• Bonds cheapen, USD strengthens on debt supply and oil prices
  • The futility of Saudi oil cuts
  • US bank capital proposals miss the target
  • China’s private PMIs beat the SOE-dominated state PMIs
  • Markets see this week’s BoC decision as a coin toss
  • US ISM-services, factory orders on tap
  • German exports surprise higher, markets ignore
  •        BI’s extended hold vindicated by softer inflation
  • Global Week Ahead

As a reminder, please see the Global Week Ahead—Macklem’s Chance to Prove He’s Serious here in full publication format and for clients the slide deck is here.

Key topics:

  • June FOMC is still ‘live’
  • The BoC needs to hike…
  • …as its conditions have been violated
  • Canadian jobs, wages and productivity
  • Treasury to replenish cash account
  • RBA decision resembles the BoC’s
  • RBI to hold, forward guidance key
  • BCRP likely to extend hold
  • Global inflation updates
  • China’s nonexistent inflation
  • Other global indicators

After some Asian equity benchmarks played catch-up to nonfarm payrolls, their enthusiasm is not carrying forward into the western benchmarks so far this morning. US and Canadian equity futures are flat and so are most of the main European indicates. Sovereign bond yields are under upward pressures and the dollar is broadly stronger probably as an ongoing effect of the payrolls surprise plus coming—but transitory—supply pressures in US debt issuance as the US Treasury seeks to replenish its cash balances that were depleted due to the debt ceiling’s freeze.

Truly fresh developments that are likely to be durable as opposed to fleeting are pretty light to start off a new trading week. The Saudis took another probably futile swing as the oil market. Few should be surprised by a report out in the WSJ on tighter US large bank capital requirements. Even fewer should be surprised that smaller non-SOE producers are beating the SOEs in China. Modest US data is on tap this morning.

Saudi Arabia’s pledge to cut 1 million barrels of production per day starting July and the extension of cuts by others to the end of 2024 is contributing to a modest gain in oil prices of under 2%. These cuts were accompanied by a Mario Draghi-style ‘whatever is necessary’ pledge by the Saudi oil minister that indicates a bias to possibly do more. One reason these cuts have modest and usually fleeting effects is that OPEC+ isn’t what it used to be; it accounts for just 40% of world oil production. Another reason is that being a cartel invites cheating across members. A third reason is that there are many other supply and demand considerations and it’s the demand side particularly related to China’s challenges that have dominated of late.

Markets are taking in stride a WSJ piece that indicates large US banks may face an average 20% increase in capital requirements under proposed changes to regulations and depending upon the nature of the institution’s business. After piddly, accident-prone regional banks blow up, the response of US regulatory authorities is curiously to make the big banks pay the price even despite the role they played in propping up some of the regionals. Tying up even more capital after the post-GFC changes would be a further growth headwind. US bank share prices are so far shaking off the report this morning, perhaps because it has been anticipated over recent weeks and months.

China’s smaller non-SOE producers powered the Caixin composite PMI higher by two full points to 55.6 and hence further into above-50 growth territory. That stands in contrast to the state’s composite PMI that had previously fallen by 1.5 points to 52.9. After the state’s services PMI fell, the Caixin services PMI climbed. The upside to the private PMIs probably came as little surprise to markets given the understanding that the state PMIs are impacted by the more challenged SOEs.

Chart 1: China's Private PMIs

Bank Indonesia’s hold at 5.75% last week was vindicated by slightly lower than expected core CPI during May that fell back a tenth to 2.7% y/y. In m/m seasonally unadjusted form, May posted an abnormally weak month compared to all prior months of May.

German exports surprised higher, but the release was shaken off by rates and the euro. Exports were up 1.2% m/m in April (-2.5% m/m consensus) but the prior month was revised to be a little worse contraction of 6% m/m (from -5.2%).

On tap into the N.A. session is pretty light US data and nothing out of Canada. Most expect US ISM-services for May (10amET) to rise a touch and thus indicate slightly firmer growth. Factory orders for April (10amET) will also get a boost from the already known jump in durable goods orders, to which they’ll add whatever happened to nondurables.