Forex Fundamental News Facts for 04th June, 2024
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[Quick Facts]
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1. ISM manufacturing PMI boosts rate cut expectations.
2. June Flashlight for the FOMC Blackout Period.
3. G7 leaders endorse Biden’s Gaza peace plan.
4. WTI and Brent plunge 3% as output cuts fail to meet expectations.
5. Trump’s campaign fundraising doubles in May, far more than Biden’s.
6. ECB is likely to cut interest rates by 25 basis points this week.
7. Cautious Optimism in UK Retail.
8. Pound to Dollar Rate Hits Fresh Highs, JOLTS in Focus.
9. Chinese Stock Rebound Sparks Rush of Firms to Raise Funds.
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[News Details]
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The U.S. ISM manufacturing PMI has unexpectedly dropped to a three-month low of 48.7%. The new orders index, at 45.4%, has reached its lowest point in a year, indicating a decrease in economic demand. The production index is barely expanding at 50.2%, while the ISM prices index, despite being the second-highest in two years at 57%, has fallen more than anticipated from April’s figure. These figures, along with the PCE price index, strengthen the argument for the Fed to reduce rates this year. The likelihood of a rate cut in September has increased to 64.1% from 54.8%, according to the CME Fed Watch Tool. The market anticipates that the Fed will maintain its stance of not rushing to cut rates at its monetary policy meeting next week, with only one rate cut expected in December.
The US interest rate markets have been fluctuating, with investors initially expecting a Federal Reserve rate cut in December, then September, and finally returning to the December expectation. This uncertainty has made the markets susceptible to economic data. The May US manufacturing ISM report showed a slight decline, with the manufacturing sector shrinking since November 2022, despite a small rise in production levels. This led to a rally in US Treasuries, with yields falling between 6.5 bps to 11.1 bps.
Oil prices also played a significant role, with Brent crude prices slipping due to supply factors, technical reasons, and demand-driven aspects related to the ISM details. This drop in oil prices, which resulted in Brent crude losing almost $3/b, has directly impacted long-term rates via inflation expectations.
In response to these market movements, German Bunds followed US Treasuries higher, with the belly of the curve outperforming the wings. The dollar suffered due to both the ISM and lower oil prices, with EUR/USD closing above the 1.0884/95 resistance area.
In other news, South Korean inflation slowed further in May to 2.7% Y/Y, the lowest level since July last year. The Bank of Korea acknowledged this progress but is still looking for further evidence of inflation converging towards its 2% target.
Lastly, data from the British Retail Consortium showed that total UK retail sales increased 0.7% Y/Y in May, with food sales increasing 3.6% Y/Y in the three months to May. However, non-food sales decreased 2.4% 3M Y/Y. Despite this, retailers remain optimistic about the potential boost to consumer confidence from major events such as the Euros and the Olympics this summer.
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The Federal Open Market Committee (FOMC) has maintained the fed funds target range at 5.25%-5.50% for six consecutive meetings since the start of the year due to a lack of further progress on inflation. The data from the three months leading up to the FOMC’s May meeting showed core PCE inflation strengthening to an annualized rate of 4.4%, more than double the pace seen in the second half of 2023. This, coupled with stronger job growth and solid activity, raised concerns about the risk of price growth picking up again.
However, since the Fed’s last meeting, the threat of prices re-accelerating and economic growth remaining strong has somewhat weakened. Inflation, as measured by the core PCE deflator, eased in April, with the three-month annualized rate slowing to 3.5%. At the same time, the job market appears to be rebalancing, with payroll growth slowing to 175K in April from an average monthly increase of 269K in Q1. The unemployment rate has risen to match a two-year high of 3.9%, and job openings/postings show that demand for new workers continues to decline.
Despite these more moderate signs of spending and hiring suggesting that inflation pressures continue to ease, Fed officials have made it clear that they need to see additional realized progress before reducing the fed funds target range. April’s data marked a step in the right direction, but inflation is still running above target for more than three years, reminding Fed officials of the difficulty in returning inflation to 2% for the long haul.
Given this backdrop, it is expected that the FOMC will leave the fed funds target rate unchanged at the conclusion of its June 11-12 meeting and that the statement will omit any hints of a forthcoming rate cut. Market participants expect a similar outcome, with futures pricing in essentially no chance of a rate change at the June meeting and the next rate move as a cut in Q4.
With the FOMC remaining in a holding pattern, there are likely to be only a few changes to the post-meeting statement. The language around balance sheet run-off will need to be updated to reflect the lower run-off caps for Treasury securities announced at the prior meeting that are now in place. More meaningfully, it is expected to see a nod to the recent mix of activity and price data suggesting a lower risk of price re-acceleration ahead. The description of recent economic activity, including hiring, is likely to be softened somewhat.
The Committee will likely continue to make it clear that it believes inflation remains too high by continuing to characterize it as “elevated.” However, the statement could acknowledge April’s better data by noting that, instead of “a lack of further progress” in recent months, there has been “a lack of consistent progress toward the Committee’s 2 percent inflation objective.”
The statement’s guidance around the path of policy is likely to remain unchanged. A chorus of Fed speakers in recent weeks have indicated that the need to gain “greater confidence that inflation is moving sustainably toward 2 percent” remains. For clues about the path for the fed funds rate further into this year and 2025, we will look to the update to the Summary of Economic Projections (SEP).
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The G7 leaders have expressed their full support for President Biden’s comprehensive plan for immediate ceasefire in Gaza, release of all hostages, significant and sustained increase in humanitarian aid throughout Gaza, and a lasting resolution to the crisis, ensuring the security interests of Israel and the safety of Gazan civilians. They have urged Hamas to accept this deal and called on countries with influence over Hamas to ensure its acceptance.
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Despite OPEC+’s announcement to extend oil production cuts on June 2, crude oil prices fell on Monday, with WTI crude futures dropping more than 3.7% and Brent crude futures declining nearly 3.5%. This is primarily due to the expectation of increased production following OPEC+’s extension of production cuts. The agreement suggests that more supply will be released into the market from October, significantly increasing next year. This has raised concerns of falling prices due to increased supply, discouraging traders from buying oil futures for later this year. The increase in supply is expected to match OPEC’s projections for demand growth in 2024.
Brent oil futures for August and West Texas Intermediate crude futures both fell by 0.4% to $78.05 and $73.80 a barrel respectively. This represents a 3.3% slide for both contracts, marking their lowest level since early February.
The Organization of Petroleum Exporting Countries and its allies (OPEC+) decided to maintain production cuts of 3.6 million barrels per day until the end of the year. However, they plan to scale back 2.2 million bpd of cuts from the end of September 2024 till October 2025. This decision was seen as a bearish signal for markets, especially if the forecasted demand for the coming year does not materialize. It also suggests that OPEC+ has limited capacity to continue supporting oil prices.
Weak purchasing managers index data from the U.S. also affected crude markets, showing a contraction in manufacturing activity for the second consecutive month in May. This raised concerns about the impact of persistent inflation and high interest rates on economic activity in the world’s largest fuel consumer, potentially leading to weaker demand.
Mixed PMI readings from China, the top oil importer, further weighed on market sentiment. Official data released last week showed an unexpected contraction in the country’s manufacturing sector.
In addition to concerns over OPEC+ decisions and weak demand, oil traders were seen pricing out a risk premium from crude after the U.S. attempted to broker a ceasefire between Israel and Hamas, potentially leading to more stable geopolitical conditions in the Middle East.
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Following Trump’s conviction in a criminal case by a New York jury, his campaign fundraising totals have surged due to increased donations rather than a significant drop in approval ratings. In May, Trump’s campaign and the Republican National Committee raised a total of $141 million, almost double the $76 million raised in April. The Trump campaign announced that they received over two million donations in May, averaging $70.27 each, surpassing the previous single-month fundraising records of the Biden campaign and the Democratic National Committee. The fundraising gap between Trump and Biden’s campaigns has widened to approximately $100 million. The Trump campaign is expected to hold more high-dollar fundraisers in the coming weeks, with Trump participating in June fundraisers in San Francisco, Los Angeles, Newport Beach, California, and New Orleans.
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Recent statements by several ECB officials and the latest forecasts from various organizations suggest that the ECB is likely to cut interest rates by 25 basis points this week. However, due to persistent inflation in the Eurozone, the ECB is expected to be more cautious about easing monetary policy after June. Despite the sluggish Eurozone economy, a traditional rate-cutting cycle is not expected under the current uncertain environment. The market is currently debating the ECB’s future rate cuts and their frequency after June, with the general expectation of one or two rate cuts this year, as opposed to the six rate cuts predicted at the start of the year.
ECB Rate Cuts in Question Amid Economic Factors:- While many economists predict quarterly reductions following this week’s initial move, some believe that persistent inflation, rapid wage growth, and a surprisingly strong euro-zone output may limit monetary easing. Some analysts and investors are beginning to question their expectations for interest-rate cuts this year due to the stance of European Central Bank hawks.
Market Reactions and Official Concerns:- Market traders have also reduced their easing bets, influenced by Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel’s apparent dismissal of a July rate cut. Austria’s Robert Holzmann suggested that two decreases in 2024 might be enough. Officials are cautious about consecutive meetings lowering borrowing costs, fearing that markets might assume this pace as standard. They also express less confidence than some colleagues that ECB policy can significantly diverge from the Federal Reserve, which is likely to maintain its current rates for some time.
Economic Reports and Market Predictions:- Recent economic reports provide reasons for caution. A key measure of euro-zone pay, which policymakers hoped would indicate conquered inflation, failed to moderate, suggesting that price pressures, especially in the services sector, may take longer to ease. Inflation rose to 2.6% last month from 2.4% in April, exceeding expectations. Meanwhile, the 20-nation economy rebounded more strongly than expected after a mild recession in the latter half of 2024, with a resilient labor market, record-low unemployment, and signs of life in struggling manufacturers. Policymakers are not expected to backtrack on June’s rate cut, which will reduce the deposit rate from the record 4% it reached nine months ago. However, markets have ruled out a July rate cut and only assign a 60% probability to a September move.
Future Predictions and Uncertainties:- Some economists, such as Danske Bank’s Piet Christiansen and Mariano Valderrama of Intermoney in Madrid, do not foresee a second decrease until as late as December. Others predict a pause in the final month of the year after just two reductions. The Federal Reserve has signaled that US rates may need to stay high for longer to ensure inflation returns to 2%, raising questions about how far the ECB can go on its own. ECB President Christine Lagarde and her colleagues emphasize that they are in no rush to lower borrowing costs, and Chief Economist Philip Lane has stated that policy will remain restrictive throughout 2024.
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The British Retail Consortium reported a year-on-year increase of 0.7% in total retail sales in May, a significant drop from the 3.9% growth seen in May 2023, but higher than the three-month average increase of 0.3%. Despite a strong bank holiday weekend for retailers and minimal improvement to weather across most of May, retail sales only saw a modest rebound last month.
Food sales increased by 3.6% year-on-year over the three months to May, a notable decrease from the 9.6% growth in May 2023. This growth is also below the 12-month average growth of 6.4%. Despite these figures, the food sector still experienced year-on-year growth for the month of May.
In contrast, non-food sales faced a decline, dropping by 2.4% year-on-year over the three months to May. This is a steep decline compared to the 0.7% growth in May 2023 and sharper than the 12-month average decline of 1.7%. In-store non-food sales saw a 2.7% decrease year-on-year over the same period, a sharp contrast to the 2.9% growth seen in May 2023, and worse than the 12-month average decline of 1.1%.
Online non-food sales offered a glimmer of hope, increasing by 1.5% year-on-year in May, reversing an average decline of 3.0% in May 2023. This growth outpaced the three-month and 12-month average declines of 1.8% and 2.6%, respectively. The online penetration rate for non-food items rose to 36.7% in May from 35.9% in May 2023, slightly higher than the 12-month average of 36.1%.
Linda Ellett, UK Head of Consumer, Retail & Leisure at KPMG, highlighted the cautious optimism in the sector. She noted the positive impact of the early bank holiday and improved weather on high street sales growth, particularly in categories like health, personal care, beauty, and computing.
Retailers are hoping for a continuation of this trend, bolstered by warmer weather and summer holiday demand. They are focused on the upcoming General Election, hoping for favourable policies to boost the economy. In the food and drink sector, Sarah Bradbury, CEO of IGD, highlighted stable shopper confidence and the positive impact of falling inflation. Retailers remain optimistic about the future, anticipating that major events and improved economic conditions will help bolster consumer confidence and spending, providing a much-needed boost to the sector.
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The U.S. dollar has been experiencing a downturn, reaching its lowest point since April against the euro and sterling. This is largely due to indications of a weakening U.S. economy, which has led to increased speculation about potential interest rate cuts by the Federal Reserve.
Data showing a consecutive monthly slowdown in manufacturing activity and an unexpected drop in construction spending have further fueled these speculations. As a result, the likelihood of a rate cut in September has risen to approximately 59.1%, as per LSEG’s rate probability app.
The Federal Reserve’s persistent high-interest-rate policy is under scrutiny as it continues to impact the U.S. economy. Analysts are keenly awaiting the upcoming job data for signs of economic stress. The market has fully priced in a first quarter-point rate increase by the Fed’s November meeting, with a total of 41 basis points of tightening expected by the end of the year.
The month of November is anticipated to be a turbulent period for the U.S. dollar due to the convergence of a potentially decisive Federal Reserve meeting and the U.S. elections. The Fed’s next policy meeting concludes on June 12, with no risk of a policy change expected at that meeting. However, officials will update their economic and interest-rate projections.
Meanwhile, the European Central Bank has signaled that policymakers will cut rates at their meeting on Thursday. However, a recent uptick in inflation may cause officials to reconsider when to implement the next easing.
In other currency news, the New Zealand dollar rose to $0.6194 for the first time since March 8, while the Aussie remained steady at $0.66895, close to the two-week high of $0.6695. The Bank of England and Bank of Japan are also set to hold potentially pivotal policy meetings later this month.
The Dollar experienced a downturn following the release of weak domestic data and a significant drop in oil prices. The ISM manufacturing survey for May fell below expectations, pushing the US Dollar Index (DXY) down to 104 and causing the EUR-USD and GBP-USD to rebound above 1.09 and 1.28 respectively.
The ISM Manufacturing PMI dropped to 48.7 in May from 49.2, falling short of the anticipated 49.6. The Prices Paid component also decreased to 57 from 60.9, lower than the estimated 60. This general weakness in the US ISM manufacturing report reflects the soft US PCE report and Chicago PMI from the previous week.
Oil prices fell by nearly 4% as investors responded to OPEC’s announcement to increase oil production from October. This decrease in oil prices, which are deflationary, supports the view that the Federal Reserve may cut interest rates later in the year. Additionally, since commodities are priced in dollars, any significant sell-offs can negatively impact the currency.
The Atlanta Federal Reserve’s GDP Now estimate for Q2 GDP growth sharply declined from 2.7% to 1.8%, suggesting that the growth rate has been below trend for the first half of this year. This recent data provides further evidence of a slowdown in the U.S. economy, which is beginning to weaken the strength of the U.S. dollar.
Attention this week is on the U.S. labor market, particularly the JOLTS report, which will provide insight into new job openings. A weak report could push the Dollar to new lows. The consensus expects a drop to 8400k in April, down from 8488k in March. The quit rate is also expected to decrease to 2% from a peak of 3% over previous years, indicating a potential easing of wage pressures.
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MMG Ltd., a mining company, has proposed a rights offering in Hong Kong to raise HK$9.08 billion ($1.2 billion), while Yankuang Energy Group is considering a $634 million shares placement. In addition, Poly Developments and Holdings Group is contemplating raising up to 12 billion yuan ($1.7 billion) through equity-convertible notes.
These firms are part of a larger trend of Chinese companies seeking affordable funding through equity or equity-linked notes, given the recent positive signs in the country’s stock market. This increase in issuances provides a silver lining for bankers amidst a slowdown in mergers, acquisitions, and initial public offerings.
Yankuang’s placement, the largest by a Hong Kong-listed firm since April 2023, has boosted share sales by Hong Kong-listed companies to $1.7 billion this quarter, marking a year-high. Chinese companies are also increasingly utilizing convertible bonds, which offer the flexibility to raise funds affordably without immediate stock dilution and typically have lower interest rates than regular debt. Alibaba Group Holding Ltd. and JD.com Inc. jointly raised $7 billion through this method last month.
As Kenny Ng, a strategist at China Everbright Securities International, points out, Chinese companies are leveraging the current positive market momentum to raise necessary funds. He also notes that the onshore market offers additional benefits due to its lower interest rates.
If Poly’s offering proceeds, it will be a rare occurrence, as only three Chinese real estate firms have raised over $1 billion through a convertible in the past twenty years. Fundraising efforts may accelerate as signs of slowing momentum in the Chinese stock rebound prompt companies to act quickly. They need to capitalize on a rally that could potentially reverse due to investor concerns about policy uncertainties and geopolitical risks.
The CSI 300 Index for mainland shares and the Hang Seng China Enterprises Index have both seen declines after significant rallies. Some hedge funds have taken profits following a rally in property developer stocks, while others have established short positions. The Bloomberg Intelligence stock index of developers, which surged over 70% in the month through May 17 following Beijing’s announcement of a housing rescue package, fell in the subsequent two weeks due to doubts about the effectiveness of the measures.
Zerlina Zeng, a senior credit analyst at Creditsights Singapore LLC, suggests that if the equity rally in the China property sector continues, more developers might tap into the convertible bond market.
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04/06 Tue 12:30pm CHF CPI m/m
04/06 Tue 8:00pm USD JOLTS Job Openings
04/06 Tue Tentative NZD GDT Price Index
05/06 Wed 7:30am AUD GDP q/q
05/06 Wed 7:45am CNY Caixin Services PMI
05/06 Wed 2:30pm GBP Final Services PMI
05/06 Wed 6:15pm USD ADP Non-Farm Employment Change
05/06 Wed 7:45pm CAD BOC Rate Statement
05/06 Wed 7:45pm USD Final Services PMI
05/06 Wed 8:00pm USD ISM Services PMI
05/06 Wed 8:30pm CAD BOC Press Conference
06/06 Thu 2:30pm GBP Construction PMI
06/06 Thu 6:15pm EUR Main Refinancing Rate & Monetary Policy Statement
06/06 Thu 6:30pm CAD Trade Balance
06/06 Thu 6:30pm USD Unemployment Claims & Trade Balance
06/06 Thu 6:45pm EUR ECB Press Conference
07/06 Fri Day 2 EUR European Parliamentary Elections
07/06 Fri 6:30pm CAD Employment Change & Unemployment Rate
07/06 Fri 6:30pm USD Average Hourly Earnings m/m & Non-Farm Employment Change & Unemployment Rate
N.B. Time mentioned here is on Gmt +6
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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc
Prepared to you by “Akif Matin“
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