OPEC+ announced on Sunday that it will extend supply cuts to the Q3 but will gradually return barrels to the market over the following 12 months. The fact that OPEC has a clear time in mind for waning its supply cut policy is not supportive of oil bulls. The barrel of US crude fell to $76.50 at the weekly open before rebounding toward the $77pb on the back of a stronger-than-expected Chinese manufacturing PMI, with the Caixin index pointing at the strongest expansion in nearly 2 years. Expected interest rate cuts from major banks could temper a soft OPEC decision this week, but they may not be enough to send oil prices on a sustained bullish journey unless global growth expectations improve alongside a softer monetary policy outlook from major central banks.
In India, the Nifty 50 jumped to a fresh record, and the rupee rallied as exit polls for the Indian election hinted at a clear-cut victory for PM Modi’s party. In separate news, S&P upgraded its outlook for India from stable to positive, laying the foundation for a higher credit rating for the rising EM giant. This upgrade could lower borrowing costs for the country and further support its economic rise.
The combination of Friday’s soft US inflation data, OPEC’s hint on softer supply policy, the Chinese PMI figure and the reaction to the Indian election results paint the market in green this Monday.
The central bank mosaic
The core PCE data showed on Friday that inflation in the US met the expectation of 0.2% monthly advance in April – the smallest advance of the year, and personal spending grew last than expected. The combination of softer-than-expected US growth and spending, combined with a satisfactory inflation read gave some relief to the market on Friday. As a result, the week ended on a more dovish note compared to when it started. The US 2-year yield slipped below the 4.90% level after having tested the 5% mark earlier in the week, the 10-year yield eased below 4.50%, the S&P500 recovered 0.80% on Friday and closed the week juts 0.5% lower, as Nasdaq managed to close a difficult session near flat and limited losses to around 1.1% for the week.
Hopefully, the surviving chance of a Federal Reserve (Fed) rate cut – or two – could help improve the investor sentiment this week as eyes turn to the Bank of Canada (BoC) and the European Central Banks (ECB) that are preparing to announce their first rate cut this week.
Note that, the ECB has been clear – and probably a bit too clear – on its intention to start cutting the rates in the June meeting. So they can’t really back down now; there will probably be a 25bp cut announced this Thursday. But the truth is, Friday’s CPI update for the Eurozone wasn’t much enchanting for the ECB doves. Consumer prices accelerated from 2.4% to 2.6% in May – higher than 2.5% expected by analysts – and core inflation unexpectedly spiked from 2.7% to 2.9%. The latest CPI update didn’t bring much confusion regarding the ECB cut expectations this week, but somehow killed hope regarding a possible, second rate cut in July. As such, and in the light of the latest developments, the ECB’s communication on what it is planning to do next amid signs of quickening inflation will matter more than the cut itself. If the ECB sounds cautious considering the rising upside risks to the price stability – and that’s my base case scenario – we could see the euro get some support following a choppy end of May. The pair is trading near the 1.0850 this morning.
