Services PMIs the Next Focus after Last Week's Bumper U.S. Jobs Report

Forex

Summary:

While U.S. markets finished the week on a high, after another bumper jobs report and a positive week across the board, markets in Europe, while finishing the week on a high, struggled to match the exuberance of investors on the other side of the Atlantic.

The Nasdaq 100 once again led the way, finishing higher for the sixth week in a row, while the S&P500 closed at its highest levels since August last year. European markets on the other hand, while finishing the week strongly higher, had a more mixed weekly performance.

The reason was a jobs report that painted a picture of a resilient U.S. economy that continues to add jobs at a solid pace, as for the 14th month in a row the number of jobs added comfortably beat economic forecasts. 339k new jobs were added in May, with a 92k upward revision to the previous 2 months, although the unemployment rate ticked up to 3.7%, a number that wasn't matched by an uptick in the participation rate. Wage growth slowed modestly to 4.3% but not by enough to suggest that the labour market is loosening. Every labour market data item the market was exposed to last week showed that U.S. businesses are still hiring, and vacancy rates are showing little sign of slowing.

This in turn presents the Federal Reserve with a problem, having so clearly suggested they might pause or skip a rate hike at this month's meeting, a lot of the economic data suggests that rate hikes thus far have had little effect. U.S. 2-year yields reacted accordingly, closing almost 16bps higher on the day, even though they still finished the week lower.

With the latest U.S. inflation numbers due out the day before next week's Fed meeting, U.S. policymakers will have a challenging job to spin the idea of holding rates while at the same time keeping the option open for a July rate move. It may well be easier to hike in June and leave one's options open for July. The messaging would undoubtedly be simpler, however the splits on the FOMC are already showing and there are differences of opinion starting to emerge on what comes next.

2-year rates did finish last week down from their peaks of the previous week, however the way they closed off their lows suggest that bond markets remain unconvinced that they will come down quicker than the rate at which they have risen over the past few weeks.

The U.S. dollar also finished the day higher on Friday in anticipation that rates would stay higher for longer, albeit modestly lower on the week.

What was clear from last week's economic data was the dire state of the manufacturing sector globally, stuck permanently in contraction with little prospect of a rebound in the short term.

The services sector on the other hand has been much more buoyant, a fact that should be borne out by today's services PMIs from Spain, Italy, France Germany, the UK and U.S., and which are expected to show resilience to the tune of 57, 57, 52.8, 57.8, 55.1 and 55.1 respectively, all performing strongly despite higher costs, although all are expected to be weaker than their April numbers.

If anything, Friday's jobs report had something for the bulls and the bears, and while European markets underperformed last week, there is a feeling that central banks are quite close to the end game when it comes to rate hikes, and that while rates shot up at the end of last week, they are holding below their recent peaks.

Inflation does appear to be coming down on the headline level, as are producer prices at a faster rate and these tend to be leading indicators, even with core prices being sticky. That would suggest that core prices will come down, albeit at a much slower rate than originally thought.

Today's EU PPI numbers for April ought to add further insight into that trend, with an expectation that on a month-on-month basis we could see the -1.6% decline in March accelerate in April to a -3.1% fall.

With China PPI also in negative territory to the tune of -3.6% year on year for the same month, the global economy could be about to undergo a wider wave of disinflation.

The wider question is whether the Saudi's attempts to underpin the oil price with further production cuts, which were announced over the weekend, make the current situation worse and push Brent crude prices back above $80 a barrel at a time when consumer sentiment remains incredibly fragile.

More question marks remain over the Chinese economy after whispers last week that the authorities there were looking at measures to support its property market, which saw a rebound in metals prices.

EUR/USD – the failure at the 1.0780 area has seen the euro slip back, with support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – slipped back from the 1.2540 area last week, but remains in a broader uptrend with support at the 1.2300 area and trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.

EUR/GBP – found support at the 0.8560 level last week, just above the December 2022 lows at 0.8558. A break of 0.8550 targets 0.8480. The 0.8620 area now becomes resistance with major resistance behind that at the 0.8720 area.

USD/JPY – last week's decline from the 140.95 area found support at the 138.40 area, and rallied back to the 140.00 level. While above the 137.00 area the risk remains for a move towards 142.50.

Source: CMC

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Warren Takunda

Cryptocurrency

Traders' Opinions

In a shocking turn of events, a group of Dogecoin investors has filed a lawsuit against renowned entrepreneur Elon Musk, alleging insider trading and market manipulation of the popular cryptocurrency, Dogecoin (DOGE). The investors claim that Musk, through a series of calculated actions, leveraged his influence to artificially boost the price of DOGE for personal gain.

According to the lawsuit, Musk utilized various means to manipulate DOGE's price, including his active presence on Twitter, his appearance on Saturday Night Live (SNL), and other attention-grabbing publicity stunts. The investors assert that Musk strategically utilized his vast online following to promote DOGE, thereby inflating its value, only to sell off significant amounts of the cryptocurrency for substantial profits.

The allegations point to an incident in April when Musk changed his Twitter profile picture to DOGE's logo. This seemingly innocuous act allegedly caused a significant surge in DOGE's price, leading to a 30% increase. The investors claim that during this price spike, Musk offloaded approximately $124 million worth of DOGE from wallets under his control or those of Tesla, the electric vehicle company he heads.

Moreover, the lawsuit argues that Dogecoin should be considered a security under the regulatory framework established by the U.S. Securities and Exchange Commission (SEC). By promoting and manipulating DOGE's value, Musk is accused of violating federal securities laws, which could have far-reaching consequences for both the entrepreneur and the cryptocurrency market as a whole.

In response to the allegations, Musk and Tesla have vehemently denied any wrongdoing, dismissing the lawsuit as a "fanciful work of fiction." They maintain that Musk's involvement with DOGE has been lighthearted and intended for entertainment purposes rather than financial gain.

This legal battle between Dogecoin investors and Elon Musk has drawn significant attention, underscoring the growing need for regulatory clarity in the cryptocurrency space. The outcome of this case may set important precedents regarding the responsibilities and limitations of influential figures in shaping the value of digital assets.

While the lawsuit continues to unfold, the allegations against Elon Musk serve as a reminder that even in the world of decentralized cryptocurrencies, accountability and transparency remain essential for investor confidence and the overall stability of the market.

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Owen Li

Commodity

Chicago-traded soybean futures last week closed below $13 per bushel for the first time in a year-and-a-half, though speculators are still hanging on to the net long position they have maintained since April 2020.

Meanwhile, an unusually dry end to May across the U.S. Corn Belt and the possible continuation of that pattern into mid-June sparked funds' biggest weekly round of short covering in CBOT corn in nearly three years.

Most-active CBOT soybean futures tumbled 2% in the week ended May 30, seemingly cementing funds into bearish territory. May 30 featured most-active beans' first settle below $13 per bushel since December 2021, and November soybeans lost nearly 3% during the four-day trading week.

As of May 30, money managers' net long in CBOT soybeans stood at just 529 futures and options contracts versus 4,147 the week before. Exiting longs were more prominent, but funds also covered soybean shorts, the first such instance in eight weeks.

Funds Cling to CBOT Soybean Long and Heavily Cover Corn Shorts_1

Most-active CBOT corn futures rose nearly 3% and new-crop December futures gained 1.6% in the week ended May 30, motivated by unfavorable U.S. weather. Money managers slashed their net corn short by nearly 47,000 contracts to 51,065 futures and options contracts.

That was entirely on short covering, the largest such round since August 2020, though speculators started padding their short positions only in late February.

Funds Cling to CBOT Soybean Long and Heavily Cover Corn Shorts_2

Both soybean meal and soybean oil futures shed more than 3% in the week ended May 30, though funds were notable sellers only in meal. Money managers cut their net long in CBOT soybean meal futures and options to 59,676 contracts, the lightest in a year. That compares with 73,789 a week earlier.

Soybean oil had been gaining throughout that week but plunged on May 30 along with other global vegoils and crude oil on broad economic concerns.

Money managers expanded their net short in CBOT soybean oil futures and options by 572 contracts to 37,449 as of May 30, their most bearish oil view since July 2019. They have been net sellers of the vegoil in 22 of the last 28 weeks.

Most-active CBOT wheat futures fell 5% in the week ended May 30, finishing it off with the first settle below $6 per bushel since December 2020. Money managers extended their net short to 126,998 futures and options contracts, the largest since January 2018, up more than 8,200 on the week.

They also cut nearly 7,000 contracts from their net long in Kansas City wheat futures and options, which fell to 9,628 contracts. Funds increased their net short in Minneapolis wheat to 7,703 contracts from 6,402 a week earlier.

The 2.5-year low in CBOT wheat combined with China's waterlogged crop and strength in corn lifted most-active wheat futures 4.7% between Wednesday and Friday. Most-active corn on Friday hit the highest levels since April 26, rising 2.5% over the three sessions and possibly erasing more fund shorts.

December corn rose 3% over that period as forecasts still showed dryness for parts of the U.S. Corn Belt through at least next week. November beans were up 2.6% and most-active beans rose more than 4%, meaning funds are likely still long.

Most-active soymeal added 1.3% between Wednesday and Friday, but soyoil surged over 7%.

In the livestock sector, benchmark CME lean hog futures set contract lows on May 26, though both August live cattle and feeder cattle set contract highs on Friday.

Money managers as of May 30 held a record net short in lean hogs of 31,110 futures and options contracts, up from 24,129 a week earlier. They held a net long in live cattle of 107,835 contracts as of May 30, up from 101,990 in the prior week and their most bullish since early March.

Funds' record net long in live cattle is 154,550 contracts from April 2019.

Source: Market Screener

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Warren Takunda

Traders' Opinions

After the recent resolution of the debt ceiling issue in the United States, the upcoming week is expected to be relatively calm on the domestic front. However, global investors will have their eyes on several key economic indicators and monetary policy meetings taking place around the world. Additionally, inflation rates and trade data from major economies will provide further insights into the current state of the global economy. In the coming week, keep an eye out for:

United States

In the United States, the primary focus will be on the release of the ISM Services PMI, factory orders, and trade data. The ISM survey for May is anticipated to reveal an expansion in the service sector, indicating a strengthening in overall economic activity. Investors will be particularly interested in the gauge that measures price pressures, as concerns about service-led inflation persist. Additionally, the trade deficit is expected to widen due to a decline in exports and an increase in imports, while factory orders are forecasted to rise for the second consecutive month.

Canada

The Bank of Canada is scheduled to announce its monetary policy decision, and market expectations suggest no change in the key interest rate, which is projected to remain at 4.5%. In addition, important economic data to watch includes Canada's foreign trade and Ivey PMI. Mexico's CPI data and consumer morale, as well as Brazil's inflation rate and services PMI, will also be closely monitored.

Euro Area

In the Euro Area, a downward revision to a modest 0.1% Q1 GDP growth figure is expected, indicating a second consecutive quarter of economic stagnation. However, retail sales in the Eurozone are anticipated to rebound, and Germany's industrial activity is set to recover following a significant drop, aided by a rebound in factory orders. Other releases to watch for include Germany's balance of trade, as well as the inflation rates of Switzerland, Turkey, and Russia. The UK's Halifax house price index and updated Services PMI will also provide insights into the British economy. A benchmark reference rate of 6.75% is expected to be maintained by the National Bank of Poland.

China

In China, attention will be on the trade balance and inflation rate for May, offering further insight into the country's economic recovery post-COVID. Recent data has cast doubt on previous recovery expectations, making these releases crucial for assessing the current state of the Chinese economy.

India

The Reserve Bank of India is anticipated to keep its interest rate unchanged for a second consecutive meeting, signaling a cautious approach to monetary policy. The release of industrial and manufacturing output data for April by MOSPI will provide additional clarity on the country's economic performance.

Other Countries

Australia's Reserve Bank is expected to maintain its cash rate following last month's unexpected hike. Australia's GDP growth figures for Q1 and the trade balance for April will shed light on the country's economic trajectory. Inflation rates for May will be released by South Korea, the Philippines, and Indonesia, providing an indication of price pressures in these respective economies.

Overall, the week ahead will be defined by macroeconomic data releases and central bank decisions. Investors will closely monitor the performance of major economies and analyze the potential impact on global financial markets. With concerns about inflation lingering, the data will be crucial in shaping future monetary policy decisions and investment strategies.

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Devin

Economic

April is supposed to herald the start of a British ritual: the house-buying season. Traditionally, it is the time when demand for homes picks up and the property supplements in the weekend papers are full of suggestions for sellers bidding to attract the interest of buyers.

But not this year. According to the latest bulletin from the Bank of England, repayments on existing mortgages in April were £1.4bn higher than new loans. This is unusual. Apart from during lockdown, it was the lowest figure since records began in 1993. The number of new mortgage approvals – loans agreed but not yet advanced – fell in April and were well below the average in the five years leading up to the pandemic.

There are a number of reasons for the lack of spring bounce in the property market. The availability of mortgages at ultra-low rates meant prices soared in the two years after the start of the pandemic, making it harder for new buyers to afford their first home. The inevitable pause for breath then happened to coincide with rising interest rates and a slowdown in the economy.

These two factors – rising borrowing costs and sluggish growth – will continue to affect the market over the coming months. The Bank has raised interest rates from 0.1% to 4.5% in the space of 18 months – and looks certain to raise them further given the failure of inflation to fall as quickly as expected. Financial markets are pricing in three more quarter-point increases from Threadneedle Street by the end of the year. Mortgage lenders have responded to higher rates by raising mortgage rates and pulling some of their more attractive products.

So far, falls in house prices have been modest, with the average cost of a home down 3.4% on a year ago, according to the Nationwide building society. Even so, this was the biggest annual decline recorded since 2009, during the global financial crisis – and there is more to come. Activity in the housing market is likely to remain subdued for at least the rest of this year, and perhaps longer if – as seems probable – the first cuts in interest rates from the Bank don't materialise until well into 2024.

A full-blown housing market crash of the sort seen in the early 1990s looks unlikely, though. Net migration stood at more than 600,000 last year, and that will underpin demand. What's more, the low level of unemployment means there are few forced sellers. The five-year slump in the first half of the 90s was caused by the dovetailing of 15% interest rates and a jobless total in excess of 3 million. The economy may still fall into recession this year as a result of interest rates staying higher for longer than previously envisaged, but there is no immediate prospect of a wave of newly unemployed owner-occupiers having to sell up.

All that said, it would be reasonable to expect a peak-to-trough fall in nominal house prices of at least 10%, which would amount to a real terms fall of more than 20% once inflation is accounted for. That's a chunky fall. It's also a welcome one.

Even though it's been said before, it's worth repeating that the UK is a country wrongly convinced that inflation-busting increases in house prices are a good thing. They are not. The flip side to over-investment in bricks and mortar is under-investment in other more productive uses of capital. The regular booms in the economy driven by consumers extracting and spending equity from the rising value of their homes are invariably followed by busts.

Those who benefit from rising prices tend to be better off people in older age groups. Those who lose out tend to be two over-lapping categories: renters and the young. Anybody under 35 who is saving up for a deposit on a flat will be glad of a drop in house prices.

Housing is likely to be a central issue at the next general election, with the two main parties each backing a different side. The Conservatives – who have all but dropped housebuilding targets – are lining up behind existing owner-occupiers. Labour has said it would impose targets and be prepared to build on parts of the green belt. It is also drawing up plans that would force landowners to sell plots of land for less than their potential market price in an attempt to stop land hoarding and so increase the supply of new homes.

Even if Labour actually goes ahead with its plan, it looks certain to be challenged in the courts. Currently, if a council wants to compulsory purchase a piece of farmland for housing development it has to pay a "hope" value. That's the value not of the farmland but of the value of the farmland adjusted for planning permission, which is substantially higher.

What is certain is that Labour's approach makes more sense than the government's. The current levels of housebuilding are incompatible with a rising population, and increasing the supply of homes requires reform of the planning system.

The politics are also interesting. Onward, a right of centre thinktank, produced a report last week in which it said the current crop of 25- to 40-year-olds was the first not to become more rightwing as it grew older, and housing is one reason for this.

Current Conservative housing policy will help those in their 50s and 60s who have already benefited from house-price inflation rather than those in their 20s and 30s struggling to get on the housing ladder. If Labour has concluded this is dumb economics and dumb politics, it is right on both counts.

Source: The Guardian

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

In response to mounting concerns over a potential new supply glut and the recent decline in oil prices towards the $70 per barrel mark, OPEC and its allies are reportedly engaged in discussions regarding the deepening of oil production cuts. According to reliable sources, these cuts could amount to as much as 1 million barrels per day (bpd), supplementing the existing cuts of 2 million bpd and voluntary cuts of 1.6 million bpd that were unexpectedly announced in April.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, collectively account for approximately 40 percent of global crude oil production. Therefore, any policy decisions made by this alliance can have a significant impact on oil prices worldwide.

While OPEC+ ministers are scheduled to gather in Vienna at 2 pm on Sunday to discuss various options, including potential production cuts, OPEC ministers will convene at 11 am on Saturday to lay the groundwork for these discussions.

If the proposed cuts are approved, they would result in a total reduction of 4.66 million bpd, which represents approximately 4.5 percent of global demand. This move comes as Western nations accuse OPEC of manipulating oil prices and thereby impeding global economic growth due to high energy costs. In response, OPEC officials and insiders argue that the West's extensive money-printing practices in recent years have contributed to inflation, necessitating actions to safeguard the value of oil exports.

Iraq's Oil Minister Hayan Abdel-Ghani emphasized their commitment to achieving global oil market stability, stating, "We will never hesitate to take any decision to achieve more balance and stability (on) the global oil market."

The surprise announcement of production cuts in April initially drove oil prices up by approximately $9 per barrel to exceed $87. However, market concerns over global economic growth and demand have since exerted downward pressure on prices. As of Friday, the international benchmark Brent crude was trading around $76 per barrel.

Saudi Arabia's Energy Minister Prince Abdulaziz previously warned investors who were shorting the oil price to "watch out," which many interpreted as a signal for potential additional supply cuts. Conversely, Russian Deputy Prime Minister Alexander Novak indicated that he did not anticipate any further measures from OPEC+ during the Vienna meeting, according to Russian media reports.

The International Energy Agency predicts a potential increase in global oil demand in the second half of 2023, which could help bolster oil prices. However, analysts at JP Morgan have criticized OPEC for not responding quickly enough to adjust supply levels in light of substantial US fuel output.

In a note, JP Morgan analysts stated, "Demand growth continues to be robust. Rather, there is simply too much supply... The alliance waited too long to reduce supply. The alliance - or at least some members - would likely need to cut more."

Analysts at Rapidan Energy Group estimate a 40 percent likelihood of further production cuts, emphasizing the ministers' determination to prevent a repeat of the 2008 scenario. During that period, a sudden collapse in global economic and financial stability caused crude prices to plummet from over $140 to $35 per barrel within six months.

As the OPEC+ meetings unfold in Vienna, market participants will closely monitor the decisions and announcements made by the alliance. The potential deepening of production cuts holds the key to rebalancing the global oil market and stabilizing oil prices in the face of prevailing concerns of oversupply.

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Cohen

OPEC+ members Saudi Arabia, the UAE, Iraq, Kuwait, Oman and Algeria will extend their voluntary oil production cuts until the end of 2024 as economic growth concerns weigh on the outlook for crude demand.

Saudi Arabia, the world's largest crude exporter, will make an additional voluntary output cut of 1 million barrels per day in July, which could be extended if required, the kingdom's energy minister said during a press conference after Sunday's OPEC+ meeting.

"We continue to set the example of how much one needs to be transparent in order to achieve the most … dominant and more important priorities, which is seeking stability and sustainability," Prince Abdulaziz bin Salman said.

The UAE, OPEC's third-largest producer, will have its voluntary cut of 144,000 bpd in place until the end of December 2024.

This is "a precautionary measure, in coordination with the countries participating in the OPEC+ agreement, which had previously announced voluntary cuts in April", Suhail Al Mazrouei, the UAE's Minister of Energy and Infrastructure, said on Twitter.

"This voluntary cut will be from the required production level," Mr Al Mazrouei said.

Russia will also extend its voluntary output cut of 500,000 bpd until the end of next year.

In a separate statement on Sunday, the OPEC+ alliance of 23 oil-producing countries said it set a new production target of 40.46 million barrels per day for next year.

The decision was taken "in light of the continued commitment … to achieve and sustain a stable oil market, and to provide long-term guidance for the market, and in line with the successful approach of being precautious, proactive, and pre-emptive", OPEC+ said.

The group will hold its next meeting on November 26 in Vienna.

The announcement comes as Brent, the benchmark for two thirds of the world's oil, lost about 11 per cent of its value this year on weak economic growth in the US and China – the two top oil-consuming nations.

Brent settled 2.49 per cent higher at $76.13 a barrel on Friday after the US Senate passed a debt ceiling agreement, averting what would have been a first-ever default.

West Texas Intermediate, the gauge that tracks US crude, was up 2.34 per cent at $71.74 a barrel.

The international benchmark crossed $85 a barrel in April after some OPEC+ producers surprised markets by announcing combined voluntary output cuts of 1.16 million barrels per day from May until the end of the year.

The move took the group's total production curbs to 3.66 million bpd, or 3.7 per cent of global demand.

At an event in Qatar, Saudi Arabia's Energy Minister told oil market short sellers to "watch out" amid volatility in the market.

"I keep advising them that they will be 'ouching'. They did 'ouch' in April," Prince Abdulaziz bin Salman said.

Short sellers strategically position themselves to make a profit if prices decline, by selling borrowed assets in the hope of repurchasing them at a lower price.

The Saudi minister's comments helped to lift prices before a sudden turnaround after Russia's Deputy Prime Minister, Alexander Novak said OPEC+ was likely to stick to existing production targets at their meeting.

Traders are looking for signs of falling Russian exports after the country extended its output cut of 500,000 bpd until the end of the year.

Russian exports surged to 8.3 million bpd in April, the highest since Moscow's invasion of Ukraine last year, the International Energy Agency said in its latest oil market report.

The agency, which attributed the rise in exports to higher production volumes, said that Russia did not adhere to the output curbs.

Swiss lender UBS said the discrepancy between Russia's stated production cuts and resilient seaborne exports may be due to changes in pipeline exports, domestic oil demand and exports of refined products.

The IEA has predicted that global crude demand will hit record levels this year on the back of an economic recovery in China, the world's second-largest economy and top crude importer.

But economic growth in the Asian country has been largely uneven since it lifted Covid-19 restrictions earlier this year.

"The non-synchronised recovery in Chinese economic growth is perhaps the biggest challenge for the oil market," Energy Aspects, a London-based consultancy, said.

"Not all sectors have risen and definitely not at the same pace."

Oil prices fell more than 2 per cent in a single session last week after a key gauge of China's manufacturing sector came in lower than market expectations.

China's manufacturing purchasing managers' index (PMI) for May fell to 48.8 from 49.2 in April, according to data from the National Bureau of Statistics, its lowest in five months.

It marked the second consecutive reading below the 50-point mark that separates expansion from contraction.

Analysts and oil industry executives expect the market to tighten in the second half of 2023 on higher Asian consumption and lower output from OPEC+ members.

"This is primarily the winter effect in Asia … but also a strong view that we still have that pre-Covid demand yet to come," Mike Muller, head of Vitol Asia, said at an event in Dubai last month.

There are a lot of "green shoots" for oil bulls in the summer amid production cuts and projections of strong crude demand growth in China, Energy Aspects said.

"But, fundamentals are not going to drive crude's flat price higher until strong inventory draws are blindingly obvious," the consultancy said.