Forex Fundamental News Facts for 10th June, 2024
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[Quick Facts]
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1. U.S. to buy another 6 million barrels of oil for Strategic Petroleum Reserve.
2. U.S. May non-farm payrolls dampen rate-cut expectations sharply.
3. Japan’s economy contracts less than expected in Q1, with weak consumption remaining the focus of attention.
4. Holzmann says ECB divergence from Fed would fuel inflation.
5. ECB’s Lagarde says the fight against inflation is not over.
6. Central Bank Rate Cuts: Watch What They Do, Listen to What They Say.
7. FOMC, CPI and Other Can’t Miss Items This Week.
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[News Details]
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The U.S. Department of Energy (DOE) has issued two new requests for a total of 6 million barrels of oil to be delivered to the Strategic Petroleum Reserve’s Bayou Choctaw site. The delivery is scheduled in installments, with 1.5 million barrels in September and the remaining 4.5 million barrels in the last quarter of the year. The DOE has already procured 38.6 million barrels of oil for a different reserve site as part of its efforts to replenish the strategic reserve, which has a capacity of over 700 million barrels. The current reserve stands at approximately 370 million barrels, a significant decrease from the 600 million barrels at the start of 2022.
Energy Sector: Despite a strong US jobs report, oil prices remained steady due to expectations of a delay in Federal Reserve rate cuts. However, the overall sentiment in the oil market is bearish, with oil prices falling for three consecutive weeks. Speculators have reduced their net long in ICE Brent, reflecting this bearish sentiment. The US Department of Energy announced a tender to purchase up to 6 million barrels of crude oil for its Strategic Petroleum Reserve due to weaker prices. US drilling activity slowed further last week, which is expected to impact US natural gas output and tighten the market in 2025. European natural gas prices continued to weaken last week due to eased supply concerns after the completion of repair work in Norway.
Metals Sector: The metals complex faced pressure last week, with LME copper and gold prices falling significantly. A stronger-than-expected US jobs report led to a surge in the USD and US treasury yields, raising doubts about the prospect for Federal Reserve rate cuts. Despite weak physical consumption, Chinese preliminary trade numbers for May showed that monthly imports for unwrought copper rose. Recent data from Cochilco showed that Codelco’s total copper production fell over 6% YoY to 95.1kt in April, primarily due to delays in structural projects. China halted buying gold for reserves in May after the precious metal surged to a record high, ending an 18-month buying spree.
Agriculture Sector: CBOT wheat extended losses for an eighth consecutive session on Friday on reports that Turkey will suspend wheat imports for the next four months to protect domestic producers from weaker prices during the harvest period. The latest trade numbers from China Customs show that soybean imports declined 15% YoY to 10.2mt in May, while cumulative imports fell 5.4% YoY to 37.4mt in the first five months of the year. The latest CFTC data show that money managers increased their net short position in CBOT soybeans by 45,523 lots to 59,741 lots as of 4 June. Similarly, speculators increased their net bearish bets in corn by 79,229 lots over the last week, leaving them with a net short position of 212,706 lots.
China’s commodity imports in May showed a mixed picture, with some commodities like crude oil experiencing a decline, while others showed deceptive strength, driven by factors other than consumption growth.
Crude oil imports dipped in the first five months of the year, with a 1.2% decrease compared to the same period last year. This decline is attributed to weak refining margins and a 7.7% drop in fuel exports in the first five months of 2024, leading to lower demand for crude. Despite OPEC’s forecast of a rise in China’s crude demand for 2024, the actual imports are down 130,000 bpd in the first five months of the year.
Iron ore imports, on the other hand, seemed strong with China, the world’s largest buyer, importing over 100 million metric tons for the third consecutive month. However, this additional iron ore is not boosting steel production but is mainly being added to inventories, which have hit a 26-month high.
Copper imports also appeared strong in May, with an 8.8% increase in the first five months of the year. However, similar to iron ore, the additional imports are largely going into inventory builds, which have reached a four-year high.
Coal is the major commodity where demand is genuinely higher, with imports in May higher than the previous year. This increase is largely due to weak domestic output, with production down 3.5% in the first four months of the year.
In conclusion, while China’s commodity imports are not in a dire state, they do not indicate a strong recovery in the world’s second-largest economy.
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The U.S. Bureau of Labor Statistics reported a significant increase in non-farm payroll employment in May, with 272,000 new jobs, the highest since March and well above the anticipated 185,000. This surge in employment led to an unexpected rise in the unemployment rate to 4.0%, the first since January 2022. Average hourly earnings also saw a 0.4% increase in May. Despite earlier data indicating a slowing labor market and increasing expectations for a rate cut in September, the strong performance of non-farm payrolls has significantly cooled these expectations. The likelihood of a rate cut in September has dropped to about 56%, and another cut in December is now roughly 50%. This has resulted in a stronger dollar and a significant drop in gold and crude oil prices.
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Japan’s GDP data for the first quarter showed that private consumption remained unchanged at -0.7% QoQ, marking the fourth consecutive quarterly decline. Corporate spending data was revised to -0.4% from the initial decline of 0.7%. The report confirmed that household and business spending remained weak, a concern for the Japanese government and the Bank of Japan. Japanese authorities are looking for signs that demand can withstand continued inflation. Markets expect the central bank to leave its benchmark policy rate unchanged at a two-day meeting that ends Friday, with many expecting a rate hike in October.
Bank of Japan’s Policy Meeting: The Bank of Japan (BOJ) is set to meet this week, with market expectations leaning towards a reduction in bond purchases in response to the yen’s weakness. This move would reverse a decade-long policy of economic stimulation through balance sheet expansion. The meeting will be a crucial test for Governor Kazuo Ueda, who recently caused significant currency market fluctuations with his remarks. Ueda downplayed the impact of a weaker yen, leading to a sharp sell-off and a 34-year low against the dollar. This resulted in the government spending an estimated $62 billion to support the yen.
Expectations for Bond Purchase Reduction: The BOJ is expected to reduce its monthly purchases of Japanese government bonds (JGBs) from the current level of 6 trillion yen ($39 billion). This reduction is seen as necessary to maintain the size of its 761 trillion yen balance sheet. A recent Nikkei report suggests that the central bank is considering scaling back these purchases. However, even if the bank decides to cut its purchasing next week, the program should be kept as a tool for responding to sharp gains in interest rates.
Market Reactions and Predictions: The market does not expect a rate hike. The predominant view is that the central bank will raise its target rate to 0.25% from 0%-0.1% in its following meeting. The BOJ raised interest rates for the first time in 17 years in March, but Ueda has emphasized a go-slow approach to avoid shocking the economy. The market environment has recently become more favorable for a reduction in bond purchases, which could potentially add upward pressure on bond yields.
Economists’ Views on Quantitative Tightening: Economists are divided over whether a reduction would constitute the start of quantitative tightening. Some believe that reductions would mark the start of balance sheet reduction, with the direction clearly toward a smaller balance sheet. Others predict that the BOJ will stop short of declaring a full-fledged quantitative tightening, indicating a more flexible stance on bond purchases and retaining the option of either raising or lowering the purchase amount depending on market conditions.
Political Factors: The BOJ may have less flexibility in autumn. In September, Japan’s ruling Liberal Democratic Party will hold a triennial leadership contest, which could result in a change of leadership and a snap general election. The BOJ would prefer to avoid a policy shift during general elections, as a tightening of policy around the time of an election could work against the party in power due to its chilling effect on the economy.
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European Central Bank (ECB) Governing Council member Holzmann warned that further reductions in the ECB’s borrowing costs could significantly impact the euro exchange rate and inflation. If the initial assumption of three rate cuts comes true and the Fed does not respond to it, this would certainly have an impact on the exchange rate and inflation. Holzmann was the only opponent of the rate cut decision last week, emphasizing that data-driven decisions should be guided by data.
Europe’s nationalist parties have capitalized on voter concerns over rising prices, migration, and the cost of green transition in the European Parliament election. They are now aiming to convert their seat gains into policy influence within the EU. Nationalist, populist, and eurosceptic parties are projected to win nearly a quarter of seats in the EU assembly, reflecting a growing Western trend towards radical alternatives.
Previously, radical right parties advocated for leaving the EU or its single currency, similar to British Brexiteers. However, these parties now aim to influence the EU from within. Nationalist prime ministers are already in place in Hungary, Italy, and Slovakia, and right-wing parties are governing or supporting in Finland and Sweden. The anti-immigrant Freedom Party in the Netherlands also appears ready to join a ruling coalition.
The new parliament’s first challenge could be determining the next Commission president as early as July. Current President Ursula von der Leyen is in a strong position for a second term, given that her centre-right European People’s Party (EPP) is set to be the largest group. However, she may need support from right-wing nationalists, such as Italian Prime Minister Giorgia Meloni’s Brothers of Italy, to secure a parliamentary majority.
The centre-right EPP has already backed off from attempts to incorporate broader environmental policies into the Green Deal package. There could also be a right-wing push to increase external processing of migrants and a tougher passage of reforms required for EU enlargement, such as reducing the need for unanimity in decisions.
A key factor will be the extent to which the radical right can unite. They do not have a strong track record. French far-right leader Marine Le Pen has urged Italy’s Meloni to form a right-wing grand alliance, but Le Pen’s party and allies expelled Alternative for Germany only last month. An alliance including Hungarian Prime Minister Viktor Orban’s Fidesz would be too much for some of Meloni’s allies, such as Belgium’s N-VA.
In conclusion, while Europe’s nationalist parties have made gains in the European Parliament, their lack of cohesion means they would need to win more than 70% of seats to completely control vote outcomes, a figure they are unlikely to reach.
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ECB President Christine Lagarde stated in her speech on Friday that while progress has been made on many fronts, there is still a long way to go to quell inflation. The central bank has cut interest rates, but the fight against inflation is far from over. Interest rates need to remain restrictive for a long time to ensure price stability. Inflation is expected to reach the target level of 2% in the second half of 2025, but the process will be bumpy. The ECB’s next move on monetary policy will depend on three factors: whether inflation continues its downward trend, whether overall price pressures in the economy have eased, and whether policymakers recognize the effectiveness of monetary policy in curbing inflation.
European Parliament Shifts Right, Impacting Key Policy Areas: Following a four-day election, the European Parliament has seen a shift to the right, with an increase in eurosceptic nationalists and a decrease in mainstream liberals and Greens. This shift could influence several crucial policy areas over the next five years.
Climate Policy: The upcoming five years are critical for Europe to meet its 2030 climate change targets. The EU has passed numerous clean energy and CO2 reduction laws to achieve these targets. However, a more climate-sceptical Parliament could potentially weaken these laws by adding loopholes. The Parliament will also negotiate a new target to reduce emissions by 2040, which will guide future policies to reduce emissions in various sectors.
Defence and Ukraine: While foreign and defence policy primarily falls under the jurisdiction of EU member countries, the Parliament plays a role in promoting pan-European cooperation on defence projects. The success of these plans, part of the European Commission’s Defence Industrial Programme, could be hindered by parties opposing greater European integration.
Trade Policy: The Parliament’s main role in EU trade policy is to approve free trade agreements. The European Commission argues for more trade agreements to compensate for lost business with Russia and reduce dependence on China. However, the approval of pending trade agreements could be more challenging due to the increased presence of nationalist eurosceptics in the Parliament.
China, US Relations: The European Commission advocates for a united EU stance towards major rivals like China and the US. It also calls for a clear, unified industrial strategy to maintain Europe’s industrial base for green and digital goods. Critics argue that nationalist right-wing parties support a more fragmented Europe, which could hinder these efforts.
Enlargement and Reform: Before admitting new countries, the EU needs to reform its internal agriculture policy and support system for its members. The EU also needs to change its decision-making process to reduce the need for unanimity. If such reforms are proposed in the next five years, the Parliament will play a crucial role in shaping them. A stronger far-right voice, opposing deeper EU integration, could significantly impact these reforms.
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Global Economic Slowdown and Monetary Policy: As the post-pandemic hyperinflation eases and global economic growth decelerates, major central banks worldwide are contemplating monetary policy relaxation. The timing of the Federal Reserve’s rate cuts has been a focal point, but other central banks have taken action before the Fed.
Rate Cuts by Major Central Banks: The Bank of Canada (BOC) was the first G7 country to cut interest rates, reducing its benchmark interest rate by 25 basis points to 4.75% on June 5, 2024. This move came as Canada’s inflation slowed more rapidly than anticipated, with the Consumer Price Index (CPI) dropping to 2.7% in April. The European Central Bank (ECB) followed suit a day later, cutting its three main interest rates by 25 basis points due to progress in disinflation. However, these rate cuts did not elicit the expected positive response in the foreign exchange market.
Market Reactions and Predictions: The market had been anticipating the ECB to cut its deposit rate from a record 4% to 3.75% for weeks. This expectation was so strong that the first rate cut was almost a foregone conclusion. The market is now more interested in whether there will be successive rate cuts following the first one. Both the ECB and the BOC have adopted a “meeting-by-meeting” approach to rate decisions, indicating that they are not in a hurry to cut rates further.
Policy Divergence and Inflation Concerns: The market remains wary of the policy divergence between the ECB and the Federal Reserve, which may not consider cutting rates for several months. A widening interest rate gap between the euro area and the United States could put depreciation pressure on the euro. While this may benefit European exporters, it could also make the ECB’s task more difficult by pushing up inflation through more expensive imports. Both the ECB and the BOC recognize the ongoing battle against inflation and the risks of cutting rates too quickly.
Conclusion: As long as ECB President Lagarde and her counterpart do not explicitly indicate successive rate cuts, the outlooks for the euro and the Canadian dollar will not be overly pessimistic. After all, the Federal Reserve is also on the path to cutting interest rates.
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Gamestop GME was the center of attention last week, ending with a live stream by RoaringKitty discussing his Gamestop position. Positive news releases also contributed to the continuation of the rally from the previous Friday, closing the week with a 1.25% increase to $534.01 on the SPY.
This week, several news releases and headlines could potentially impact the market, with the FOMC release on Wednesday being the most significant. Here are five key factors to watch:
- Bond Auctions Data indicates that rates are beginning to affect American consumers, with debt figures showing increased spending and a larger portion of income going towards debt servicing. Additionally, US debt is reaching unprecedented levels. These factors could influence foreign interest in US debt, potentially leading to poorer-than-expected performance in the 10-year and 30-year bond auctions this week. If these auctions are weak, it could affect the Equities market if investors become wary.
- CPI The Consumer Price Index (CPI) is due out on Wednesday morning, before the FOMC statement and Fed Funds rate announcement. Core inflation, which excludes food and energy, could be more significant than the headline CPI as it provides a more accurate measure of consumer prices. Therefore, observing the difference between Core and headline could indicate the contribution of food and fuel prices to the overall price increase. If inflation is lower than expected, the market could rally. However, if inflation is higher than expected, the market could start to sell.
- FOMC/ Fed Funds The Fed Funds rate will be released on Wednesday, along with a press conference. It will be interesting to hear Powell’s comments, especially as several central banks have started to cut rates. The rate is expected to remain at 5.50%. If this expectation is met, market volatility could increase until the press conference provides further insight. Any deviation from the expected rate could be viewed negatively and could trigger selling pressure.
- PPI On Thursday, the Producer Price Index (PPI), which measures the change in the cost of finished goods, will be released. A spike in PPI could negatively impact the markets, particularly following the FOMC the day before. However, if PPI is lower than expected, the market could rally towards the end of the week.
- Consumer Sentiment The preliminary UoM Consumer Sentiment will be released on Friday morning. This figure has been declining for several months, and if this trend continues, it could trigger market volatility. However, if sentiment improves and exceeds the estimate of 73.0, it could inject optimism into the market and trigger a market rally.
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🔥News releases on THIS WEEK :
10/06 Mon All Day AUD & CNY Bank Holiday
11/06 Tue 12:00pm GBP Claimant Count Change
11/06 Tue 4:00pm USD NFIB Small Business Index
11/06 Tue 11:01pm USD 10-y Bond Auction
12/06 Wed 7:30am CNY CPI y/y
12/06 Wed 12:00pm GBP GDP m/m
12/06 Wed 6:30pm USD CPI & Core CPI m/m
12/06 Wed 8:30pm USD Crude Oil Inventories
13/06 Thu 12:00am USD Federal Funds Rate & FOMC Statement
13/06 Thu 1:15am CAD BOC Gov Macklem Speaks
13/06 Thu 7:30am AUD Employment Change
13/06 Thu 6:30pm USD PPI & Core PPI m/m
13/06 Thu 10:00pm USD Treasury Sec Yellen Speaks
14/06 Fri Tentative JPY Monetary Policy Statement & BOJ Press Conference
14/06 Fri 8:00pm USD Prelim UoM Consumer Sentiment
14/06 Fri 11:30pm EUR ECB President Lagarde Speaks
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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