Monday’s Bullseye


Non-farm payroll data for the month of May absolutely smashed expectations and risk assets responded by extending their gains sharply on Friday. But let’s not draw too many conclusions from just one jobs report. We now want to see continued job gains and improvements in other macro data in the weeks and months ahead...



Global shares extended their rally for the third consecutive week with the Nasdaq 100 remarkably surpassing its all-time highs made just before the global economy went into a lockdown. Other global indices did very well too, most notably the German DAX. Sentiment remained positive on optimism surrounding the re-opening of major economies and amid the recent introduction of large stimulus programmes. This week it was the European Central Bank who decided to increase its Pandemic Emergency Purchase Programme (PEPP) by 600 billion euros, which fuelled hopes of a faster economic recovery. On top of this, the German government agreed to a €130 billion fiscal stimulus package. Recently other governments and central banks have announced similar large stimulus packages to help kick-start their respective economies which have been severely hit by the coronavirus crisis. Their actions have sparked a major rally in equity prices, which accelerated this week. The risk-on trade has also weighed on the US dollar, allowing commodity dollars, the euro and pound, as well as emerging market FX, to push further higher. Safe-haven gold, which has been struggling somewhat, slumped on Friday in reaction to the surprisingly strong US jobs report, as investors concentrated on racier equities.

Week Ahead

Non-farm payroll data for the month of May absolutely smashed expectations and risk assets responded by extending their gains sharply on Friday. Virtually no one had expected a positive number, let alone 2.5 million job gains which helped to lower the unemployment rate to 13.3%. If the numbers are accurate, this suggests the economy is turning around faster than most people had expected.

But let’s not draw too many conclusions from just one jobs report. We now want to see continued job gains and improvements in other macro data in the weeks and months ahead. In so far as the coming week is concerned, there are a few important issues to watch:
 
  • OPEC+ meeting is on Saturday. The fact the meeting will happen over the weekend means there will be a big risk prices will gap at the open on Sunday night, which could have implications for the wider markets. If the OPEC+ agrees to extend the 9.7 million barrels per day cuts for two or more months, then Brent crude prices could climb towards $45 per barrel. Anything short of that will likely disappoint the markets. Read more HERE.
  • Chinese trade figures for the month of May will be released on Sunday. If the world economy is recovering as strongly as the markets are pricing in, then we should start to see solid demand for Chinese exports. Clearly, the big risk is if that’s not the case and we see some really disappointing numbers.
  • Meanwhile, German industrial production data will come in on Monday. This is expected to show a 16% m/m drop but the data is for the month of April, and we all know how bad things were then. So, FX traders may not pay too much attention to this, even if the expected drop turns out to be more severe than 16%.
  • US CPI is likely to have been flat last month and unless there is a massive surprise in either direction then don’t expect too much of a market reaction from this, as the Fed will not respond to any short-term changes in inflation given that it has other, bigger, worries right now.
  • The Federal Reserve’s FOMC will have had both the latest jobs and inflation numbers to take into account when deciding on monetary policy on Wednesday. With the stock markets at or near record highs again and employment rebounding sharply, the Fed may start to talk more confidently about the economic outlook again and in doing so it may gave the ‘wrong’ signal to the market - like the taper tantrum back in 2013, when stocks sold off as investors learned that the Fed was slowly putting the brakes on its quantitative easing program. However, I believe it is far too early for the Fed to start talking about tapering QE again.
  • Unemployment claims fell below 2 million last week and if the trend continues, we should see the rate of new applications for unemployment benefits fall further. Analysts expect there to be 1.55 million new claims this time. However, if claims were to spike back above the 2 million mark then that should raise some serious questions over the health of the jobs market following the surprise 2.5m non-farm payroll gains in May.
There will be a handful of macroeconomic pointers to look forward to in the last day of the week, including UK monthly GDP, construction output and manufacturing production for the month of April.

But clearly, with the OPEC+ meeting happening on Saturday, the key risk facing investors will be if crude oil and potentially other markets gap as a result of their decision. So our featured chart for this week is Brent:

Brent
Source: ThinkMarkets and TradingView 
 



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