Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets are moving lower this morning as the cautious tone of yesterday’s Federal Reserve communications and signs of a potential secondary spike in US Covid-19 infection data raise concerns that recovery optimism had become overdone in recent weeks. S&P 500 futures indicate a -1.7% lower open after the index erased all of its year-to-date downside on Monday and then posted two consecutive days of losses for the first time in nearly a month. The Nasdaq is also set to open to losses after registering a new record high yesterday. Equities in the EU and Asia also retreated overnight. Longer-dated Treasury yields have almost fully reversed last week’s breakout from their two-month trading range, with the 10-year yield descending to 0.71% this morning, while the dollar is receiving a renewed safe-haven bid after falling steeply over recent weeks. Crude oil is lower as well, with Brent slipping below $41.

Fed Holds Policy Steady and Commits to Extend Extraordinary Easing

Yesterday, the FOMC retained its current policy settings and Chair Powell discussed the potential for yield caps and augmented guidance down the road as expected, though some analysts are pointing to the Fed’s focus on downside risks as denting market sentiment. The highly anticipated FOMC decision yesterday matched consensus expectations that rates would be left unchanged and no new policies would be enacted. Still, the tone of the accompanying statement and Chair Powell’s press conference was decidedly cautious, which is consistent with prior communications. According to the updated interest rate projections (the “dot plot”), all but two FOMC members expect that it will be appropriate to keep rates at zero through 2022. However, market participants were left uncertain regarding future policy maneuvers, with Chair Powell again only noting that forward guidance and yield curve control (YCC) are being considered. Alongside the rate outlook, the Fed projected that the US economy will shrink 6.5% in 2020 but show a 5.0% gain in 2021 followed by 3.5% in 2022, with unemployment estimated to be 5.5% by the end of 2022. The range of forecasts is wide, however, reflecting great uncertainty over the possible lingering impact of the virus. Also, the Fed reinforced its commitment to maintain “smooth market functioning” by promising to maintain its Treasury and mortgage purchases “at least at the current pace” of $80bn Treasuries and $40bn of mortgage backed securities (MBS) a month “over coming months,” as opposed to its previously open-ended commitment to quantitative easing (QE). For context, the Fed went from a peak of $300 billion a month in Treasuries during the early days of the coronavirus crisis to $80 billion more recently. The QE outlook seems to have been somewhat below consensus expectations, with some market participants anticipating an increase in Treasury purchases and doubling of MBS purchases. The stock market reaction was initially mixed, as growth-sensitive equity sectors retreated and tech stocks surged anew, but sentiment has turned more negative overnight. Meanwhile, the ensuing downside for Treasury yields and the dollar is straightforward and consistent with the exceptionally dovish rate messaging.

Covid-19 Conference Call on Resurgence Risk

The rising potential for a secondary spike of Covid-19 cases as lockdowns ease is another factor that is weighing on investor sentiment this week. Analysts continue to monitor figures showing an increase in coronavirus cases in California, Florida, Texas, Arizona, other states that have been in the process of reopening for economic activity. Yesterday, Texas reported its highest number of daily cases since the pandemic began. White House public health advisor Dr. Fauci stressed in remarks earlier this week that the coronavirus pandemic “isn’t over yet” in the absence of a vaccine. – MPP conference call: Please join us this morning at 11am for a call with Dr. Chris Mores, a virologist and Program Director for the Global Health Epidemiology and Disease Control MPH program at the Milken Institute School of Public Health of George Washington University. Dr. Mores will discuss how he is interpreting the latest Covid-19 infection data and his outlook for the coming months, particularly in light of the mass gatherings in many US cities over the past week.
Dial-in Details:
Dial-in number (US): (351) 888-7930
International dial-in numbers: https://fccdl.in/i/brendanwalsh
Online meeting ID: brendanwalsh
Join the online meeting: https://join.freeconferencecall.com/brendanwalsh

Additional Themes

US Jobless Data in Focus After Nonfarm Payroll Surprise – Initial unemployment claims for the week ending June 6^th are expected to show 1.550 million new filings. For context, the prior week, 1.877 million Americans filled for unemployment benefits, the lowest level since the coronavirus crisis began almost three months ago. Still, this was slightly above market expectations of 1.80 million and lifted the total reported since March 21^st to 42.6 million. The largest increases in jobless claims were reported in California and Florida, while those in New York dropped sharply. Meanwhile, continuing claims unexpectedly rose to 21.5 million in the week ended May 23^rd, above expectations of 20 million. These datapoints contrast with last Friday’s May nonfarm payroll data, which showed that the US economy gained 2.5 million jobs in May, smashing expectations of 7.5 million more jobs lost and marking the largest jobs increase in the history of the series after 20.7 million lost jobs in April.

Crude Prices Retreat from Recent Highs – US crude inventories hit a record high last week after posting declines for three of the four preceding weeks, compounding pressure on oil prices as traders increasingly question the optimistic case for a rebound in

Summary and Price Action Rundown

Global risk assets are fluctuating moderately this morning ahead of today’s Federal Reserve decision, while investors continue to monitor noisy economic data for signs of a rebound alongside Covid-19 infection data for the risk of a secondary spike. S&P 500 futures point to a flat open after the index backed off its loftiest level since late February yesterday following a dizzying two-week surge higher. Equities in the EU and Asia similarly lacked direction overnight. Longer-dated Treasury yields continue to retrace last week’s breakout from their two-month trading range, with the 10-year yield descending to 0.80%, while the dollar struggles amid anticipation of more ultra-accommodative messaging from the Fed today. Crude oil remains choppy at current levels, with concerns over today’s US stockpile figures weighing this morning.

Investors Await Today’s Conclusion of the June Federal Reserve Meeting

Significant monetary policy changes are not expected, so the focus will be on the accompanying communications, which will include new economic and interest rate projections. In his press conference following today’s FOMC decision, Chair Powell is expected to discuss additional policy options to extend their extraordinary monetary easing over the coming quarters, with yield curve control and enhanced forward guidance sure to be among the options discussed. Analysts will be attuned to the Fed’s treatment of last week’s spike in nonfarm payrolls for May given that FOMC members have been almost entirely focused on downside risks to the economy in their remarks over the past weeks and months. There will also be scrutiny of the Fed’s quasi-fiscal programs that are designed to provide funding to corporations, states and municipalities, and medium-sized businesses. Earlier this week, the Fed announced yesterday afternoon that it would be adding further flexibility to the terms of its long-awaited Main Street Lending program, cutting the minimum loan size to $250k from $500k, allowing a deferral of principal repayments for up to two years instead of the previous one-year grace period, and lengthening the maturity from four years to five. Chair Powell is likely to be pressed for further details on the timeline for launch of this program. This meeting also will include new FOMC economic projections and the dot plot of expected rate levels, as well as a focus on the risks of self-reinforcing disinflationary dynamics (more below).
Global Economic Data Remains Inconclusive on Recovery Trajectory

Despite euphoria in equities and incrementally encouraging signs from other financial markets, last Friday’s astoundingly upbeat nonfarm payroll numbers remain the exception amid uneven and fitful signals from most other traditional economic data. After the World Bank’s dismal projections earlier this week, the OECD weighed in with its forecasts for a 6% global growth contraction this year, with its estimate for US GDP at -7% and the EU at -9%, and only a 5% rebound in 2021 for the worldwide economy. Overnight, South Korea, which is held as the gold standard in Covid-19 containment for a major sovereign nation, reported its highest level of unemployment in a decade in May despite social distancing restrictions having been lifted in April. Joblessness rose to 4.5% from 3.8% the prior month, outpacing expectations for an increase to 4.0%. Economists cite the lack of external demand as continuing to weigh on the trade-oriented South Korean economy. Meanwhile, data filtering in from April continues to show the depths of the economic shock from the pandemic, with Japan machine tool orders contracting 12.0% month-on-month while Germany’s exports plunged 24.0% month-on-month and 31.1% year-on-year, sending the trade surplus to its steepest monthly decline on record and the narrowest point since December 2000.

Additional Themes

Deflation Risks in Focus – Overnight, releases of May producer price data in Japan and China showed worsening deflationary pressures, with respective readings of -2.7% year-on-year (y/y) and -3.7% y/y both undershooting estimates and evidencing deterioration from April’s level. In the US, May consumer goods inflation data is out today, and the producer price index is due tomorrow, with expectations for stabilization of both gauges. Market-based indicators of long-run inflation expectations for the US, such as 10-year TIPS breakevens, have rebounded from the March trough but only to equal the previous multi-year lows of the 2016 global deflation scare.

Wariness Continues over Coronavirus Data – Analysts continue to monitor figures showing an increase in Covid-19 cases in California, Florida, Texas, Arizona, other states that have been in the process of reopening for economic activity. Reports yesterday also indicated that a number of National Guardsmen mobilized to respond to protests last week have tested positive for Covid-19. White House public health advisor Dr. Fauci stressed in remarks yesterday that the coronavirus pandemic “isn’t over yet” in the absence of a vaccine.

Summary and Price Action Rundown

Global risk assets are moving lower this morning as the dizzying rally fueled by optimism over economic reopening takes a breather, with investors weighing the latest Covid-19 data and looking ahead to this week’s Federal Reserve meeting. S&P 500 futures point to a 0.8% lower open after the index erased its 2020 losses yesterday following a two-week sprint higher during which it gained 9.4% over 10 trading sessions. The S&P 500 is now barely 4% below record highs from February while the tech-heavy Nasdaq registered a new record high and is up 12.7% year-to-date. Equities in the EU are also retracing a portion of their ongoing rally this morning, while Asian stocks were mixed overnight. Longer-dated Treasury yields are unwinding their breakout from their two-month trading range, with the 10-year yield settling to 0.83%, while the dollar is pausing its downtrend. Crude oil is also in counter-trend mode this morning after climbing briefly to a new multi-month high yesterday on the OPEC+ supply cut extension.

Markets Pause to Assess Reopening and Recovery Prospects

Amid mixed signals from financial markets, public health officials, economic data, and Covid-19 infection figures, investors are pondering whether the recent bout of optimism has been overdone. The sense of relief in recent weeks has been palpable, with even the US epicenter of the pandemic, New York City, starting the process of reopening this week after two months of lockdown. According to the NYC Department of Small Business Services, about 16,000 “nonessential” retail businesses and 3,700 manufacturing companies will reopen, in addition to more than 32,000 construction sites being allowed to restart work. Absent a resurgence of cases, the city could move into the second phase of reopening after two weeks. A gauge of US small business optimism released this morning captured the hopeful mood, rising to 94.4 in May from 90.9 the prior month, though the uncertainty subcomponent remains elevated. Some Congressional Republicans are seizing on the improving outlook, most prominently featured in the May nonfarm payroll spike, to advocate for a longer pause before passing the next pandemic relief bill. White House advisor Kevin Hassett said yesterday that the odds of another aid package were “100%” but suggested that the Trump administration would prefer to see July data before deciding on the magnitude and substance of the bill. Meanwhile, analysts are monitoring data showing an increase in Covid-19 cases in California, Florida, Texas, other states that have been in the process of reopening, though increased testing may be a factor.

Federal Reserve Tweaks Lending Program Ahead of June Meeting

Monetary policy is in the spotlight this week as the FOMC begins its two-day meeting today. In advance of its June meeting, the Fed announced yesterday afternoon that it would be adding further flexibility to the terms of its Main Street Lending program, cutting the minimum loan size to $250k from $500k, allowing a deferral of principal repayments for up to two years instead of the previous one-year grace period, and lengthening the maturity from four years to five. This comes as market participants await what is expected to be a relatively uneventful FOMC meeting from a policy perspective, with all settings expected to remain steady, but with significant interest as to the accompanying communications on future monetary maneuvers. Specifically, Chair Powell is expected to discuss additional policy options to extend their extraordinary monetary easing over the coming quarters, with yield curve control and enhanced forward guidance sure to be among the options discussed. This meeting also will include new FOMC Economic Projections and the dot plot of expected rate levels.

Additional Themes

Oil Prices Stumble on Saudi Announcement – Crude oil is continuing to retrace a portion of its steep multi-month rally as traders take profits after OPEC and its allies (collectively known as OPEC+) agreed on Saturday to extend output curbs through July. Notably, however, Saudi’s Energy Minister announced that the Kingdom’s voluntary additional cuts of 1.2 million barrels per day will conclude in June, weighing further on oil prices yesterday. Other headwinds include the resurgence of Libyan output and a burgeoning recovery in US shale oil production.

World Bank Issues Grim Outlook – Amid the global economic fallout from the coronavirus pandemic, emerging and developing economies are set to shrink this year for the first time in the last 60 years according to the World Bank. The bank’s forecast warns that as many as 100 million people in the developing world will be tipped into extreme poverty by a projected 2.5% contraction in emerging markets’ GDP. Recently, major developing countries have seen a rapid increase in Covid-19 cases, including Brazil, Russia, and India. Overall, the World Bank sees the global economy shrinking 5.2% for the year, which is steeper than the IMF’s -3.0% projection from April, reflecting the growing economic impact of the virus. The report warned of a more adverse scenario in which the global GDP contraction could be as high as 8%, with emerging market economies shrinking around 5% and an estimated sluggish 1% global recovery in 2021.

Summary and Price Action Rundown

Global risk assets are mostly higher this morning amid continued optimism over economic reopening, rising oil prices following the OPEC+ agreement, and expectations for more exceptionally accommodative messaging from the Federal Reserve at this week’s meeting. S&P 500 futures indicate a 0.4% higher open, which would add to last week’s torrid 4.9% gain that cut year-to-date downside to a mere 1.4% and the decline from February’s record high to 5.7%. Equities in the EU are retracing a portion of their ongoing rally this morning, while Asian stocks also posted gains overnight. Longer-dated Treasury yields are extending their breakout from their two-month trading range, with the 10-year yield rising to 0.91%, while the dollar is continuing its downtrend. Crude oil is climbing to a new multi-month high after OPEC and its allies agreed over the weekend to extend supply cuts (more below).

OPEC+ Unites Over Further Supply Cuts

Crude oil is continuing its steep multi-month rally after OPEC and its allies (collectively known as OPEC+) agreed on Saturday to extend output curbs through July with a focus on stricter compliance. Key aspects of the deal include an agreed-upon 9.6 million barrels per day (bpd) cut through July (slightly lower than previous 9.7 million bpd due to Mexico’s withdrawal from supply cuts) and previously non-compliant countries from May and June making extra supply reductions to compensate, a point that was non-negotiable to both Saudi and Russian officials. These compensatory measures will turn investor attention towards the compliance of Iraq and Nigeria over the next few months as the primary indicator of the cohesiveness of the cartel’s agreement. The Joint Ministerial Monitoring Committee will meet again on June 18^th to continue to monitor the oil market and determine whether the cuts would need to be extended until August. Going forward, the cartel will also have to contend with two key factors that may work to counter their efforts to support prices. First is the resurgence of Libyan oil, as the ceasefire agreement has already seen the resumption of production at the war-torn country’s largest oil facilities. Second is the potential rebound in US shale oil output, with reports noting that producers are starting to undo the shut-ins that have occurred over the past few months.

Economic Data Sends Mixed Signals Over Global Recovery

As analysts continue to ponder the dramatic upside surprise in last Friday’s US nonfarm payroll figures for May, data from overseas suggests that the recovery remains fitful. Although April data may be considered somewhat stale and backward-looking, German industrial product for the month was worse than anticipated, contracting 17.9% month-on-month and 25.3% year-on-year (y/y). Automobile sales in Germany were down 50% y/y in May, though China’s car buying rebounded for a gain of 1.9% y/y. Not all the data from China was positive, however, with May exports down -3.3% y/y and imports -16.7% y/y, with the former moderately better than expected but the latter considerably weaker. However, analysts noted that the import data showed large increases in crude oil and soybean purchases, which are suggestive of compliance with Phase One trade deal commitments. Meanwhile, Japan’s revised first quarter GDP figure showed an improvement from the initial reading of -3.4% quarter-on-quarter annualized contraction to 2.2%, though economists are pointing to possible distortions in the figure based on challenging reporting conditions during the onset of the pandemic. Similarly, market participants are trying to parse the significance of the “misclassification error” disclosed by the Bureau of Labor Statistics, which led to a significant understatement of the unemployment rate in Friday’s stunning release. For context, the unemployment rate fell to 13.3% after record highs in April, well below market expectations of 19.8%. The number of unemployed persons fell by 2.1 million to 21 million. However, the real unemployment rate is another 3% higher at 16.1% due to continued misclassifications in BLS household surveys regarding temporary layoffs due to the pandemic. The challenge is the treatment of furloughed workers, who reported that they remain employed but absent at the direction of management.

Additional Themes

US Protests Remain a Backburner Issue for Markets – Despite the magnitude and societal significance of the demonstrations that continued over the weekend with a more peaceful tone than last week, there remains scant overt reaction in financial markets. Still, investors are pondering how these developments might change the outlook for November’s election.

This Week – Analysts will be highly attuned to how Chair Powell and the FOMC frame the surge in May nonfarm payrolls on Wednesday at the conclusion of the two-day Fed meeting. Aside from the FOMC, this week’s calendar is somewhat light. Initial jobless claims and continuing jobless claims will be in focus on Thursday. Consumer and producer price indexes will be noted, but are unlikely to move the market, while the consumer sentiment gauge on Friday will be salient to the assessment of the ongoing economic rebound.

Summary and Price Action Rundown

Global risk assets are advancing this morning amid expectations for better-than-feared US labor market and an impending OPEC agreement to extend price-supportive supply cuts. S&P 500 futures point to a 0.8% higher open, which would add to week-to-date gains of 2.2% that have reduced year-to-date downside to 3.7% and the decline from February’s record high to 8.1%. Equities in the EU are soaring after a week of massive fiscal and monetary stimulus in the bloc, while Asian stocks also posted gains overnight. Longer-dated Treasury yields are extending their breakout from their two-month trading range, with the 10-year yield rising to 0.87% even before the nonfarm payroll data is out, while the dollar remains in a steep downtrend. Crude oil is jumping to a new multi-month high as OPEC prepares to extend supply cuts (more below).

Recovery Hopes Build to a Crescendo Ahead of Nonfarm Payrolls

After yesterday’s somewhat disappointing jobless claims figures contrasted with the more upbeat ADP payroll estimates earlier this week, markets are poised for a positive signal from this morning’s May nonfarm payroll numbers. Later this morning, the BLS will release the official May Employment Report, where expectations are for 7.5 million job losses and an unemployment rate of 19.1%. Markets are leaning toward a better-than-expected release, however, with the 10-year Treasury yield breaking to its highest level since late March and US equity futures soaring ahead of the open. For context, the US economy lost 20.5 million jobs in April, better than consensus estimates of 22 million, which followed 870K losses in March. April’s tally was the largest monthly decline in US employment ever recorded, and the unemployment rate jumped to 14.7%, the highest in the history of the series but still below consensus expectations of 16%. The number of unemployed persons rose by 15.9 million to 23.1 million. However, the real rate is another 5% higher, as the BLS does not include people who are not looking for a job as unemployed. 18.1 million of the newly unemployed characterized themselves as only temporarily laid off and expect to return to work once restrictions are loosened. The labor force participation rate decreased by 2.5% points to 60.2%, the lowest rate since January 1973. Earlier this week, labor market data has conveyed some mixed signals. Thursday’s release showed that 1.9 million Americans filed for unemployment benefits last week, the lowest amount since the coronavirus crisis began, but slightly above market expectations of 1.8 million. This puts the total reported since March 21^st at 42.6 million. Meanwhile, continuing claims unexpectedly rose to 21.5 million in the week ended May 23^rd, above expectations of 20 million. On the brighter side, payroll company ADP estimated that in May private businesses laid off 2.8 million workers, after shedding a downwardly revised 19.6 million in April, which was much better than market forecasts of a 9.0 million job loss.

OPEC Goes Back to the Negotiating Table

Oil prices are advancing this morning as OPEC and its allies (collectively known as OPEC+) have agreed to meet tomorrow to agree on an extension of ongoing supply reduction agreements. For context, oil prices had retreated from multi-month highs earlier this week as OPEC+ and its allies looked set to push their June meeting back for weeks over issues of noncompliance with ongoing production cut commitments, with Nigeria and Iraq meeting less than half the cuts necessary in May. The energy ministers of the delinquent cartel members reconfirmed their quota commitments on Tuesday, however, and Russia and Saudi subsequently affirmed their tentative agreement to extend current supply cut levels of 9.7 million barrels per day through July, putting a floor under crude prices. In addition to cartel supply cuts, the continued oil uptrend over the past month has been underwritten by resumed economic activity in China, the slow lifting of lockdown measures worldwide, and declining production from the US shale patch. Yesterday, the Energy Information Administration reported a 2.1 million barrel decrease in US stockpiles from last week. Brent crude has now retraced nearly half of its 2020 decline from $69 per barrel in January down to $19 in April.

Additional Themes

Air Travel Remains a US-China Sticking Point – US airlines rebuffed China’s announcement earlier this week that it would begin lifting restrictions on foreign carries beginning Monday, calling it a step in the right direction but insufficient to address their concerns. News on Wednesday afternoon that the US would block Chinese airlines in a tit-for-tat exchange for China’s restrictions on US carriers was largely overlooked by market participants, who have dialed back concerns of a significant rupture in US-China relations.

PPP Revisions Pass the Senate – Yesterday, the Senate passed legislation that will allow small businesses more flexibility in using the rescue-loan funds from the Paycheck Protection Program (PPP). This comes as Congress and the Trump administration prepare to negotiate the next round of fiscal spending to cushion the economic blow of the pandemic.

Summary and Price Action Rundown

Global risk assets are pausing for breath this morning after a brisk multi-week rally as investors await today’s European Central Bank decision and key US economic data. S&P 500 futures indicate a 0.5% lower open, which would pare week-to-date gains of 2.6% that has narrowed the index’s year-to-date downside to 3.3% and the decline from February’s record high to 7.8%. Equities in the EU moderately lower while Asian stocks were mixed overnight. Longer-dated Treasury yields are steady near the top of their range, with the 10-year yield at 0.74%. Meanwhile, the dollar is retracing a portion of its recent decline as the euro gives back some of its rally, though the renminbi was steady overnight. Crude oil is falling further below its recent multi-month high as OPEC struggles to extend supply cuts (more below).

EU Asset Rally Pauses Ahead of the ECB

European assets are consolidating a portion of their recent and substantial gains as investors await a key decision by the European Central Bank (ECB) later this morning. At 7:45am ET, the ECB will issue its much-anticipated decision for its June meeting. Growth prospects for the euro area are grim, and the ECB expects a 5%-12% GDP contraction this year. Still the ECB is expected to leave interest rates unchanged as it did at its April meeting, holding the main refinancing rate at 0% and its deposit interest rate at -0.5%. Instead, the ECB is widely expected to expand its Pandemic Emergency Purchase Program (PEPP) and estimates for the upsizing range between €500 billion and €750 billion alongside expectations for extension to year-end. This could be the extent of what the ECB can do unilaterally in terms of asset purchases, given rising German opposition, without rallying support from national governments for further action. Meanwhile, overnight, German Chancellor Merkel secured agreement for additional fiscal support for the EU’s largest economy worth €130 billion, though direct support for the German auto industry through cash incentives to purchase cars was not included in the final version. Shares of German automakers are retracing a portion of their recent rally this morning, declining between 2% and 4%. This comes as the bloc continues to negotiate a draft for a €750 billion pan-EU pandemic relief budget that represents a vital step towards fiscal unionization and is based on a Franco-German plan released on May 18^th. Since that date, the Euro Stoxx index is up 17.3%, outpacing the 9.1% gain for the S&P 500 over that period, while the euro is 3.6% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, have converged swiftly toward German bund yields. Though EU risk assets have begun to reflect a more upbeat view of the recovery amid the ample stimulus, regional economic data remains deeply depressed. April retail sales registered -19.6% year-on-year, only slightly better than estimates of -20.6% and down from the prior month’s -8.8% pace of contraction.

Investors Await Further Signs of Improvement in US Data

With growing signs of recovery in May helping fuel US stock market euphoria over the prospect of a solid summer growth rebound, today’s weekly jobless data is expected to show continued easing in layoffs. For the week ending May 30^th, economists estimate that initial jobless claims will decline to 1.8 million from the prior week’s tally of 2.1 million new filings, which would mark a new weekly low since the coronavirus crisis began. Improvement aside, these tallies are grim, and the total of new unemployment benefits reported since March 21^st is set to rise above 42 million. However, the continuing jobless claims decreased by 3.9 million to 21.1 million in the week ended May 16^th from a record 24.9 million in the week ended May 9^th. This is an indication that as states lifted stay at home orders, the process of returning to work has slowly begun. Today’s data for the week ending May 23^rd is expected to show a further decline to 20.0 million, though reporting issues, particularly in California and Florida, may be skewing these numbers. For context, yesterday featured some relatively upbeat jobs data as payroll company ADP estimated that in May private businesses laid off 2.8 million workers, after shedding a downwardly revised 19.6 million in April, which was much better than market forecasts of a 9.0 million job loss. On Friday, the BLS will release the official May Employment Report, where expectations are for 8.0 million job losses and an Unemployment Rate of 19.8%.

Additional Themes

China Moves on Air Travel – News yesterday afternoon that the US would block Chinese airlines in a tit-for-tat exchange for China’s restrictions on US carriers was largely overlooked by market participants, who have dialed back concerns of a significant rupture in US-China relations after President Trump’s restrained reaction to the situation in Hong Kong. China announced overnight that it would lift restrictions on foreign carries beginning next week.

OPEC Meeting Pushed – Crude oil prices are stumbling below multi-month highs as this week’s OPEC+ meeting looks set to slide to mid-month amid drama over supply cut non-compliance by Iraq and others. Russia and Saudi Arabia are said to demand full adherence before the meeting.

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as investors noted continuing unrest in US cities but focused on economic reopening and recovery prospects, though oil prices paused their rally amid OPEC intrigue. S&P 500 futures point to a 0.4% higher open, which would extend yesterday’s 0.6% gain that put the index’s year-to-date downside at 4.6% and the decline from February’s record high at 9.0%. Equities in the EU are continuing to outperform while Asian stocks extended their gains as well. Longer-dated Treasury yields are edging higher within their narrow range, with the 10-year yield at 0.70%. Meanwhile, the dollar is deepening its ongoing decline as the euro continues to rally, though the renminbi slipped lower overnight. Crude oil had reached a new multi-month high earlier this morning but is retreating amid doubts over the OPEC meeting that was provisionally scheduled for this week (more below).

EU Assets Continue to Rally

Better-than-anticipated data and moves toward reopening more of the regional economy are extending the outperformance of EU stocks and the rebound in the euro against the dollar. The final reading of the May service sector purchasing managers’ index (PMI) for the EU printed 30.5 versus an initial reading of 28.7, which still reflects sharp contraction of activity but at an easing pace and is the best level since February. May’s composite PMI, which combines services and manufacturing gauges, registered 31.9 versus a preliminary reading of 30.5, which is also the highest level since February and well below the deep abyss of April. Importantly, the PMI readings for Italy, which has been the EU country hardest hit by the pandemic, showed some of the steepest improvement from the initial reading for May and April’s historic lows. For context, PMI readings below 50 denote a slowing of activity in the sector. Meanwhile, unemployment for EU only edged higher to 7.3% in April from the prior month’s 7.1%, bettering consensus expectations of 8.2%. Adding to the positive tone in regional markets are reports that Germany’s government is preparing to downgrade its travel warnings and restrictions this week. These developments are helping extend the outperformance of EU assets that has been largely underwritten by hopes for additional stimulus, with German Chancellor Merkel pushing for additional fiscal support for the EU’s largest economy and member nations negotiating a historic €750 billion pan-EU pandemic relief budget that represents a vital step towards fiscal unionization. Since May 18th, when France and Germany unveiled their plans for this relief budget, the Euro Stoxx index is up 16.3%, handily outpacing the 7.6% gain for the S&P 500 over that period, while the euro is 3.6% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, continue to converge toward German bund yields. – MPP view: To be fair, the recent outperformance of EU assets does represent a degree of catch-up after lagging on this rebound, but if the EU looks set to emerge from the pandemic with stronger internal bonds than before, that stands in sharp contrast to most everywhere else.

Questions Mount Ahead of OPEC+ Meeting

Oil prices are wavering this morning following reports that Saudi Arabia is threatening to suspend the meeting of OPEC and its allies (collectively known as OPEC+) this week barring firm commitments from countries like Iraq and Nigeria to honor output cut commitments. As traders awaited official confirmation of the virtual meeting of OPEC+, which had been provisionally schedule for tomorrow, headlines this morning put the cartel summit in doubt. Saudi’s reported hardline approach to overproduction among some members is threatening consensus expectations for a one-month extension through July of the 9.7 million barrels per day output cuts, which is being pushed by Russia and its allies. Saudi’s position on this proposal has remained unclear, though the Kingdom had reportedly been looking to push the May-June output cut levels through the end of the year to further support supply rebalancing. Another unknown is whether Saudi, Kuwait, and the UAE would extend their volitional additional cuts of 1.2 million barrels per day alongside any broader extension. Crude prices have retreated this morning from their highest levels since early March, even as a report from the American Petroleum Institute pointed to a further drawdown of US crude stockpiles this week. – MPP view: Commitments to cartel supply cuts were always going to get wobbly as prices rise and now reports indicate that shale patch shut-ins are slowing. If tomorrow’s Baker Hughes US active drill rig count indicates that shale production may be bottoming, it will mean that OPEC+ will have a steeper uphill climb over the coming months even if it does manage to agree on a short output cut extension. The oil price rally has been impressive and has gone farther than we anticipated, but this OPEC+ episode will be a key test.

Additional Themes

US Unrest Draws Scant Market Reaction – Reports indicated a relatively more peaceful overnight in US cities after a string of nights marked by violence. – MPP view: Wall Street is not alone in its confusion over the potential significance of the whipping political winds in the US, but generally speaking it is hard to trade the election until after Labor Day.

Zooming Earnings – Yesterday after the market closed, Zoom Video Communications reported its triumphant Q1 earnings report, topping estimates by $0.10 with an earnings-per-share (EPS) value of $0.20. Revenue of $328.2 million beat projections by $124.6 million and exceeded last year’s amount by 169%. As Covid-19 quarantine measures were strictly instated, many business operations and social interactions have moved to online platforms resulting in soaring growth for companies like Zoom. Counter to the trend of the recent earnings season, Zoom has proudly declared its 2021 forward guidance expecting Q1 2021 to be between $495 million and $500 million. The stock price is 0.4% higher pre-market, furthering its climb of 205% for the year.

Summary and Price Action Rundown

Global risk assets continued to rise overnight despite simmering US-China tensions and continuing unrest in US cities, as investors remain focused on the prospects of additional fiscal and monetary stimulus and hopes for economic recovery over the coming months. S&P 500 futures indicate a 0.5% higher open, which would extend yesterday’s 0.4% gain that put the index’s year-to-date downside at 5.4% and the decline from February’s record high at 9.8%. Equities in the EU are soaring as Germany pivots toward additional stimulus while Asian stocks posted gains, with Hong Kong stocks outperforming amid continued relief over the measured US retaliatory policies announced on Friday. Longer-dated Treasury yields are edging higher within their narrow range, with the 10-year yield at 0.67%. Meanwhile, the dollar is extending its ongoing decline while the renminbi posted gains overnight. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent above $39 per barrel.

Investors Attempt to Look Past US Unrest

Ongoing protests in numerous US cities against racial inequality, which in some cases have turned violent, drew unprecedented threats of domestic military intervention from President Trump yesterday, though financial markets are evidencing scant reaction. Market participants are pondering the extent to which the economic recovery will be impacted either directly, by keeping people at home and hurting consumer confidence, or indirectly, though a possible resurgence in Covid-19 infections given the heightened potential for transmission amid the chaotic and crowded scenes. Counterbalancing this added uncertainty is the heightened expectation that these disturbing developments in major US economic centers, including New York, Los Angeles, and Chicago will spur the Fed to enhance their already enormous stimulus programs and push Congress and the Trump administration to redouble their efforts pass another significant pandemic relief bill. For context, Congress is set to restart negotiations over the coming round of pandemic relief this month after the House Democrats’ $3 trillion draft plan failed to garner support from the Trump administration or Senate Republicans last month. With Friday’s release of May nonfarm payroll data expected to show an unemployment rate approaching 20%, the sources of discontent among the protestors are surely not limited to racial injustice.

EU Stimulus Prospects Continue to Brighten

With German Chancellor Merkel pushing for additional fiscal support for the EU’s largest economy and a historic pan-EU pandemic relief budget currently being negotiated, EU assets have been posting notable outperformance. Reports this morning indicate that Chancellor Merkel is working toward a second German fiscal stimulus plan of up to €100 billion to follow the initial relief program of €156 billion, which was passed in March under the government’s special emergency powers. With one of the stimulus options on the table being cash incentives for car purchases, EU automaker stocks are soaring this morning, rising between 6% and 8% on the day. This comes amid increasingly forceful and consequential EU steps toward both economic stimulus and fiscal burden-sharing. Specifically, the European Commission (EC) published a €750 billion coronavirus recovery plan last Wednesday in a historic step towards fiscal unionization. Like the Franco-German plan published the prior week, the EC proposal would allow significant new transfers of wealth among members, funded by €750 billion in commonly issued EU debt for the recovery plan. All EU countries must approve the plan, which includes €500 billion in grants and €250 billion in loans to hard-hit members, and negotiations are likely to drag on for weeks. Since the Franco-German plan was published on May 18^th, the Euro Stoxx index is up 14.0%, handily outpacing the 6.7% gain for the S&P 500 over that period, while the euro is 3.2% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, continue to converge toward German bund yields.

Additional Themes

OPEC+ Set to Extend Output Cuts – Ahead of the official meeting of OPEC and its allies (known as OPEC+) on Thursday of this week, reports indicate that Russia and a few other producers are pushing for only a one-month extension to the output cuts. Saudi’s position on this proposal is unclear, though they had been looking to push the May-June output cut levels through the end of the year to further support supply rebalancing. A one-month extension would be the shorter end of the range and would take the 9.7 million barrels per day output reduction through July, though it is unclear whether Saudi, Kuwait, and the UAE would extend their volitional additional cuts of 1.2 million barrels per day as well. Crude prices have extended their recent gains this week to their highest levels since early March.

RBA Holds Rates – The Reserve Bank of Australia held rates steady at 0.25% as expected, but the more upbeat commentary has lifted the Australian dollar 0.8% versus its US peer.

Summary and Price Action Rundown

Global risk assets were mixed overnight as US-China tensions continue to percolate despite relatively restrained policy response from President Trump over Hong Kong, while investors ponder potential economic fallout from ongoing US protests. S&P 500 futures point to a flat open after a choppy overnight session, while last week’s powerful 3.0% gain pared the index’s year-to-date downside to 5.8% and the decline from February’s record high to 10.1%. Equities in the EU are higher while Asian stocks outperformed overnight amid relief that President Trump appeared to stop short of major escalation with his measured retaliatory policies on Hong Kong. Longer-dated Treasury yields remain steady within their narrow range, with the 10-year yield at 0.66%. Meanwhile, the dollar is continuing to decline while the renminbi was steady overnight, though the offshore-traded renminbi is slightly weaker. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent at $38 per barrel.

President Trump Strikes a Balance on Hong Kong Response but Tensions Remain High

Markets evidenced a degree of relief after President Trump announced a relatively restrained policy response to China’s clampdown on Hong Kong but reports this morning that China is suspending some US farm goods purchases rekindled concerns of further escalation. Chinese state firms have reportedly been instructed by Beijing to pause purchases of US soybeans and pork as China’s leaders ponder their response to US actions on Hong Kong. For context, President Trump’s commentary on Hong Kong was forceful at his press conference on Friday but the policy actions he announced were more moderate than some investors had feared, given the wide-ranging policy options available. Notably, the Phase One trade deal was left untouched and no additional tariffs or major sanctions were imposed or threatened, while the withdrawal of Hong Kong’s preferential trade status was characterized as a process rather than an abrupt revocation. Still, the President announced he will be removing US funding from the World Health Organization, suspending visas for Chinese nationals in the US with ties to the People’s Liberation Army, and eliminating policy exemptions afforded to Hong Kong ranging from extradition to export controls and dual use technologies with “few exceptions,” though the carve-outs remained unspecified. Additionally, he called for an executive investigation into “the differing practices of Chinese companies listed on US markets.”

US Unrest Casts Shadow Over Economic Reopening Hopes

The cautious and uneven process of gradually restarting more normal activities has been upended in many areas across the US over the weekend by spiraling protests against racial inequality. With demonstrations turning violent in a number of major US cities this weekend, market participants are pondering the extent to which the economic recovery will be impacted either directly, by keeping people at home and hurting consumer confidence, or indirectly, though a possible resurgence in Covid-19 infections given the heightened potential for transmission amid the chaotic and crowded scenes. New York Mayor de Blasio said that plans for reopening the city would proceed despite the unrest, with most metropolitan areas taking a similar approach. With Friday’s release of May nonfarm payroll data expected to show an unemployment rate approaching 20%, the sources of discontent among the protestors are surely not limited to racial injustice. Meanwhile, Congress is set to restart negotiations over the coming round of pandemic relief this month after the House Democrats’ $3 trillion draft plan failed to garner support from the Trump administration or Senate Republicans last month.

Additional Themes

Fitful Chinese Economic Data – Over the weekend, China released its purchasing managers’ indexes (PMIs) for May, with the various gauges reflecting moderate degrees of expansion but with both upside and downside surprises. The official government PMI reading for the manufacturing sector was slightly below expectations of 51.1, printing a slower 50.6, down from 50.8 in April, while the service sector was broadly in line with expectations at a perkier 53.6. For context, PMI readings above 50 denote expansion of activity in the sector. Importantly, the employment components of both readings slipped back into contraction, hinting at potential backsliding in the recovery. Meanwhile, external demand clearly remains a headwind, with the sub-index of new export orders in sharp contraction at 35.3.

OPEC+ Debates Output Cut Extension – Ahead of the official meeting on Thursday of this week, which was moved up from the original June 9-10 dates, OPEC and its allies (known as OPEC+) are reportedly set to consider an extension of coordinated supply cuts of between one and three months. For context, headlines have suggested that the Saudis were looking to extend the May-June output cut levels through the end of the year to further support supply rebalancing but Russia has been advocating a for relatively shorter period and a “wait-and-see” approach to the potential demand recovery. Oil prices are mixed this morning.

Summary and Price Action Rundown

Global risk assets were mixed overnight ahead of today’s White House press conference on China, which could serve to either escalate or ease already heightened US-China tensions. S&P 500 futures indicate a 0.3% lower open after yesterday’s 0.2% decline shaved week-to-date gains to 2.5%, putting the index’s year-to-date downside at 6.2% and the decline from February’s record high at 10.5%. Before yesterday’s announcement of President Trump’s Friday press conference on China, the S&P 500 had been over 1% higher amid continued optimism over economic reopening, with jobless claims data suggesting hints of improvement. Equities in the EU are trading lower while Asian stocks were directionless overnight amid continued underperformance by Hong Kong’s benchmark Hang Seng index. Longer-dated Treasury yields remain unable to move higher, with the 10-year yield slipping back to 0.67%. Meanwhile, the dollar is lower as the euro extends its recent bounce despite stagnating inflation and the renminbi remained stable. Crude oil has been struggling to make headway this week, with Brent sinking below $35 per barrel as traders look ahead to June’s OPEC+ meeting.

Investors Await President Trump’s Press Conference on China

After the Chinese leadership ushered the controversial Hong Kong security bill into law earlier this week, news yesterday afternoon that President Trump is set to announce the US response sometime today introduced a hint of caution into ebullient US equities. Although the timing of the press conference remains unclear, President Trump is set to lay out his administration’s response to China’s clampdown on Hong Kong. For context, China’s legislature passed the measure in a characteristically one-sided vote after the US State Department declined to certify Hong Kong’s autonomy from China on Wednesday. By doing so, Secretary of State Pompeo opened the door to executive action against preferential trade status of the territory under the Hong Kong Human Rights and Democracy Act that was signed into law last year. Reports suggest that the White House is considering removing Hong Kong’s preferential tariff rate applied to its US exports and cancelling certain Visas for Chinese students and researchers with military ties, which would fall short of a full cancellation of the territory’s special trading status. Meanwhile, the House is expected to consider the bill that passed the Senate last week that would sanction Chinese entities and individuals taking part in enforcing the new security law in Hong Kong and punish banks that do business with them. Relatedly, President Trump is expected to sign a bill to sanction Chinese entities over their suppression of Muslim minorities in western China. Meanwhile, China upped its bellicose rhetoric against Taiwan overnight, increasing the sense of geostrategic tension.

Glimmers of Hope in US Data Ahead of Fed Chair Powell’s Remarks

With US markets conveying mixed signals on the growth outlook, incoming data is displaying some improvement though Fed communications are likely to stay focused on the downside risks. Last week, 2.123 million Americans filled for unemployment benefits, the lowest level since the coronavirus crisis began. However, filings came in slightly above market expectations of 2.1 million and lifted the total reported since March 21^st to 40.7 million. Most notably in the report, continuing jobless claims decreased by 3.86 million to 21 million in the week ended May 16^th from a record 24.9 million in the week ended May 9^th. This is an indication that as states have lifted stay at home orders, the process of returning to work has slowly begun. Meanwhile, first quarter (Q1) US GDP was revised down from -4.8% to -5.0%, the second estimate from the BEA showed. This is the largest drop in GDP since the fourth quarter of 2008. However, the Atlanta Fed GDPNow estimates that Q2 GDP will have contracted 41.9%. In April, US Durable Goods Orders plunged 17.2% month-on-month (m/m), following a downwardly revised 16.6% slump in March, but were above market expectations of a 19% drop. April’s US consumer spending and income data is due today, alongside a key inflation metric, as well as May consumer confidence. Also, Fed Chair Powell’s remarks later this morning are likely to remain consistently cautious.

Additional Themes

Trump/Twitter Spat Continues – Overnight, Twitter flagged one of President Trump’s tweets regarding the situation in Minneapolis as running afoul of its rule against glorifying violence. For context, after Twitter took the step of appending fact-checking links to some of his tweets, President Trump yesterday followed through on his pledge take aim at social media with an executive order to loosen liability protections for the content of third party posts. Facebook CEO Zuckerberg made conciliatory remarks in an interview yesterday, suggesting that social media should not attempt to be the “arbiters of truth.” Shares of Twitter and Facebook sank 4.5% and 1.6%, respectively, yesterday with year-to-date performance of -1.4% and 9.9%.

Looking Ahead – The US nonfarm payrolls report for May will be in the spotlight next week, as will purchasing managers’ indexes for the US, EU, Japan, and China. The European Central Bank has a meeting, as do the Bank of Canada and Reserve Bank of Australia.