Markets
US payrolls guided Friday’s market dynamics in an otherwise quiet session. Job growth was better than expected (850k vs. 720k), breaking with two months of disappointments. The household survey-based unemployment rate, however, unexpectedly rose from 5.8% to 5.9%. These two labour market gauges are key elements in the Fed’s assessment so having them going in opposite ways provides an excellent opportunity to observe from the sidelines rather than feel the pressure to act swiftly. Markets at least seemed to think so and brought both the S&P500 and Nasdaq to new all-time highs. Bets on Fed hikes were pared back, causing outperformance of the short and medium end of the curve. Yields fell up to 4.1 bps (7y). The 10y yield (-3.4bp) retreated to just below support of 1.43%. The German yield curve bull flattened again. Both the 10y and 30y finished the week more than 3 bps lower with the former slipping below -0.20% support and closing the post-Fed gap. The move followed reports the day earlier the ECB is holding a special strategy meeting this week (Tuesday through Thursday) to wrap up its strategy review, including the way it defines price stability. EUR/USD reversed European weakness, rebounding from the low 1.18 area to finish at 1.1865 as the dollar softened in the wake of the payrolls. The 1.185 support lived to fight another day. USD/JPY fell but held the 111 barrier in the close. EUR/GBP lost ground but is still going nowhere around 0.86.
Asian-Pacific markets trade mixed. China marginally underperforms following the country’s broadened crackdown on tech platforms and disappointing PMIs. The services Caixin PMI eased significantly from 55.1 to 50.3, just above the neutral level with Markit citing a resurgence of Covid-19 (in the Pearl River Delta) as one of the important factors explaining deteriorating sentiment. Combined with the manufacturing slowdown to 51.3 last week, the composite indicator declined to 50.6. Core bonds have a minor downward bias. US cash markets remain closed in observance of Independence Day (4th of July). The dollar strengthens marginally on FX markets.
Today’s economic calendar is all but empty and without guidance from the US either this is going to be a day to forget soon. Commodities, and oil in particular, might grab most of the headlines. OPEC+ is still in disarray over a further output increase starting from August (see headline below). Overall sentiment will guide trading. European equity futures trade neutral. After closing the gap, the German 10y yield could be in for a technical rebound, in line with current (inverse) moves in the Bund future. Question is what this means in thin markets of course. To the downside, support lies at -0.25%. In EUR/USD we’ll be looking for 1.185 to hold but we don’t expect any sizeable market moves today.
News headlines
According to a report of the International Energy Agency, global demand for gas is expected to recover to pre-pandemic levels this year. The IEA sees global gas consumption rising 3.6% this year after a contraction of 1.9% last year. Albeit at a slower pace, demand is expected to grow to 7% above the pre-corona level in 2024. “The rebound in gas demand shows that the global economy is recovering from the shock of the pandemic and that gas is continuing to replace more emissions-intensive fuels”. The outlook assumes that there are no new policies to curb natural gas consumption in the coming years.
The rift within the OPEC+ cartel to reach a deal on production restrictions hasn’t been resolved during the weekend. A deal to raise production by 2 mln barrels per day between August and December was reported to have been blocked by United Arab Emirates. The UAE doesn’t agree on a proposal to extend the broader agreement on production cuts until the end of 2022. The UAE also asks its baseline production reference which is used for the calculations of the cuts, to be reviewed, reflecting its actual production capacity, rather than the (outdated) October 2018 production reference. The negotiations will continue today. The price of Brent oil continues hover near post-corona peal levels in the $76 p/b area.
