- Markets are back to risk-on mode as US-China tensions appear to be on hold; the dollar is getting some modest traction
- May US jobs data will be the main event; Canada also reports May jobs data
- The euro and European credit spreads have reacted positively to the ECB decision; the latest round of high-level Brexit talks is set to end with little progress
- Russia reports May CPI; oil continues to recover
- Japan reported April household spending; Philippines reported May CPI
The dollar is mixed against the majors ahead of US jobs data. The Antipodeans are outperforming, while Swissie and euro are underperforming. EM currencies are mixed. IDR and KRW are outperforming, while PLN and TRY are underperforming. MSCI Asia Pacific was up 0.7% on the day, with the Nikkei rising 0.7%. MSCI EM is up 0.7% so far today, with the Shanghai Composite rising 0.4%. Euro Stoxx 600 is up 1.0% near midday, while US futures are pointing to a higher open. 10-year UST yield is up 4 bp at 0.86%, while the 3-month to 10-year spread is up 4 bp at +72 bp. Commodity prices are mostly higher, with Brent oil up 3.0%, WTI oil up 2.4%, copper up 1.6%, and gold down 0.5%.
Markets are back to risk-on mode as US-China tensions appear to be on hold. US Trade Representative Robert Lighthizer said he feels “very good” about the progress of the Phase One trade agreement. And so, the strong rally in global equity markets continues into its third week. And this time around, US stocks are the clear underperformer. As of mid-morning in London, the S&P 500 (futures) is up 3% on the week, compared to gains of around 6% for the EuroStoxx 600 and over 7% for the MSCI EM.
The dollar is getting some modest traction. DXY traded today at the lowest level since March 12 near 96.442 before seeing a modest bounce. The technical picture remains poor for the dollar, as the break below the key 97.837 level earlier this week sets up a test of the March 9 low near 94.65. Likewise, the euro traded today at the highest level since March 10 and is on track to test the March 9 high near $1.15. Sterling traded today at the highest level since March 12 near $1.2690. Lastly, USD/JPY traded today at the highest level since March 27 near 109.40. Break above 109.50 is needed to set up a test of the March 24 high near 111.70.
May US jobs data will be the main event. Consensus for nonfarm payrolls is currently -7.5 mln vs. -20.537 mln in April, with the unemployment rate seen rising to 19.1% from 14.7% in April. ADP provided the final clue with its private sector jobs data Wednesday, which came in at -2.76 mln vs. -9.0 mln expected. While ADP has a poor record as a predictor of NFP, the whisper number is likely to be somewhat below -7.5 mln. April consumer credit also will be reported today. With the media embargo in effect for the June 10 FOMC meeting, there are no Fed speakers until Powell’s post-decision press conference next Wednesday.
Canada also reports May jobs data. “Only” 500k jobs are seen lost compare to nearly -2 mln in April. Still, this is equivalent to a -5 mln reading in the US. The unemployment rate is seen rising to 15% from 13% in April. Later this morning, May Ivey PMI will be reported. While the Bank of Canada sounded upbeat at this week’s meeting, the truth of the matter is that the economy has a deep hole to climb out of. Note Bombardier Aviation just announced job cuts totaling nearly 2,500. While the bank may be on hold for now, we cannot imagine it will withdraw any support for the foreseeable future. CAD continues to benefit from risk-on sentiment, and USD/CAD appears on track to test the January low near 1.2950. The 200-day moving average near $1.3465 may provide some interim resistance.
The ECB delivered a modest upside surprise yesterday. It increased its Pandemic Emergency Purchase Programme (PEPP) by EUR600 bln rather than the EUR500 bln consensus and extended it through at least June 2021 fromend-2020 previously. The ECB will also reinvest its PEPP holdings until at least end-2022. Baseline GDP forecasts were -8.7% for 2020, 5.2% for 2021, and 3.3% for 2022, while baseline inflation forecasts were 0.3% for 2020, 0.8% for 2021, and 1.3% for 2022. With eurozone governments issuing significant amounts of debt to fund deficits, we expect another increase in PEPP at the September meeting.
The euro reacted positively, trading today at the highest level since March 10. It has fallen back a bit now but the March 9 high near $1.15 is within sight. After that is the January 2019 high near $1.1570 and then the October 2018 high near $1.1620. However, it’s worth noting that the $1.1365 area is key, representing the 62% retracement objective of the 2018-2020 drop. A clean break above this level would set up a test of the September 2018 high near $1.1815. Germany reported April factory orders, which plunged -25.8% m/m vs. -19.9% expected and a revised -15.0% (was -15.6%) in March.
We are also seeing the large net positive effect of yesterday’s ECB actions on European credit markets. Italy’s 10-year spread to German bunds have narrowed almost 20 bp to 175 bp. This came mostly from the sharp decline in Italian yields, but also helped by the 4 bp rise in the German equivalent, which continues to trend higher. In addition, we saw corporate credit extending their gains. The Itraxx indices all continued to see narrowing spread, especially the cross over (high yield), now at around 360 bp, down from 700 bp in March.
The latest round of high-level Brexit talks is set to end with little progress. In other words, the flurry of optimism early in the week about a possible agreement on level playing field and fisheries was just that, a flurry. It’s now up to the UK to request an extension before July 1. Despite the staunch position by the Boris Johnson against it, we still think the odds favor an extension. That said, we do not think markets are pricing in the rising odds of a hard Brexit as sterling continues to be swept by the broad dollar weakening move, appreciating 0.3% today and 2.4% on the week.
Russia reports May CPI. Inflation is expected to ease to 3.0% y/y vs. 3.1% in April. The central bank cut rates 50 bp to 5.5% at its April 24 meeting and signaled further easing. Next policy meeting is June 19 and Governor Nabiullina said that a 100 bp remains on the agenda then, though she added that the odds of such a large cut are less than 100%. Last week, Russia reported April retail sales, unemployment, and construction. As expected, all deteriorated sharply from March as the impact of the pandemic spread.
Oil continues to recover with both Brent and WTI now recoupled and back to around $40 per barrel. Recall that by the end of April, WTI was trading around $13 and Brent around $20 dollars per barrel. The latest leg higher came from reports that OPEC+ is set to sign off on an output cut extension on Sunday after overcoming resistance from Iraq. The April deal envisioned an output cut of about 10% of global oil supply, though compliance has of course been a problem.
Japan reported April household spending. It contracted -11.1% y/y vs. -12.8% expected and -6.0% in March. Despite the upside miss, spending still fell by the most on record dating back to 2000. With the lockdown seen in May, spending is likely to contract even more before things get better. No wonder the government just announced another fiscal stimulus package. The BOJ just announced details of its lending scheme, while We see Japan policymakers on hold for the time being until the impact of these latest measures can be seen. USD/JPY traded today at the highest level since March 27 near 109.40. Break of the 109.50 area is needed to set up a test of the March 24 high near 111.70.
Philippines reported May CPI. Headline inflation came in a tick higher than expected at 2.1% y/y vs. 2.2% in April. Inflation is the lowest since November and moves closer to the bottom of the 2-4% target range. USD/PHP has broken lower to trade at the lowest level since January 2018 and this is likely to add to disinflationary pressures. Next policy meeting is June 25 and another 50 bp cut to 2.25% is possible. At the very least, a 25 bp cut is expected.