e continue to work through a short trading week but one packed full of economic news and other potential developments for markets to digest. Today, the focus was on manufacturing PMI reports, changes to the OECD’s outlook and the US Beige Book.
The OECD criticized governments and central banks around the world for creating a low growth trap. The agency felt governments haven’t done enough to boost demand, restructure their economies or use fiscal tools to stimulate growth. It went on to indicate that ultra-easy monetary policy
, which has been left to do all the work, is losing effectiveness and leading into a negative feedback loop with low growth and low confidence leading to low investment and low trade.
The OECD cut its growth forecasts for the US and UK and joined the chorus of doom about Brexit risks. Interestingly, both US and UK markets rejected the OECD’s gloomy assessment, and clawed back early losses to finish well above their lows of the day. Traders decided instead to focus on the fact that the US and UK were two of a very short of list of countries reporting better than expected manufacturing PMI. The UK crossed back above 50 into expansion territory indicating that the Brexit debate isn’t hurting the UK economy as much as some seem to think. For the US, better than expected PMI, steady new orders and no surprises in the Beige Book regional economic report keep the Fed on track toward a potential June interest rate increase.
Crude oil spent the day still bouncing around in a range between $48.00 and $50.00 ahead of tomorrow’s OPEC meeting. There was some talk that the cartel may try to bring back a production quota after abandoning previous policy in December. If they do, it's likely to be higher than before as OPEC production has increased significantly since then. We could hear some calls for cuts from some struggling smaller members particularly Venezuela, but really, it’s Saudi Arabia and Iran that need to agree in order to bring everyone else into line just as their failure to agree scuttled hopes of a production freeze at the Qatar meeting back in April. This time around nobody is expecting any major news, particularly with the market rebalancing and the price rising in recent months. Any development could be seen as a surprise while comments from the countries could spark short term swings
Copper and gold traded lower on the day in response to sluggish PMI reports. With energy traders sitting on their hands ahead of the OPEC meeting, it comes as no surprise that energy and mining stocks underperformed the markets on a weak day to begin with and that the resource weighted X&P/TSX underperformed its US peers. This softness could carry through to Australian stocks in early trading with the potential for trading action in stocks plus AUD and NZD around today’s Australia retail sales and trade reports.
Thursday morning brings an ECB meeting plus a number of opportunities for comment from ECB President Draghi ahead of this month’s UK Brexit referendum and Spanish election. Employment for Spain may also impact sentiment toward Europe. Traders may look for comments on whether QE and negative rates are working to stimulate the Eurozone economy or not. Also traders may be watching for whether Draghi jumps on the bandwagon or avoids the temptation to threaten the UK ahead of the Brexit vote (threats which are increasingly being ignored by the markets) or if he makes any prediction on how a Brexit vote could impact the Eurozone. GBP underperformed USD and EUR today as a new poll put the two sides in a dead heat and all three currencies could be active again Thursday.
US ADP payrolls are also due Thursday with traders looking to employment for confirmation of a strong market. The only thing is that ADP and nonfarm payrolls could be distorted by a strike at Verizon which put 35,000 workers off the job and on the picket lines temporarily. Considering that employment growth could slow as the US nears full employment, I suspect it would take a result below 100K to get the Fed to reconsider its rate hike plan. The street is at 173K I’m guessing 150K similar to last month.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
OECD economic outlook
2016 GDP growth targets
World steady at 3.0%
US cut to 1.8% from 2.0%
Eurozone raised to 1.6% from 1.4%
UK cut to 1.7% from 2.1%
China steady at 6.5%
Japan steady at 0.7%
US construction spending (1.8%) vs street 0.6%, previous revised up to 1.5% from 0.3%
Manufacturing PMI Reports:
Canada RBC 52.1 vs previous 52.2
US Markit 50.7 vs street 50.5
US ISM 51.3 vs street 50.3
US ISM new orders 55.7 vs previous 55.8
UK 50.1 vs street 49.6
Germany 52.1 vs street 52.4
France 48.4 vs street 48.3
Spain 51.8 vs street 52.5
Italy 52.4 vs street 53.0
Sweden 54.0 vs street 53.8
Norway 51.1 vs street 48.5
Greece 48.4 vs previous 49.7
Poland 52.1 vs street 51.8
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
11:30 am AEST Australia retail sales street 0.3%
11:30 am AEST Australia trade balance street ($2.1B)
TBA OPEC meeting news (if any)
8:00 am BST Spain unemployment change street (104K) vs previous (83K)
9:30 am BST UK construction PMI street 52.0
10:00 am BST Eurozone producer prices street (4.1%)
12:45 pm BST ECB meeting decision no change to interest rates or QE expected
1:30 pm BST ECB Draghi press conference
3:00 pm BST ECB Draghi speaking
8:15 am EDT US ADP payrolls street 173k vs previous 156K
8:30 am EDT US jobless claims street 270K
10:30 am EDT US natural gas street 82 BCF
11:00 am EDT US DOE oil inventories street (2.5 mmbbls) vs previous (4.2 mmbbls)
11:00 am EDT US DOE gasoline inventories street (.35 mmbbls) vs previous 2.0 mmbbls
8:35 am EDT FOMC Powell speaking
1:00 pm EDT FOMC Kaplan speaking
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