RBA Meeting, Fed Minutes, OPEC+ Deal

Quick recap: The big event last week was Friday's NFP and employment data.

Heading into the release markets were treading water, with concerns that an above consensus print would see continued dollar strength and possibly cap gains in equity indices.

On this front there has definitely been a regime change.

Earlier in the year any positive data was cheered on as it reinforced the strengthening economic recovery.

Since June’s Federal Reserve meeting, the positive data is still cheered, but those cheers now come with caveats and a note of caution.

“Of course it’s a good thing if more people get back to work, it’s another positive sign for the economy and the future... Just don’t do it too quickly”

Why?

The sooner employment recovers, the sooner the Federal Reserve will begin to withdraw QE support and consider hiking interest rates.

In any case, markets seemed to take this as a ‘Goldilocks’ report.

NFP’s did come in above the 720k consensus.

850k jobs were added, but the unemployment rate ticked higher too, hitting 5.9% (vs 5.8% previously).

At first glance, this seems impossible. How can 850k jobs be added yet the unemployment rate increases?!

According to the BLS 151,000 people re-entered the labor force and some workers are classified as being ‘employed but absent from work’.

Without this misclassification, the unemployment rate would have been 6.1% in June.

Summing up, the jobs recovery is progressing well, although there is still significant slack in the labour force.

As long as inflation normalises from here, there is no excessive pressure on the Federal Reserve to pre-emptively tighten policy and start withdrawing liquidity.

Goldilocks

U.S. Stock Indices rallied after the release…

And money managers say we should "get used to it"

Q2 Earnings Season kicks off properly w/c 12th July and there's already some extra juice in those earnings estimates.

Let’s take a look at the main events coming up this week.

The jewel in the crown could well be the RBA meeting.

Earlier in the year, Australia’s central bank had insisted that ‘the conditions for rate hikes will not be met until 2024 at the earliest’.

That language softened slightly at the last meeting when “the board viewed these conditions as unlikely until 2024 at the earliest’.

Slightly more optimistic.

There are reasons for optimism too. The labour market is recovering well, and any fears of long-term economic scarring seem misplaced.

However, Australia’s low vaccination rate has recently seen the return of lockdowns, and this is sure to influence thinking on policy decisions and forward guidance.

So, what can we expect?

No change to the cash-rate is expected.

However, the bank will announce adjustments to their QE program, which is set to expire in September.

ING suggest four main options that the RBA could take:

1) Ceasing asset purchases

2) Repeating A$100bn asset purchase scheme for six months and then reviewing

3) Conducting a smaller amount (like A$50bn) of purchases for six months and then reviewing

4) Repeating A$100bn for a longer period than six months.

Options 2 & 3 seem most likely, and there is also the possibility that the bank will choose flexibility, by announcing a program that allows them to purchase up to (e.g. A$100bn), whilst not committing to make full use of the program.

Markets will be keenly watching the forward guidance too.

OIS pricing suggests that the RBA will begin hiking towards the end of 2022, and will increase the cash rate to 0.75% by the end of 2023.

A dovish statement would likely undermine confidence in the probabilities behind that hiking schedule.

Markets view of the RBA might shift and see them as late to the tightening party, which could have a negative impact on the AUD.

Likewise, any upgrades to the language and probabilities of those conditions for rate hikes being met sooner than 2024 could be positive.

FOMC minutes could offer some insight into the thinking surrounding the dots, and just how hawkish (and certain) that thinking truly is.

Most FOMC members have been quite vocal since the meeting however, with lots of comments demonstrating the wide range of opinions.

Nomura have played detective to try and join the dots...

George & Kaplan's dots up there for the end of 2023 look hilarious to me.

I'm not sure they'll ever get rates above 1% again.

Another brilliant illustration of why these inflationary pressures will be transitory (yeah, that word again) 👇👇👇

The best argument for hiking rates?

Increase the cost of capital to try and build some risk premium back into the market.

Covid has already re-capitalised the zombies at record low rates.

Now it's time to sort this out... 👇👇

OPEC+ Update

UAE are unhappy about their low production baseline, and will make it a key requirement of any negotiation over extending the deal until the end of 2022, although it looks as if a deal for more imminent production increases will be reached...

Main events & data for the week ahead (Newsquawk)

MON: U.S. Market Holiday (Independence Day), Final Chinese Caixin Services Final PMI (Jun); EZ Sentix Index (Jul); EZ, UK and US Markit Services and Composite Final PMIs (Jun);  BoC Business Outlook Survey,

TUE: RBA Policy Decision; German ZEW Survey (Jul); EZ Retail Sales (May); US ISM Services PMI (Jun)

WED: FOMC Minutes (Jun), EIA STEO

THU: ECB Minutes (Jun)

FRI: Chinese Inflation (Jun); UK GDP Estimate (May) and Output Data (May); Canadian Labour Market Report (Jun)