The latest employment report had every economist scratching their head. The stunning 2.51 million jobs created in May is leading many investors to become even more optimistic that the underlying economy is improving. The worst might be behind us but risks remain to the outlook. Some investors believe unprecedented stimulus from global central banks will drive the economic rebound and continue to support their dollar bearish bets. If the global economic revival continues, a tall task at hand when you consider the China risk and coronavirus second wave concerns, the greenback losing streak could continue.
The week ahead will focus the Fed’s upcoming rate decision and reopening momentum across the globe. Two highly coveted reports will also be released by the World Bank and the OECD, which will only represent their best guess on how the global economic recovery will turn out. Investors will also pay attention to the euro-area finance ministers’ next round of talks with the EU’s recovery package and the Eurogroup presidency succession. US-China trade tensions will also remain a focal point as both sides continue to exchange jabs.
United States: Fed In Focus
After getting an A for their swift and strong response to the coronavirus pandemic, the Fed now needs to wait and see how the recovery unfolds. Wednesday’s policy decision announcement should be an easy one for Powell and company. The next natural step seems for them to consider adopting yield-curve control. This would make the Fed target yields for possibly two-or five-year maturities.
Following a surprisingly robust nonfarm payroll report, many investors will start to doubt we may see another strong fiscal response by the US government. Stimulus provided stocks a safety net, but now the next part of the rally will solely rely on improving economic activity.
The reopening of the US economy continues with New York City expected to reach their first phase of reopening on Monday. While New York continues to have the right trajectory regarding new coronavirus cases, concerns are growing that the recent protests could result in a significant spike of cases. Health experts are also growing cautious that many parts of the country are starting to see higher cases and that could eventually derail many states from reaching their next reopening phase.
United Kingdom
The economy is continuing to reopen, despite widespread concern about whether measures are being unwound too soon. Still, the numbers continue to improve. That will be tested in the coming weeks though, especially if the good weather continues and people flock to beaches and parks.
Europe
The ECB increased purchases under PEPP by €600 billion this week and extended it until June 2021, taking the program to €1.35 trillion and asset purchases under all programs this year to a record €1.4 trillion. The move comes on top of the proposed recovery package from the European Commission last week and no doubt contributed to the ongoing rally in equity markets this week. Central banks once again proving that any talk of policy tools being exhausted is extremely premature.
Turkey
The lira has steadied over the last few weeks. It’s more than 6% off its lows but still around 15% below January levels. The decline in the dollar recently may have alleviated some of the pressure on the currency, if that reverses, the lira’s good fortune could change fast. But the economy is emerging from the lockdown and reported coronavirus cases have fallen considerably. The crisis is far from over and the economy had major problems long before the pandemic but the situation appears to be improving.
China
China Balance of trade released on Sunday. Deterioration expected. Large miss either way will set the tone for Monday in Asia. Otherwise, markets will be susceptible to increased trade/Hong Kong rhetoric.
Hong Kong
Protests have died down for now over the securities law. Possible resurgence this weekend. HSBC and Stan Chart under fire for backing China’s HK security law. There is no significant data this week.
India
The economy starts reopening this week which should be positive for markets. Standoff with China continues in the Himalayas and non-bank financial woes continue to impact sentiment.
Australia
AUD and equity rally continue with strong momentum. The NAB Business Confidence report will be released Tuesday and Westpac consumer sentiment. Neither is likely to have more than a short-term impact. AUD and Australian equities are a strong proxy for global recovery. Sentiment and news in that space will be the primary risk/driver.
Japan
Japan’s final GDP Q1 on Monday. Machinery orders and PPI Wednesday. Industrial Production Friday. Nikkei has performed strongly, but repeated outbreaks of COVID-19 in Tokyo could sap sentiment. Supplementary budget before Parliament this week.
Market
Gold
Gold prices have been under pressure after a miraculous stock market run that seems to be showing some signs of plateauing. Friday’s surprisingly strong nonfarm payroll report also dealt a strong blow to gold bulls, taking prices well below the $1700 level. Gold is looking vulnerable in the short-term, but should still be supported as a choppy global economic recovery will continue to see the majority of central banks remain accommodative. Despite some calls for the Fed to slow down, the amount of stimulus that is being pumped into the global economy will provide a nice safety-net for gold prices.
With the Presidential election under five months away, tensions with China are unlikely to be alleviated anytime soon and that should provide underlying support for gold. Eventually the tit-for-tat trade war will force China to come down on US tech and that will put significant pressure with this historic stock market rebound. The dollar is weakening, trade tensions are here to stay, risks for a second wave of the coronavirus are just a handful of reasons why it will be difficult for a downtrend to form for gold.
Bitcoin
Bitcoin traders had some humble pie after the latest attempt above $10,000 saw a main crypto-exchange deliver another key outage during another volatile trading day. Bitcoin mania was making a comeback as institution interest grows and hedge funds scramble for risky bets to make up for underperformance.
Institutional traders will not tolerate exchange crashes, so it will be interesting to see if Bitcoin interest starts to fade again. The only thing certain about Bitcoin is that volatility is likely to remain elevated. Bitcoin’s true believers however seem determined to see this out until prices return to record territory, so extreme selloffs should not surprise anyone.
Key Economic Releases and Events
Sunday, June 7th
Possible OPEC+ meeting
Australian Markets observe Queen’s Birthday
CNY China May Trade Balance: $40.0Be v $45.3B prior; Exports Y/Y: -6.5%e v +3.5% prior; Imports Y/Y: -7.8%e v -14.2% prior
7:50pm JPY Japan Q1 Final GDP Q/Q: -0.5%e v -0.9% prelim; Annualized SA Q/Q: -2.1%e v -3.4%prelim
7:50pm JPY Japan Apr Current Account (JPY): 360Be v 942.3B prior
Monday, June 8th
ECB President Lagarde attends European Parliament hearing
2:00am EUR Germany Apr Industrial Production M/M: -15.5%e v -9.2% prior
4:30am EUR Eurozone Jun Sentix Investor Confidence: No est v -41.8 prior
8:15am CAD Housing Starts: No est v 171.3K prior
9:00pm NZD Jun Prelim ANZ Business Confidence: No est v -41.8 prior
9:30pm AUD May NAB Business Confidence: No est v -46 prior
Tuesday, June 9th
OPEC Meetings
5:00am EUR Eurozone Q1 Final GDP Q/Q: -3.8%e v -3.8% prelim; Y/Y: -3.2%e v -3.2% prior
6:00am USD NFIB Small Business Optimism: 91.5e v 90.9 prior
9:30pm CNY May CPI Y/Y: 2.6%e v 3.3% prior; PPI Y/Y: -3.2%e v -3.1% prior
9:30pm AUD Jun Westpac Consumer Confidence M/M: No est v 16.4% prior
Wednesday, June 10th
OPEC+ Meetings
The OECD releases its economic outlook
2:45am EUR France May Industrial Production M/M: No est v -16.2% prior
8:30am USD Apr CPI M/M: 0.0%e v -0.8% prior; Y/Y: 0.3%e v 0.3% prior
10:30am Crude Oil Inventories
2:00pm FOMC Interest Rate Decision: No changes to interest rates expected; could discuss yield curve control
2:30pm Fed Chair Powell Press Conference
Thursday, June 11th
Euro-area finance ministers meet to discuss the EU’s recovery package and Eurogroup presidency succession.
2:30am EUR May Bank of France Ind. Sentiment: No est v 48 prior
8:30am USD Weekly Initial Jobless Claims
6:30pm NZD New Zealand May Business Manufacturing PMI: No est v 26.1 prior
6:45pm NZD New Zealand May Food Prices M/M: No est v 1.0% prior
Friday, June 12th
5:00am EUR Eurozone April Industrial Production M/M: -20.0%e v -11.3% prior; Y/Y: -30.0%e v -12.9% prior
10:00am USD Jun Preliminary Michigan Sentiment: 76.0e v 72.3 prior
1:00pm Baker Hughes US rig count
Sovereign Rating Updates after the close:
– Fitch on Germany
– Fitch on Spain
– DBRS on UK
– Moody’s on Norway