What data should we focus on?
As the second half of the year begins, the market is now focused on the second part of the Federal Reserve’s dual mandate…
As the second half of the year begins, the market is now focused on the second part of the Federal Reserve’s dual mandate. The dual mandate of the Fed is inflation and full employment.
To the market and most Fed officials, the inflation mandate has arguably made “substantial progress” given that it’s currently above the 2% target. So now if the jobs market is deemed to have made “substantial progress”, the tapering of ultra-easy policy can begin.
The discussion on tapering has started, and barring an escalation in the Covid situation (which remains a risk despite vaccination roll-out success, given the emergence of new strains of the virus) or an unexpected fall in inflation prints, a strong improvement in the jobs situation will heighten expectations of a sooner-than-expected tapering.
For now, jobs data (Unemployment claims, Non-Farm Payrolls) will be what the market is going to obsess over.
What is driving Oil prices higher?
According to data going back to 1982 from the Energy Information Administration, total stockpiles in crude inventories in the US (including the Strategic Petroleum Reserve) have fallen at a rate of 1.15 million barrels per day over the last four weeks, marking the largest 4-week decline on a rolling basis.
A gauge of supply tightness is the movement of the spread between the oil futures contracts. When the nearer delivery contract price is higher than the later delivery contract (example September contract price higher than October), it means that the market is paying a premium for oil being delivered sooner i.e. for immediate use. The higher the spread, the tighter the supply situation.
The chart above shows the spread has been steadily rising in the last few months and is the highest in years. With the US economy continuing to reopen and the summer months approaching, oil demand is expected to rise and stay elevated.
Demand and supply dynamics all point to higher oil prices in the weeks ahead..
OPEC+ Meeting: the group is expected to announce another production increase of around 500k barrels per day. That may sound like a lot, but it would still leave the oil market in a massive supply deficit according to OPEC’s own calculations. Deviations from that 500k increase will cause some volatility in oil prices.
Look out for US unemployment claims to gauge market sentiment. If it signals a stronger than expected job market, USD could strengthen on expectations of a sooner than expected tapering from the Federal Reserve. US ISM Manufacturing PMI is another key data to watch though unless it’s a big surprise, market impact should be limited. .
Keep short USD and long NZD, & CNH. Remain short USD vs NZD & CNH. Stay short.
2. Commodities: Uranium — Fundamentals remain intact. Stay long and patient.
Key risks: Higher US yields that will lead to a strong USD.
Equity Index: Long Nasdaq futures. Support is at 12,950–13,000. A day without new highs, but big picture remains the same. Stay long and patient while looking for substantial dips to buy.
Single Stocks: Retracement in energy stocks is a short-term blip in a long-term trend. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields due to inflation fears and geopolitical worries are the key risks.
WHAT HAPPENED YESTERDAY
- The U.S. Dollar Index rose 0.35% to 92.37 on the day. AUD dipped below 0.7500 on mixed China data (China’s Caixin Manufacturing PMI at 51.3 versus 51.8 expected and 52.0 prior.) and Covid-19 concerns in Australia. Hawkish Fedspeak by Kaplan (voter in 2023, hawkish) added to Dollar strength. Kaplan said that he “would prefer to taper sooner than end of year.” and that an “Earlier taper will mean more flexibility later.” He also commented that “We are going to get to substantial further progress [on the jobs market] sooner than had expected.”)
- The ADP employment report that came in modestly above expectations (actual +692K vs expected +600K) was tempered by the fact that last month’s estimate of +978K was revised lower to +886K. The focus remains on Nonfarm Payrolls to be released on Friday.
- The US 10-year Treasury Bond (1.45%) and 30-year yield (2.06%) dipped 4 basis points respectively while the 2-yr yield dipped by 2 basis points to 0.25.
- Precious metals strengthened despite a stronger USD possibly due to quarter-end positioning and lower Treasury yields.
- The S & P 500 (+0.38% to yet another record high) & Dow Jones Industrial Average (+0.61%) closed higher while the Nasdaq (-0.12%) finished a tad lower as the FANG stocks dipped at the end of the session. Russell 2000 (-0.6%) continued to slump for yet another day.
HEADLINES & MARKET IMPACT
Notable Snippet: In what’s been dubbed the “Great Resignation,” a whopping 95% of workers are now considering changing jobs, and 92% are even willing to switch industries to find the right position, according to a recent report by jobs site Monster.com.
Of the companies that are planning for office reentry, managing employees who want to continue working remotely is a top concern, LaSalle Network found.
After spending more than a year at home, some don’t want to go back to commuting, preferring the flexibility of remote work at least a few days a week.
Others are simply burned out from logging long hours while also balancing child care and remote school, sometimes all at once.
And nearly all employees are ready to see what else is out there.
Notable Snippet: The expected summer travel surge comes despite new warnings about the delta variant of the virus, with evidence showing it is more transmissible, causes more hospitalizations and reduces the efficacy of vaccines. The delta variant, first identified in India, makes up 33.9% of cases in the UAE, according to the UAE Health Department.
The United States Centers for Disease Control and Prevention moved to reissue a Level 4 “do not travel” warning for the UAE on Monday, the highest possible category, citing concerns about the virus. The UAE is also still on the U.K.’s travel “red list,” where it has been since late January.
The more than half million people expected to transit the UAE in the coming days is almost equivalent to the entire passenger traffic of London’s Heathrow Airport in May this year, according to Heathrow Airport data
Notable Snippet: The talks resumed after the two sides reconvened the Trade and Investment Framework Agreement (TIFA) Council, which under former US president Barack Obama was in charge of finding ways to deepen commercial relations.
Wednesday’s talks “focused on enhancing the longstanding trade and investment relationship between the United States and Taiwan”, a statement released by the Office of the United States Trade Representative said.
The two sides discussed a range of issues including supply chains, trade facilitation and digital trade, as well as environment and labour, he added.
THEMATIC CONTEXT: If we consider that Taiwan holds the key (Taiwan Semiconductor Manufacturing) to China becoming the next superpower, then it’s obvious why the US wants to butter Taiwan up. These are evident ancillary actions in US’ strategic competition with China, one where unlimited fiscal money is involved. — 21 Jun 2021
Phan Vee Leung
CIO & Founder, TrackRecord