Week Ahead – Did a soft jobs report end the dollar’s rebound?

US economic data is good, but not yet supportive of the substantial progress that is needed for the Fed to seriously begin talking about tapering asset purchases.  The US dollar and Treasury yields plummeted after job growth in May fell well short of economists’ estimates.  Payrolls rose by 559,000 last month, a solid improvement from April’s upwardly revised 278,000, but much lower than the whisper number that looked for 800,000 jobs.

The economy is strengthening but the pace is slower than most have expected.  In the first five months of the year, the US has added 2.169 million jobs, which leaves over 7.6 million still needing jobs.  The labor market recovery is far from substantial and that should confirm a patient stance from the Fed.

The upcoming week is filled with a wide range of risk events, that include a handful of rate decisions, a key inflation report, crunch time for infrastructure spending talks, and resumption of talks over the Iran nuclear deal.  Currency traders will pay close attention to the latest US inflation report, the ECB policy meeting, and what will be the Biden administration’s decision on taxes and infrastructure spending.

ECB likely to hold off on slowing bond-buying

Will US inflation continue to speed up in May?

Energy traders fixated over Iran nuclear deal talks

Country

US

The US economy continues to recover, albeit at a slower pace than what Wall Street was expecting.  The May nonfarm payroll report was an improvement over the disappointing prior month but fell well below the 800,000-whisper number.  The key takeaway is that the economy is nowhere near showing substantial progress in the labor market recovery and that should keep Treasury yields heavy and the dollar vulnerable.

The focus next week turns heavily political as President Biden tries to wrap up his infrastructure deal with a compromise over taxes.  The GOP will use the tepid employment report as an excuse to end the extension of the supplemental federal unemployment benefits.

The key economic release of the week will be the US inflation report for the month of May.  Pricing pressures are expected to remain but at a slower pace.  The month-over-month reading is expected to show 0.4% gain, which would be down from the 0.8% increase seen in April. Hotter-than-expected CPI readings could be what is needed help Treasury yields to rebound.

Financial markets might get a little choppy as investors brace for the June 16th FOMC policy.

EU

The ECB holds its policy meeting on Thursday. The meeting promises to closely watched, as ECB policymakers are expected to make a key decision with regard to asset purchases. There does not appear to be any real disagreement among members of the Governing Council. Hawkish members are not expected to complain about additional bond purchases, with eurozone yield spreads widening. There is a strong likelihood that at the meeting the ECB will make “significantly higher” bond purchases for another three months through the Pandemic Emergency Purchase Programme (PEPP).

At the meeting, the bank will release updated economic forecasts. We are unlikely to see any substantial change, although they could indicate a slight drop with economic activity in the first half of 2021 and higher inflation for the full year.

Martin Kazaks, a member of the Governing Council, said last month that the ECB could opt to taper the PEPP as early as June if the eurozone economy does not show a downturn. Kazaks added that there are upside risks to the economy’s outlook. However, other members have stated they are not in favor of a taper in the third quarter.

Germany

The state of Saxony-Anhalt will hold an election on Sunday, June 6. Polls show that Chancellor Angela Merkel’s Christian Democrats could lose to the Afd, a far-right party.

On Tuesday, Germany releases ZEW Survey Expectations for June. The consensus stands at 86.0, up from the previous reading of 84.4.

UK

Cornwall will host the G7 meeting, which will run from Friday until Sunday. President Biden will attend, marking his first visit to the UK as president. Australia, South Africa, India and South Korea will participate in the summit as guest countries.

The UK will treat the market to a data dump on Friday. The highlight release is the GDP reports for April which should show a modest improvement from 2.1% to 2.8%.

Emerging Markets

Poland

Poland’s central bank is expected to keep interest rates steady at 0.10%.  The National Bank of Poland is considering a tightening of monetary policy, with a taper possibly in the second half of 2021. Policymaker Hardt went even further, calling for the central bank to raise rates by 15 basis points at its policy meeting on Wednesday. At the same time, Hard said that it was premature for the bank to terminate its bond-purchase programme, which, he said, “has a stabilizing effect on the market”.

Russia

On Friday, the Russian central bank holds a policy meeting. Tthe bank is expected to raise its key rate by 25 or 50 basis points. Policymakers often change their thinking right up to the decision.

Turkey

The markets are on edge after Turkish President Recep Tayyip Erdogan said on Wednesday that interest rates need to come down. With inflation in double digits, a cut in rates could see inflation spiral out of control. The lira plunged 4 per cent on Wednesday, dropping to a record low of 8.88 against the dollar, before recovering slightly.

China

China has another important week of data with the release of trade data early in the week, April CPI on Tuesday, and possible releases of money supply, aggregate financing loans, and money supply data.  China’s inflation data will closely be followed as it could add to global inflation worries.  Trade data should show exports and imports remain robust, a sign the economic recovery is firmly intact.

The yuan looks ripe to weaken now that it is trading once again above the 6.40 level.  Dividend payments for Chinese firms in Hong Kong is also providing some support for calls for a weaker yuan.  Market positioning suggests a peak is in place for the yuan.

India

The Indian rupee remained near the lows of the week after the RBI kept rates unchanged and signaled they will remain accommodative to revive and sustain growth.  Decisions over sovereign bond purchases came in-line with expectations.

The upcoming week has one key release, India’s industrial production will be tricky as output was hampered by lockdowns, but last year’s miserable readings will make this reading look better than it really is.  The April year-over-year industrial output reading is expected to rise 126%, which would be much higher than 26% prior reading.

Australia & New Zealand

Aussie investors will continue to look for clues from the RBA over what they will do with its three-year yield target at the July 6th RBA meeting.  The RBNZ will continue to slow the pace of weekly bond purchases.

New Zealand releases ANZ business confidence, REINZ house sales, and Manufacturing PMI.

Australia releases ANZ Job advertisements, NAB business confidence, and Westpac Consumer Confidence.

Japan

Japan appears to be headed for another recession as lockdowns continue to hamper economic growth.  The final read of first quarter GDP might improve to -4.8%, but optimism is downbeat for the second quarter.  Japan is still preoccupied with preparations for next month’s Olympics.

Markets

Oil

Energy markets will fixate over every incremental update with the Iran nuclear deal.  Talks are expected to resume, and pressure is growing to revive the deal before the Iranian presidential election on June 18th.  Expectations continue to dwindle, but optimism is still there for a deal to get done.  Depending on how much Iranian crude returns and how quickly, Brent crude prices could swing by $10 in either direction.  Energy traders are still optimistic that robust demand recovery will remain in place and that the market will stay balanced.

Gold

Bullion volatility will remain elevated as the trajectory of Treasury yields become less certain.  Gold rebounded after a disappointing nonfarm payroll.  The Fed is not seeing substantial progress in the labor market recovery and that should confirm their ultra-accommodative stance throughout most of the summer.  Gold could see further momentum next week if Treasury yields remain heavy.

Bitcoin

Bitcoin volatility has started to ease, partially from retail traders focusing on meme stocks and as corporate America holds off embracing cryptos until ESG concerns are addressed.  Long-term bets on Bitcoin appear firmly locked-in and that appears to be providing some underlying support.

Elon Musk’s tweets are so far not discouraging retail investors, but if Tesla abandons their crypto holdings, the $30,000 level could easily break.

Key Economic Events

Saturday, June 5

– Former President Donald Trump speaks at a North Carolina Republican Party event.

Sunday, June 6

– Vice President Harris travels to Guatemala and Mexico to discuss the surge of Central American migration to the U.S.

– Germany’s poorest state, Saxony-Anhalt, holds an election, with the polls suggesting Merkel’s CDU could fall.

– Mexico votes in legislative midterm elections. President AMLO’s ruling coalition is expected to defend their majority in the lower house.

Monday, June 7

– ECB Governing Council member Holzmann delivers a briefing on the latest Financial Stability Report.

– The International Atomic Energy Agency (IAEA), holds a board meeting

– Apple holds its annual Worldwide Developers Conference (WWDC) and is expected to reveal new hardware and software.

Economic Data/Events:

• Australia ANZ job advertisements, foreign reserves
• China trade, foreign reserves
• South Africa Foreign/gross reserves
• Germany factory orders
• Japan leading index
• Russia CPI
• Switzerland CPI, unemployment, foreign currency reserves
• Spain Industrial output
• Czech Industrial output
• Norway Industrial production
• Finland trade balance
• Sweden budget balance
• Chile copper exports
• Apple Worldwide Developers Conference keynote

Tuesday, June 8

-World Trade Organization meets to discuss expanding the production of Covid vaccine facilities.

-EU home affairs ministers meet in Luxembourg.

-FIA and SIFMA host a virtual Asset Management Derivatives Forum. SEC Commissioner Allison Herren Lee gives a keynote address.

Economic Data/Events:

• Australia NAB business conditions/confidence
• Eurozone GDP
• Germany industrial production, ZEW survey expectations
• South Africa GDP
• Czech Retail sales
• US Trade balance
• Canada international merchandise trade
• Japan GDP, trade balance, BoP, bankruptcies
• Czech international reserves
• Italy retail sales
• Hungary Industrial production
• Sweden Industrial production

Wednesday, June 9

-Hungary Central Bank’s Deputy Governor Virag speaks at a banking conference

Economic Data/Events:

• Bank of Canada (BOC) Interest Rate Decision: Not much expected following the hawkish April meeting
• Poland Central Bank Rate Decision: Expected to maintain record-low borrowing costs despite inflation spiking to 4.8% in May.
• US wholesale inventories
• Mexico CPI
• China CPI
• Russia CPI
• New Zealand manufacturing activity, ANZ business confidence
• Australia Westpac consumer confidence
• Germany Trade Balance
• Hungary Trade Balance
• Denmark Trade Balance
• China PPI, money supply, new yuan loans
• Japan M2 money stock, machine tool orders
• South Africa SACCI business confidence
• EIA Crude Oil Inventory Report

Thursday, June 10

-Bank of Canada Deputy Governor Lane speaks

-Iran nuclear deal talks reconvene in Vienna

-EU environment ministers meet in Luxembourg

-OPEC releases monthly Oil Market Report

Economic Data/Events:

• ECB Rate decisions: PEPP buying to remain intact, possibly ready to be lowered in the third quarter.
• US initial jobless claims, CPI
• France Industrial production
• Japan PPI
• Norway PPI
• New Zealand REINZ house sales
• South Africa current account, manufacturing production, gold production
• Czech CPI
• Denmark CPI
• Norway CPI
• Sweden CPI
• Russia gold and forex reserves,
• UK RICS house prices

Friday, June 11

-G-7 leaders’ summit starts in Cornwall, England

Economic Data/Events:

• US University of Michigan sentiment
• UK Industrial production, Trade Balance
• India Industrial production
• Turkey Industrial production
• Mexico Industrial production
• New Zealand Manufacturing PMI
• Japan BSI business conditions
• Russia rate decision: Expected to raise Key rate 25 basis points to 5.25%
• Russia trade data
• Italy unemployment
• Baker Hughes US rig count

Sovereign Rating Updates:

– Spain (Fitch),

– Austria (Moody’s)

– Netherlands (Moody’s)

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