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Khatija Haque - Head of MENA Research
Published Date: 08 July 2019
US payrolls data was much better than expected in June, with 224k non-farm jobs added last month against a consensus forecast of 160k. The detail of the report was encouraging as well, particularly as manufacturing jobs rose by 17k in June, the most since January this year despite weakening manufacturing survey data in recent weeks. Business services, education & health and construction all saw solid increases in jobs last month. Government employment rose by 33k in June, the most since August 2018.
The June payrolls data has dented market expectations of a 50bps rate cut by the Federal Reserve, although a 25bp rate cut is still fully priced in for July. We expect the Fed to remain on hold this month, with a 25bp rate cut likely in Q4 if economic data continues to deteriorate over the summer. All eyes will be on Fed Chairman Powell’s semi-annual testimony before Congress on Wednesday, as this is his last opportunity to manage market expectations ahead of the July FOMC meeting. Also due on Wednesday are the minutes from the June FOMC meeting where there appeared to be a wide divergence of views among members as to the near term direction of interest rates.
Turkish Central Bank Governor Murat Cetinkaya was removed from his post by President Erdogan over the weekend. The President has long made his opposition to tight monetary policy clear, and soaring real interest rates following a slower-than-expected inflation print in June seemingly prompted the move. This increases the likelihood of a rate cut at the TCMB’s July 25 meeting, although the move will raise investor concerns about the central bank’s independence, and increase scrutiny of any upcoming decisions.
Egypt has implemented long-heralded subsidy cuts as part of its ongoing reform programme, which will likely keep y/y inflation in the double-digits for the time being. The fuel indexation mechanism is among the changes, which will link some fuels to benchmark crude prices and raises the price of diesel by 22.7%. Although the inflationary pressures will be mitigated by base effects as last year’s subsidy reforms pass through, the central bank will likely look to see the effect of these latest measures before making any further rate cuts, and we expect no action at Wednesday’s meeting.
Source: Bloomberg, Emirates NBD Research
A stronger than expected jobs report failed to dent expectations that the Federal Reserve would cut rates as early as this month with Fed funds futures implying a 98.5% chance of a 25bps cut. Yields on benchmark US treasuries moved higher after the strong NFP report: yields on 2yr USTs rose almost 11bps while 10yr UST yields moved back above 2% at the end of the week. US Fed Chair Jerome Powell will give testimony to Congress this week where he may dampen market expectations for a rate cut this month.
Gilt and bund yields both ended the week lower as markets expect more dovish action from the Bank of England and ECB. Commentary from Mark Carney in the past fortnight has helped push yields on 10y gilts to 0.738% while bunds yields have moved lower in anticipation that the new ECB president, Christine Lagarde, will maintain a dovish stance on policy.
The dollar traded firmer in the aftermath of Friday’s much stonger non-farm payroll headlines, with the dollar index climbing 0.54% to close the week at 97.286. This move firmly breached the 100-day moving average (97.107) and tested the 50-day moving average (07.259) although the break of the later was not sustained. Currently trading at 97.207, a break above the 50-day moving average and 76.4% one-year Fibonacci retracement can result in further gains towards the 98 level.
Global equities pushed higher over the week as markets continue to expect a return to accommodative policies from central banks. The S&P 500 ended the week up 1.65% despite a drop on Friday while the FTSE gained 1.7%. The Shanghai index added slightly more than 1% over the week.
Regional equity markets started the week on a largely softer footing. The Tadawul gave up 0.4% while the DFM fell 0.45%. The ADX closed marginally higher.
If OPEC+ needed any confirmation from markets that production cuts were losing their significance in the short-term, last week’s price action should be examined in detail. OPEC+ agreed to extend their production cut deal until Q1 2020 yet both WTI and Brent closed lower on the week. WTI gave up 1.6% to close at USD 57.51/b while Brent futures fell 3.5% to end the week at USD 64.23/b. Soft manufacturing data out of the US and Germany along with persistent expectation that the Federal Reserve will need to cut rates this month kept demand considerations front of mind and more influential than supply restraint. Central banks globally are positioning themselves in a more dovish stance to try and support growth in the tail-end of the business cycle. While a softer dollar from an imminent Fed cut—not our core view—should notionally be supportive for commodities, the context of slowing global growth will outweigh any benefit.
Short-term time spreads weakened in Brent and WTI last week. In Brent the 1-2 month spread closed the week at USD 0.39/b in backwardation compared with more than USD 0.8/b a week earlier while in WTI the narrow contango widened. Longer-dated spreads deteriorated as well with Dec spreads for 19/20 recording smaller backwardations in both benchmarks. Dubai spreads managed a small pick-up at the end of the week but on average over five days were weaker. Saudi Arabia and Kuwait have reportedly come to an agreement to allow production from the Neutral Zone to resume after years of no output. The capacity of the Neutral Zone is around 500k b/d shared between two fields. An increase in output would help to offset some of the current shortfall in heavy, sour barrels thanks to disrupted supplies from Venezuela and Iran but increasing output now would seemingly be at odds with the OPEC+ decision to restrict output.
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