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Week Ahead: Non-Farm Payrolls, Infrastructure Spending and OPEC+ Headline the Week

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Fundamental analysis of Forex market

The BOE was “on hold” last week as most committee members felt that recent higher inflation readings were transitory.  And after the hawkish-leaning FOMC meeting 2 weeks ago,  the US Fed paraded out speaker after speaker last week to hammer home the idea that recent inflation is transitory and will fall once the reopening boom has slowed.  The hotly negotiated US infrastructure spending bill was announced last week, but is there more to it than meets the eye?  OPEC+ meets on Thursday is expected to raise oil output.  In addition, markets and the Fed will get a better look at the employment situation in the post-covid US when Non-Farm Payrolls for June are released on Friday.  Also, this week is end of month and end of quarter.  Watch for volatility into the end of June!

Central Banks

The BOE left rates unchanged last week and decided not to continue to taper bond purchases as the did at their previous meeting.  Although inflation is hot (near 2.1%) and the Claimant Count has convincingly beaten expectations 2 months in a row,  members decided to remain on hold.  MPC members did hike their GDP forecast for 2021 and their inflation forecasts, which they said could exceed 3%.  However, they felt is could return to near 2% in the medium term (transitory).  Speaking of which, after the hawkish tilt from the FOMC meeting 2 weeks ago and hawkish Fed speak from Fed members Bullard and Kaplan last Friday, Powell marched out neutral and dovish Fed members this week to try and calm markets.  As a matter of fact, Fed Chairman Powell himself testified last week that price pressures would prove to be transitory and would ease after re-opening disruptions settled down.  In addition, Fed’s Bostic, Williams, Mester, Daly and Kashkari all made similar comments. Note that Core PCE for May released on Friday was 3.4%, a tad weaker than expected but the highest rate since 1982.  This is said to be the Fed’s favorite measure of inflation.

Infrastructure Spending

US President proclaimed last week that “We have a deal” regarding the heavily debated Infrastructure spending bill.  The total spending package would be worth roughly $1.2 trillion over 8 years and help to repair and build roads, bridges, pipes and broadband internet.  The plan will include $579 billion in new spending, which will be paid for by the sale of strategic petroleum reserves, 5G spectrum auction proceeds, extending expiring customs user fees and redirected covid funds.  Most importantly for Republicans, there are no plans in this bill to increase taxes.  However, it does not include items high on the Democrats wish list, such as childcare, climate change, and education.  These are expected to be proposed in another “human infrastructure” bill, which would include raising taxes on the wealthy and corporations. It could be passed via reconciliation, which would only require a 50-50 Senate vote, with Vice-President Kamala Harris casting the deciding vote.  House leader Nancy Pelosi said one cannot pass without the other, creating skepticism around the whole thing.  Watch for comments for all sides this week, which could accelerate or derail the whole bill.

OPEC+

OPEC+ will meet this week at the OPEC-JMMC meeting on Thursday.  Last week, “Sources” suggested that OPEC+ is mulling easing output curbs by 500,000 bpd in August.  Recall that the last course of action OPEC+ took was to increase supply by 350,000 bpd in May and June, and 441,000 in July.  However, also recall that Saudi Arabia took a rather large cutback of 1,000,000 bpd in production for this to occur, while Russia continued pumping away.  Traders will be watching to see how much of that lost production Saudi Arabia will get back.  Note that WTI crude and Brent Crude are trading near pandemic highs of 74.00 and 75.45, respectively.

Earnings

This will be a very slow week for earnings as we head into the final days of June.  A few notable earnings releases are as follows:  BBBY, MU, STZ, WBA

Economic Data

Friday is Non-Farm Payroll day!  Early expectations for an additional 650,000 jobs to have been added to the US economy during June.  Watch average hourly earnings as well, another key inflation measure for the Fed which measures wage increases.  The Fed will be watching to see if the current “transitory inflation” is feeding through to wages.  The current YoY expectation is for 2.1% vs 2% in May.  See our economic calendar for all releases this week.  The more notable economic releases are as follows:

Monday

  • Japan: BOJ Summary of Opinions
  • UK: BOE Haldane Speech

Tuesday

  • Japan: Unemployment Rate (MAY)
  • Japan: Retail Sales (MAY)
  • UK: Mortgage Approvals (MAY)
  • EU: ECB President Lagarde Speech
  • EU: Economic Sentiment (JUN)
  • EU: Consumer Confidence Final (JUN)
  • Germany: Inflation Rate Prel (JUN)
  • US: CB Consumer Confidence (JUN)

Wednesday

  • Australia: RBA Governor Lowe Speech
  • Japan: Industrial Production Prel (MAY)
  • China: NBS Manufacturing PMI (JUN)
  • China: Non-Manufacturing PMI (JUN)
  • Japan: Consumer Confidence (JUN)
  • Germany : Unemployment Change (JUN)
  • UK: GDP Growth Rate Final (Q1)
  • EU: Inflation Rate Flash (JUN)
  • UK: BOE Haldane Speech
  • US: ADP Employment Change (JUN)
  • Canada: GDP (APR)
  • Canada: PPI  (MAY)
  • US: Chicago PMI (MAY)
  • US: Pending Home Sales (MAY)
  • Crude Inventories

Thursday

  • Global: Markit Manufacturing PMIs Final (JUN)
  • New Zealand: Building Permits (MAY)
  • Japan: Tankan Large Manufacturers Index (Q2)
  • Australia: Trade Balance (MAY)
  • China: Caixin Manufacturing PMI (JUN)
  • UK: Nationwide Housing Prices (JUN)
  • EU: ECB President Lagarde Speech
  • UK: BOE Gov Bailey Speech
  • EU: Unemployment Rate (MAY)
  • US: Construction Spending (MAY)
  • US: ISM Manufacturing PMI (JUN)

Friday

  • Australia: Home Loans (MAY)
  • Germany: Retail Sales (MAY)
  • EU: PPI (MAY)
  • Canada: Trade Balance (MAY)
  • Canada: Building Permits (MAY)
  • US: Trade Balance (MAY)
  • US: Non-Farm Payrolls (JUN)
  • Canada: Markit Manufacturing PMI (JUN)
  • US: Factory Orders (MAY)

Chart of the Week: Daily USD/JPY

Source: Tradingview, FOREX.com

USD/JPY has been on the move higher since the beginning of May and is teetering at a breakout point!  The pair had been in a downtrend since putting in pandemic highs on February 2020 and formed a bearish wedge as price traded down to 102.59 on January 6th.  The pair broke out from the wedge on January 26th and began moving higher.  The target for the breakout of a descending wedge is a 100% retracement of the wedge.  On March 30th USD/JPY reached a near-term high of 110.97 before pulling back to the 38.2% Fibonacci retracement level from those January lows to the March 30th highs, near 107.50.   That support level held, and price began moving higher once again.  The pair is holding above an upward sloping trendline from the January 6th lows and forming a rising triangle.  Last week, USD/JPY ran stops above 110.97 and put in a high of 111.11, however, the false breakout appears to be in jeopardy as the pair closed the week at 110.83.  Resistance above is at last weeks highs and then horizontal resistance at 111.70 and 112.22 (the February 2020 highs).  Support below is at the upward sloping trendline near 110.10 and then the 50 Day Moving Average at 109.91. Below there, price can fall back to the April 23rd lows near 107.47.

As we head into July, the markets will be looking for the next catalyst for volatility.  This week, the catalyst could be comments from central bank officials, the US infrastructure spending bill, the OPEC+ meeting, month-end/quarter-end flows, or US Non-Farm Payrolls.  Keep in mind, we are not out of the woods yet regarding the coronavirus, as the Delta variant seems to be taking over as the dominant strain.  However, it hasn’t gotten bad enough to effect central banks plans or disrupt the markets.  Always be ready for the next catalyst….It could come from anywhere!

Have a great weekend!