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crude oil pops

Oil the chain

Crude oil gapped up late Sunday at the open and has held about half of the overnight gains after Saudi Arabia pledged an additional 1m bpd in productions cuts. OPEC+ also agreed to extend current cuts into 2024, though the UAE gets a concession to pump 200k bpd more next year to make sure it stays in the club. The move in crude was not massive by any stretch – spot WTI jumped $2 to above $74 and now trades around the $73 marker, a level it was at a week ago. The question is where next? First, the Saudis generally deliver on cuts, so it should result in a material reduction in the number of barrels on the market, not just on paper. The cut could add to a potential supply shortfall later in the year, though shorts don’t appear too spooked right now – it will be a question of physical shortfall driving prices if the global economy holds up ok and demand remains firm (a lot depends on the Fed). And the market may be more comfortable that OPEC is going to do ‘whatever it takes’ to keep Brent above $80...the question is whether the macro headwinds abate, or we hit the hard landing.


Sentiment stable despite ceiling

European stocks were mildly positive in early trading on Monday after Friday’s surge, which saw the FSTE 100 extend its bounce off its two-month low back above its 200-day SMA and Wall Street rallied to its highest since August on a super-hot jobs report. Yields not massively higher since – 10s at 3.75%, so market reading this as a positive – Fed achieving the impossible soft landing maybe? Wages were not that strong. And there has been a definite unclenching on the signing of the debt ceiling bill in the US.


Denial and daring

Recession, what recession? There are lots of leading indicators that scream recession coming in the US but until the employment market changes it’s not a recession like we kind of understand. This goes back to the point I made several months ago in our Watchlist 2023 – recession but not as we know it. Labour is so tight (excess labour demand vs supply), keeping wage-price-spiral-like conditions and sticky core inflation, leaving the Fed unable to fall back on its old habit of cutting rates to limit the recession. June rate pricing suggest a one-in-four chance the Fed hikes by another 25bps this month, better than evens it comes in July if not.

Fear, what fear? This is an unloved rally for sure – SPX above 4,200 and out of the range just as the VIX drops to its lowest since Feb 2020....possible reasons for this apparent calm: debt ceiling deal done so no major tail risk of a default being priced; the banking crisis in the US appears to have calmed down a lot (for now); and whether the Fed goes for a couple more hikes or not there is a definite sense that it is near the end of its hiking cycle – whether this is true or not remains to be seen.


What to look for today...

Later is the US services PMI data double for May – surveys coming from both the Institute for Supply Management and S&P Global, with April factory orders and durable goods also on the tape. In Europe, PPI inflation and a speech by Christine Lagarde are of note.

Elsewhere...UBS rallied after it said it would complete the takeover of CS by June 12th. When you talk about too big to fail, we now have the definition of it right here.


Coming up this week 

RBA tomorrow: There was hawkish talk from the Reserve Bank of Australia in May, with the Australian central bank saying that "some further tightening" may be required to ensure that inflation returns to target in a "reasonable timeframe". Markets and economists think the RBA will hike again this year, just not necessarily at today’s meeting. The expectation is that it will deliver one more 25-basis-point interest rate increase by end-September to 4.10%. Seems like a coin toss whether it hikes tomorrow or not.

Then it’s the turn of the Bank of Canada, which is facing pressure to raise rates again. Statistics Canada reported April CPI inflation rose to 4.4 per cent from a year ago, a faster pace than the 4.1 per cent expected. BoC governor Tiff Macklem has remained pretty tight-lipped about whether it will hike again. The BoC has been on pause for the last meetings after a rapid hiking cycle that saw the benchmark rate rise 4.25 percentage points in a year. GameStop earnings are due out.

Japan’s lending and final GDP numbers set the tone in Asia ahead of revised GDP figures for the Eurozone later on Thursday. US weekly unemployment claims will be the main focus though as traders look to see what cracks – if any – might be appearing in the labour market following on from that hot nonfarm payroll report. 

China’s CPI and PPI inflation readings will be of note – factory gate prices from the world’s second largest economy are a useful leading indicator for global inflation. Lending figures for China are also tentatively scheduled for release from today, as is the latest US Treasury currency report. 

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