OPEC-Plus to accelerate pace of production

• OPEC+ agreed to accelerate its pace of production increase for July and August to 648k b/d for each month, roughly 50% larger than what they have agreed to increase in the last several months. The statement from OPEC+ noted that as refinery maintenance ends, “refinery intake is expected to increase,” focusing on the demand side of the oil market rather than supply risks related to EU sanctions that have been placed on Russia’s oil exports. While the move is in some ways an acknowledgement of the need to raise output at a faster pace given how tight oil markets are, OPEC+ has been struggling to hit the lower targets of 432k b/d as many members run up against capacity constraints. A nominally higher target serves more as an attempt to talk the market down as there is a low chance most members will be able to hit their new higher targets.
• The ADP report of private sector employment expanded by 128k in May, its lowest level since the end of strict lockdown conditions in the US in April 2020. The April print was also revised lower to 202k jobs. Small companies actually lost employees last month while the leisure and hospitality sector saw the weakest jobs growth since the end of 2020. The nonfarm payrolls numbers will be released later today with around 300k jobs expected to have been added.
• Initial jobless claims in the US fell to 200k in the week ending May 28, down from 211k the prior week. Continuing claims also slipped to 1.309m from more than 1.34m previously. The labour market remains in strong health albeit at a tempering pace as the economy is essentially operating at full employment. Evidence of a rate hike induced slowdown in the labour market will be more evident later in the year.

Today’s Economic Data and Events

• 11:00 TU CPI y/y May: forecast 74.7%
• 12:00 EC composite PMI May final: forecast 54.9
• 16:30 US nonfarm payrolls May: forecast 325k
• 16:30 US unemployment rate May: forecast 3.5%
• 18:00 US ISM services index May: forecast 56.5

Fixed Income

• US Treasuries were relatively quiet in a day interrupted by a UK public holiday. Yields on the 2yr UST closed slightly lower at 2.6296% while the 10yr was relatively unchanged at 2.9076%. Lael Brainard, vice chair of the Federal Reserve said it was “very hard to see the case for a pause” after the Fed hikes by 50bps at the June and July FOMC meetings. Markets have been discounting the probability of a hike in September, more out of hope than seemingly any sincere belief that the Fed isn’t committed to fighting against inflation.
• In Europe bonds traded weaker overnight. Yields on the 10yr bund added 5bps to close at 1.232% while 10yr French bonds slipped with yields adding more than 5bps to 1.755%.

FX

• Improved risk sentiment in the US session helped to weigh on the dollar which was lower against most peer currencies. EURUSD added more than 0.9% to 1.0747 while GBPUSD rose by 0.7% to 1.2578. Markets will be focusing on the communication from Fed and ECB officials in coming weeks as they line up further normalization of policy. USDJPY also moved against the dollar, down by 0.2% to 129.84.
• In commodity currencies there was a broad rally against the dollar. USDCAD fell 0.69% to 1.2570, abetted to a degree by higher oil prices while AUDUSD rose 1.2% to 0.7265 and NZDUSD added 1.2% to 0.6559.

Equities

• US equity markets recorded robust gains yesterday, benefitting from greater risk-on sentiment. The NASDAQ added 2.7%, followed by the S&P 500 (1.8%) and the Dow Jones (1.3%).
• In Europe, the FTSE was closed for the UK’s bank holiday, but the rest of Europe turned positive as the composite STOXX 600 added 0.6%. The DAX gained 1.0% and the CAC 1.3%.
• Locally, the DFM lost -0.3%, the ADX -0.4% and the Tadawul -1.3%.

Commodities

• Oil prices reversed initial losses on the day to closer higher as the OPEC+ plan to accelerate its production increases in July and August will still likely end up leaving the market tight. Brent futures closed up 1.1% at USD 117.61/b while WTI added 1.4% to USD 116.87/b. The OPEC+ news is an adjustment of the existing plan rather than a wholesale revision of supply expectations, hence oil prices moved higher as the new higher target levels are still unlikely to be achievable by most OPEC+ members.
• At the same time, US oil inventories fell by more than 10m bbl last week as commercial stocks fell by more than 5m bbl along with a similar sized reduction in the SPR. Gasolines stocks were also lower albeit by a much smaller degree. Oil production in the US held steady at 11.9m b/d while product supplied dropped slightly.

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