2023 Weekly Views

Highlights

Oil

Saudi Arabia announced its voluntary decision to cut an additional 1M bpd (barrels per day) of its own output for the month of July (Saudi energy Minister said the cut could be extended beyond July if needed). In addition to the 1M incremental cut by Saudi Arabia, it was announced that the voluntary output reductions unveiled back in April by OPEC+ will be extended until the end of 2024 (they were set to expire after 2023). Finally, the OPEC+ collective output target was cut by 1.4M bpd in 2024, although a lot of this reduction is theoretical since many countries are undershooting their current quotas right now (the UAE was given a higher quota for next year).

Market update

Central banks parade

The S&P 500 closed the week at 4,282.37, +3.16% higher. The Dow Jones closed at 33,762.76, +3.05%, with the Nasdaq higher by +4.27%. The volatility index VIX closed the week at 14.60 up from 17.95. The Euro Stoxx 600 surged +0.16%.

The 10-year UST closed at 3.69% down from 3.80% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -170bps. US Corporate Bond spreads: Investment Grade widened 1bp at 210bps and High Yield widened 3bps at 495bps. German 10-year Bunds yield closed at +2.31% down from +2.54% a week before. In Europe, Corporate Investment Grade spreads were unchanged at 183bps and High Yield spreads widened 16bps at 498bps.

The US Dollar Index (DXY) depreciated -0.18% last week and closed at 104.01. The Euro closed at 1.0708 (-0.14%); the Yen appreciated +0.48%, closing at 139.92 and the Swiss Franc depreciated -0.38%, closing at 0.9091. Gold closed at $1,947.97 appreciating +0.08%. Oil was lower, Brent closed at $76.13 (-1.07%) and WTI at $71.74 (-1.28%).

Macroeconomy

Debt ceiling bill

The debt ceiling bill passed both the House of Representatives (by 314 votes in favor to 117 against) and the Senate (63 to 36 votes) last week, eliminating the tail risk of a US default. The immediate market focus will turn to the implication of the upcoming surge in T-Bills issuance to replenish the Treasury General Account, which may lead to a decline in bank reserves or Money Market Funds deposits at the Fed, or both. In the longer run, the big picture is that fiscal consolidation will likely remain very limited, with downside risks to the spending cuts estimated by the CBO at USD1.5tn over the next decade.

Jobs report

US economy added 339k in May, compared to the 195k forecast. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance. Change for March and April was revised up by a combined 93k. On the other side, according to the separate Household survey, the number of employed people fell by 310k which drove the unemployment rate up to 3.7% (up from 3.4% in April and ahead of the 3.5% forecast). The participation rate was flat at 62.6% (in line with estimates). Wages cooled to +4.3% y-o-y in May, down from +4.4% in April (expectation was +4.4%). The workweek length shrank to 34.3 hours, down from 34.4 in April and below the 34.4 forecast. This means total compensation (wages x hours) decelerated.

US eco data

Both the ISM manufacturing and the regional business surveys painted a grim picture of economic activity, one that would be consistent with a recession if it wasn’t for the strength in the labor market. The ISM declined to 46.9 in May, with large declines in new orders and prices paid consistent with an ongoing deterioration in final demand.

Fed speakers

Several Fed officials signaled their intentions to at least maintain a tightening bias, if not hike rates further sooner rather than later. That said, a majority of Fed members seems to be in favor of “skipping” the June meeting, as suggested by a WSJ article published last week. Fed speakers Governor Jefferson and Philadelphia Fed Harker were among the ones signaling rate hikes could take a pause at the June meeting.

Euro area inflation

Eurostat's flash estimate showed that euro area headline inflation slowed in May to 6.1% y-o-y from 7.0% in April and core inflation to 5.3% y-o-y from 5.6% the previous month. At the level of core inflation, both services (from 5.2% y-o-y to 5.0%) and goods inflation (from 6.2% y-o-y to 5.8%) slowed down in May. Looking ahead, headline inflation should continue to slow progressively, while core inflation is expected to remain sticky throughout the summer due to services. While the European Central Bank (ECB) is likely to welcome the slowdown in price rises in May, the data show that headline and core inflation remain far above its target. M3 report for April showed bank loans and money aggregates slowed further. Euro area private credit growth was down by 0.6pp to 3.3% y-o-y (corporate loans -0.6pp to 4.6% y-o-y, household loans -0.4pp to 2.5% y-o-y) in April, a trend that is likely to continue in the coming months.

Swiss GDP

In contrast with neighboring Germany, where GDP contracted by 0.3% quarter on quarter in Q1, Swiss GDP grew by 0.3% q-o-q in Q1, after a flat print in Q4. Adjusted for sporting events, Swiss GDP rose by 0.5% q-o-q. The details showed substantial growth in private consumption (+0.6%) in Q1 (unlike in Germany where private consumption contracted by 1.2%). Looking ahead, weaker global demand will be a challenge for Swiss manufacturing. The KOF Economic Barometer slid for the second month in a row in May, to a six-month low of 90.2 from 96.1 in April.

China PMI

Chinese official manufacturing PMI dropped further to 48.8 in May. The official non-manufacturing PMI moderated but continued to stay in expansionary territory at 54.5 in April. Overall, the composite PMI dropped to 52.9, compared to 57.0 in March and 54.4 in April. Within non-manufacturing sectors, the PMI for construction dropped notably in May, while the services sub-index also declined to 53.8, marking the lowest level since the beginning of this year. While business expectations for the services sector remained relatively solid, the previously strong recovery momentum in tourism and hospitality sectors may start to fade. By sectors, the contraction in manufacturing PMIs was mainly dragged by the upstream basic material industries. This is in line with the broad-based decline in Chinese monthly FAI growth in April. Meanwhile, the raw material input price sub-index slumped to 40.8 in May, which may lead to sustain disinflationary pressure in China in the near term.

What to watch

• Monday: Apple Worldwide Developers Conference; US Factory & Durable Goods Orders (Apr.); US ISM Services Index (May); China Caixin PMI (May)
• Tuesday: Germany Factory Orders (Apr.); Eurozone Retail Sales (Apr.); Reserve Bank of Australia Policy Decision
• Wednesday: Germany Industrial Production; US Trade Balance (Apr.); Bank of Canada Rate Decision; China Trade Balance (May)
• Thursday: Reserve Bank of India Rate Decision
• Friday: China CPI and PPI (May)