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Week Ahead: Mo' Jobs, Mo' Problems

All about the jobs this week.

First Friday of the month means it's NFP day.

As with many data points recently, there's a wide range of expectations.

Consensus is somewhere around 600-700k (although I've seen estimates as low as 225k while some expect close to a million jobs will have been added).

Putting this into context: 'what will the Fed do if...?'

There seems to be an acceptance among Fed members that inflation is high now, but should prove transitory in the end.

Bostic said last week that 'transitory' may prove to be 6-9 months rather than the 2-3 months they originally expected.

I think the dots have bought some credit with the market... Credit that they're not going to let inflation get out of control, or be 'behind the curve' while they're off pursuing airy-fairy dreams of maximum, inclusive employment as some had suspected.

Perhaps there was a little complacency behind the launch of the FAIT framework, and the idea that inflation would only be a problem to address if it took place alongside full employment.

The messaging recently seems to have shifted to full employment can be pursued as long as inflation stays under control.

According to Fed forecasts, core inflation will hit target this year, next year and in 2023.

Presuming the market takes this at face value, that means inflation targets will be hit and rate hikes are on the table from 2022...

Comments last week showed that policy-makers are divided... 👇

If inflation is already hitting target (e.g. if forecasts are correct) and re-employment is picking up pace, then the market may begin to reprice a faster tightening cycle.

We may be reaching the point where good jobs news = bad news for riskier markets due to the policy tightening implications.

An above-consensus NFP print on Friday would be a good test of this theory.

According to the WSJ, Missouri is starting to see better hiring conditions now the state unemployment benefits have expired 👇

While the NYT report that it has made no difference whatsoever...

In Texas, the 'financial safety net' is being withdrawn entirely...

Federal unemployment benefits end for Texans on Saturday. Their electricity can be cut for nonpayment starting Tuesday. For renters, evictions will begin to proceed normally again at the end of July.

“We’re going to see disparity in the coming months as social safety nets are being taken away, and people are going to have to figure out all these things on their own,” said Pia Orrenius, a senior economist at the Federal Reserve Bank of Dallas.

The effects of stimulus withdrawal will begin to filter through (probably from next month) as more state benefits expire.

Perhaps they already are...

Fed members might reach some kind of consensus on the unemployment situation...

 Fed heads a long way apart on unemployment pic.twitter.com/Y5bIWSumBx— 📈 Tim 📉 (@VolaTim) June 24, 2021 

However, the 'big fear' of a fast tightening cycle to get ahead of inflation has always looked unlikely.

Whilst implied 'liftoff' has been brought forward to Dec 2022, the implied pace of subsequent rate hikes in the following 12 months has fallen.

And Morgan Stanley think they've joined the dots... 👇

How long until interest rates are 'high' again?

When rates were hiked to 2.5% in the last cycle, Big Tech did just fine...

And in recent hiking cycles, rates have peaked at a lower level than the prior cycle (and generally taken longer to get underway...) 👇

The economic benefit of the close to $5 trillion in federal government support provided since the pandemic struck, including the $1.7 trillion CARES Act passed last March and the $1.9 trillion American Rescue Plan this March, is also peaking.

More than $4 trillion of the federal funds have already been disbursed, with the peak in outlays, equal to about 7.5% of GDP, occurring this quarter and next. By the fourth quarter of this year, outlays will fall to less than 5% of GDP and if lawmakers provide no additional support it will fall to 1.5% of GDP in 2022.

Fiscal policy will swing from significantly shoring up economic growth to weighing on it by this time next year.

Central banks are starting to tighten, and Norway are set to lead the G10 pack.

The Federal Reserve’s crab walk toward the moment it reduces its aid has cemented the global pivot, with counterparts in the U.K., Canada, Norway, Sweden, South Korea and New Zealand among those sketching out maps to a pullback.

China’s central bank has already switched gears and is focusing on controlling debt while ensuring those parts of the economy that still need liquidity, get it.

Just last week, Mexico, Hungary and the Czech Republic raised interest rates, following hikes earlier in 2021 from Brazil, Turkey and Russia.

Things that don't need to be said... 👇

'The European Central Bank and Bank of Japan are signaling they’ll maintain their easy-money settings'

On the fiscal side, infrastructure talks are continuing.

Biden's statement that the two plans would be 'linked' had jeopardised negotiations just as a breakthrough seemed possible, but he's walked that back now...

Discussions over the separate reconciliation package are ongoing.

Due to the wafer thin majority, Democrats need every seat to vote for the plan... and Manchin is not keen on spending $6 trillion 👇

 Manchin sounds like he's thinking of something a lot smaller than Bernie Sanders...

“If they think in reconciliation I’m going to throw caution to wind [and support $6 trillion] when we can only afford 1, 1.5, maybe 2 … then I can’t be there”— Burgess Everett (@burgessev) June 27, 2021 

Month/quarter end could see slightly higher volatility this week, and the Russell index rebalancing comes into effect too.

More on that 👇

OPEC+ Meeting: Easing Cuts?

We continue to hold the view that ICE Brent will average US$70/bbl over the second half of this year, with OPEC+ still sitting on plenty of spare capacity, whilst there is the risk of increased Iranian supply if/when US sanctions are lifted.

However, this view is assuming that OPEC+ brings this capacity back onto the market in increments of at least 500Mbbls/d per month.

Anything less would likely increase the potential for further price upside.

Even at current pricing, U.S shale drilling isn't storming back...

“We are underinvesting as an industry around the globe,” said Rick Muncrief, chief executive of Devon Energy, one of the largest US shale producers.

After years of outspending, Devon is among the shale groups that have pledged to use windfalls from higher prices to strengthen their balance sheets and return capital to investors through dividends or share buybacks. “The days of needing to grow [production] at double-digit rates, that’s behind us,” Muncrief told the Financial Times. “The industry has overbaked too many times.”

Investors’ growing doubts about oil’s long-term future are also a factor, said Bradley Williams, chief executive of Elephant Oil & Gas, a private-backed Wyoming-focused driller. “It’s a real headwind now,” he said. “To drill a bunch of wells — what are we drilling into? Is it a constructive commodity price environment or are we going to see a rapid transition away from oil and gas that’s going to result in soft commodity prices and ultimately poor returns?”

Nevertheless, oil is looking a little stretched ahead of the meetings (and the inevitable sources comments).

Main events to watch this week (via Newsquawk)

MON: BoJ Summary of Opinions (Jun)

TUE: German CPI Prelim (Jun); EZ Sentiment Survey (Jun); Japanese Jobs Data (May); US Monthly Home Prices (Apr)

WED: Chinese Official PMIs (Jun); Japanese Industrial Output (May); German Unemployment (Jun); EZ Flash CPI (Jun); US ADP National Employment (May); UK GDP (Q1); Canadian Monthly GDP (May) PPI (May); US Chicago PMI (May)

THU: OPEC+ Meeting; Riksbank Policy Decision; Japanese Tankan Survey (Q2); Australian Trade Balance (May); US ISM Manufacturing PMI (Jun); EZ Unemployment Rate (May)

FRI: German Retail Sales (May); US Labour Market Report (Jun)

And today's option expiries

EUR/USD 1.1900 (447M), 1.1920-25 (825M), 1.1945-50 (1.13BLN), 1.1965 (316M), 1.2000 (1.23BLN), 1.2100 (308M)

USD/JPY 109.50 (431M), 110.00 (485M), 110.50 (1.38BLN), 111.00 (385M), 111.75 (500M), 112.00-05 (900M)

EUR/GBP 0.8500 (710M)

AUD/USD 0.7485-90 (500M)

NZD/USD 0.6980 (315M)

EUR/CHF 1.1050 (250M)

USD/CAD 1.2360 (250M)

AUD/JPY 84.65 (240M)

Source: DTCC