing in mind that the Riksbank has been usually following the footsteps of the ECB, we believe that there is a decent chance for a push back, perhaps for officials to take off the table the “end of the year” part. Remember that at its latest gathering, the ECB decided to push back its own forward guidance, while last week, President Draghi said that additional stimulus will be required if a sustained return of inflation to the ECB's aim is threatened. That said, although we see the case for the Riksbank to close the door to a 2019 hike, given the decent Swedish data, we don’t expect policymakers to start signaling a cut, at least not yet.

With regards to the economic indicators, during the Asian morning, we get Australia’s building approvals for May and China’s Caixin services PMI for June. Australia’s building approvals are expected to have stagnated after falling 4.7% in April, while China’s Caixin services PMI is anticipated to have ticked down to 52.6 from 52.7. Later, during the European day, we get the final services and composite PMIs for June from the Euro-area nations of which we get the manufacturing prints on Monday. As we already noted, the UK services PMI for the month is also due to be released.

In the US, markets will close early as it is the Independence Day Eve. We do however get some US data. The ADP employment report for June is scheduled to be released, and expectations are for the private sector to have gained 140k jobs, more that May’s poor 27k. This could raise speculation that the NFP print, due out on Friday, may also rebound from its previous soft figure of 75k. That said, we repeat for the umpteenth time that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are considered) has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.47%. The final Markit services and composite PMIs for June, the ISM non-manufacturing index for the month, and the trade balance for May are also due out.

ADP vs NFP employment jobs

On Thursday, during the European morning, Switzerland’s CPI for June is coming out and the forecast is for the yoy rate to have remained unchanged at +0.6%. At their latest gathering, SNB officials kept their policy unchanged, and although they upgraded their inflation projections, they still see the yoy CPI rate falling short of their 2% objective during the forecast horizon. Remember that this is conditional upon interest rates staying at current levels. Thus, with a CPI rate well below their objective, and a strengthening franc recently, we don’t expect SNB officials to be tempted to alter their ultra-loose policy anytime soon.  On the contrary, given that they still see the franc as highly valued, we expect them to keep interest rates negative and stay willing to intervene in the FX market when necessary. Eurozone’s retail sales for May are also coming out and the forecast suggests a 0.4% mom rebound after a 0.4% slide in April.

Switzerland CPIs inflation

In the US, market will stay closed in celebration of the Independence Day.

On Friday, the spotlight is likely to turn to the US employment report for June. Nonfarm payrolls are expected to have risen by 160k, following May’s disappointing print of 75k. The unemployment rate is anticipated to have held steady at its 49.5-year low of 3.6%, while average hourly earnings are forecast to have accelerated to +0.3% mom from +0.2%. Barring any deviations to the prior prints, this could drive the yoy rate back up to +3.2%, as the monthly rate of June 2018 that will drop out of the yearly calculation was +0.1%.

US Average earnings vs core CPI

Overall, the forecasts point to a decent report, in line with further tightening in the US labor market. At its latest meeting, the Fed dropped its “patient” stance and instead noted that it will “act as appropriate” to sustain the economic expansion. What’s more, 7 of its 17 members favored two quarter-point rate cuts by year end, which has prompted market participants to ramp up their bets with regards to lower US rates, fully pricing in a 25bps cut for the next gathering in July, another one in September, and almost a third one in December. According to the Fed funds futures, there were also decent expectations with regards to a 50bps cut in July.

US Fed funds futures Market vs FOMC rate expectations

That said, although 25bps are still fully priced in for July, the chance for a “double” cut eased after Fed Chair Powell said last week that policymakers are “grappling” with whether uncertainties around trade and tame inflation warrant lower interest rates. What’s more, over the weekend, US President Trump and his Chinese counterpart Xi Jinping decided to put tariffs on hold and return to the negotiating table in order to resolve their trade dispute. Therefore, having in mind the reality check markets went through after Powell’s comments, as well as the prospect of easing tensions between the US and China, a strong employment report may raise more doubts as to whether the Fed will cut rates aggressively, and thereby encourage investors to price out one of the three cuts they anticipate for this year.

We get employment data for June from Canada as well. The unemployment rate is expected to have ticked up to 5.5% from 5.4%, while the employment change is expected to have slowed to 5.0k from 27.7k in May. Following the decline from 5.7% to 5.4% in May, a tick up to 5.5% in June for the unemployment rate is not that bad in our view, neither a slowdown in job gains, if we consider that May’s 27.7k followed April’s record print of 106.5k. Coming on top the strong acceleration in the CPIs for May, and the better-than-expected monthly GDP for April, a decent employment report could keep BoC’s officials’ hands away from the cut button, at a time when most of the other major central banks are already cutting rates, or signaled they could do so soon. Canada’s Ivey PMI for June is also due to be released and the forecast is for the index to have increased to 56.2 from 55.9.

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