Federal Reserve Chairman Jerome Powell will update Congress on his expectations for the U.S. economy, just as the Fed’s latest stimulus action keeps a flagging stock market rally going. U.S. retail sales and industrial production data for May are due, as is the NAHB’s house price index. The Bank of Japan has also bolstered its direct lending to companies, and the International Energy Agency says oil demand will bounce back more sharply than it originally thought. Here’s what you need to know in financial markets on Tuesday, June 16th.
1. Powell to testify before Congress
Federal Reserve Chairman Jerome Powell will testify before the Senate Banking Committee in his semi-annual report to Congress on the state of monetary policy, starting at 10 AM ET (1400 GMT).
Powell is set to unveil the Fed’s first new forecasts for the U.S. economy this year, having passed in March due to the uncertainty caused by the pandemic.
He’ll also likely talk up the effectiveness of the Fed’s stimulus, which will gain another leg from today in the shape of direct purchases of individual corporate bonds. The Fed will buy according to an internally-developed index made up of all the bonds in the $9.6 trillion corporate debt market from companies that qualify. The issuer must have had an investment-grade-rating as of March 22 and the securities must have a remaining maturity of less than five years.
The start of New York Fed’s announcement that such purchases will start this week had been enough to ensure that U.S. stocks closed in positive territory on Monday, even though they had clearly been prefigured in the Fed’s announcement of the program in March.
2. Retail sales, industrial production data due
Powell will be testifying against the backdrop of a fresh data dump from the U.S. economy in May. Retail sales, due at 8:30 AM, are expected to have rebounded by 8% in May after their record 16.4% drop in April, with core retail sales rising by a more modest 5.5%. Core sales have fallen for three months in a row – the first time they have done so in eight years.
The retail sales data will be followed by industrial production and manufacturing output figures at 9:15 AM. Industry has rebounded faster than consumption in China, where the virus hit first, but economists expect only a 2.9% increase in output in May.
The National Association of Home Builders will also release its housing market index for the month at 10 AM. That’s expected to rise to 45 from 37 last month.
3. Stocks set to open higher on central bank support
U.S. stock markets are set to open higher, still supported by the Fed’s promise of action to support the credit markets on Monday. There is also chatter of the Trump administration preparing an additional $1 trillion infrastructure spending bill, but given that such stories have popped up repeatedly since before Trump’s election, it’s not clear how much more real the plan is now.
Stocks to watch on Tuesday include Groupon (NASDAQ:GRPN), which reports quarterly earnings, and Tesla (NASDAQ:TSLA), which the Financial Times reported as having agreed a major supply deal for cobalt with mining giant Glencore (OTC:GLNCY).
.4. Bank of Japan ups stimulus ahead of other CB meetings
The Bank of Japan increased the size of its direct lending program for corporates to the equivalent of $1 trillion, from an originally announced $700 billion.
The news had little effect on the yen, with traders having priced in such action already. However, it supported risk appetite in overseas markets, bolstering hopes of further central bank action in the course of the week.
In addition to the Fed’s new bond-buying and the BoJ’s action, the Bank of England and the Swiss National Bank are both expected to announce fresh stimulus at their regular policy meetings on Thursday. Elsewhere, the European Central Bank’s Fabio Panetta hinted that the ECB may follow the Fed in buying the debt of so-called ‘Fallen Angels’, having so far excluded junk-rated companies from its own corporate debt purchases.
5. IEA sees sharper rebound in oil demand
The International Energy Agency trimmed its forecasts for oil demand destruction this year in its latest monthly report on the global oil market.
The IEA revised up its forecast for average demand by 500,000 barrels a day. It now sees demand falling on average by 8.1 million b/d, rather than the 8.6 million b/d it forecast last month. That’s still the biggest-ever yearly drop since the IEA began compiling its data.
The IEA was also more optimistic about 2021, projecting a 5.7 million b/d increase in demand. That suggests the market will rebalance more quickly than many think, given that supply is likely to be constrained by financial distress in the U.S. shale industry.
The dollar edged higher in early European trade Wednesday, with the safe haven currency in demand as a resurgence of the coronavirus in the United States cast doubt over the strength of the economic rebound.
At 3:050 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 96.873.
There are almost 11.8 million COVID-19 cases globally as of July 8, according to Johns Hopkins University data, of which the U.S. has the highest known numbers of cases and deaths in the world.
A number of Federal Reserve officials expressed concern Tuesday that the surge in infections could adversely impact the economy just as some stimulus programmes are set to expire.
Atlanta Federal Reserve Bank President Raphael Bostic warned that the spike in the number of cases has made business owners “nervous again” and that ‘there is a real sense this might go on longer than we have planned for.”
Still, the rise in cases is not simply a matter for America. The AUD/USD pair lost 0.2% to 0.6935, with the Australian dollar weakening after the country’s second-largest city Melbourne re-imposed lockdown measures to curb the outbreak.
Elsewhere, GBP/USD gained 0.2% to 1.2559 after Prime Minister Boris Johnson said that the U.K. remains committed to working hard to find an agreement over trade with the EU. Chancellor of the Exchequer Rishi Sunak is due to announce details of the country’s latest fiscal stimulus package later Wednesday.
Sterling has gained around 0.6% this week against the dollar and 0.4% against the euro, but still remains one of the weakest G7 currencies as doubts still remain as to whether a trade deal will be signed by the end of the year.
Additionally, skepticism exists that a proposal by some of Donald Trump’s advisers to undermine Hong Kong’s currency peg would come to fruition, as such a move would be difficult to implement and risk hurting U.S. interests as much as it would punish China.
Oil retreats slightly on risk aversion
With one eye on the equity markets overnight, oil markets mirrored the response of currency markets, giving up some of their recent gains and slipping into range trading mode. Brent crude fell slightly by 0.70% to 42.90 a barrel. WTI eased by 0.70% to USD 40.50 a barrel.
Both contracts are unchanged this morning in Asia, with critical resistance on Brent crude at USD 44.00 a barrel, and on WTI at USD 42.00 a barrel. Only a fall below USD 40.00 a barrel for Brent crude, or USD 37.00 a barrel for WTI, would suggest that the rally in oil prices has run its course.
Oil prices continue to remain balanced between Covid-19 induced growth concerns, and recovery expectations in Asia and Europe. Oil’s downside is likely to be limited unless the US situation deteriorates dramatically. OPEC+ discipline is high, and the grouping will no doubt find the willingness to extend the headline cuts if the situation calls for it.
Excitement builds for gold longs as USD 1800.00 approaches
Anticipation is building in the gold fraternity, with Covid-19 concerns giving a haven boost to prices overnight. Gold rose 0.60% to USD 1795.00 an ounce, having tested USD 1797.00 an ounce earlier in the session. Gold’s grind higher is remorseless and pleasingly, appears to have detached itself from negative equity price action for now.
The USD 1800.00 an ounce region will be a tough nut to crack though. It capped gold’s advance multiple times from 2011 to 2012. I do not doubt that there will be substantial option related offers ahead of it to defend USD 1800.00 strikes. Nevertheless, gold is girding itself for the long-awaited assault on this critical resistance level. Gold had support at USD 1775.00 an ounce. Only a daily close below here would delay proceedings. Should USD 1800.00 an ounce give way, gold is likely to move quickly to the USD 1820-1830 zone, driven by stop loss and algorithmic buying.
Gold is unchanged in Asia today in yet another moribund session. It will probably be left to the New York market to get the job done.
Oil prices fell on Tuesday, erasing earlier gains, on concerns that the surge in coronavirus cases in the United States, the world’s biggest oil user, will limit a recovery in fuel demand.
U.S. West Texas Intermediate (WTI) crude (CLc1) futures fell 17 cents, or 0.4%, to $40.46 a barrel at 0340 GMT, after earlier rising to as high as $40.79.
Brent crude (LCOc1) futures declined by 19 cents, or 0.4%, to $42.91, after hitting an intraday high of $43.19.
With 16 U.S. states reporting record increases in new COVID-19 case in the first five days of July, according to a Reuters tally, there is mounting concern that public health measures to limit the virus spread will curb fuel demand.
Florida is re-introducing some limits on economic reopenings to grapple with rising cases. California and Texas, two of the most populous and economically crucial U.S. states, are also reporting high infection rates as a percentage of diagnostic tests conducted over the past week.
«The potential for demand destruction as lockdown re-instatement looks more likely are combining with concerns about OPEC+ discipline to weigh on oil prices,» said CMC Markets’s Chief Market Strategist Michael McCarthy in Sydney in an email.
The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, collectively known as OPEC+, are lowering output by 9.7 million barrels per day (bpd) for a third month in July.
However, those cuts are set to taper to 7.7 million bpd starting next month, adding supply at the same time U.S. fuel demand, especially for gasoline, remains impacted by the COVID-19 outbreak.
«Summer driving demand in the U.S. is low, keeping gasoline demand subdued, and a reintroduction of lockdowns is a major headwind,» ANZ said in a note.
Data from the American Petroleum Institute industry group later on Tuesday and the U.S. Energy Information Administration on Wednesday are expected to show a 100,000 barrel rise in gasoline stockpiles, six analysts polled by Reuters estimated.
The U.S. crude market faces some uncertainties from a court decision on Monday ordering the shutdown of the Dakota Access pipeline, the biggest artery transporting crude oil from North Dakota’s Bakken shale basin to Midwest and Gulf Coast regions, over environmental concerns.
Market sources in the Bakken said the closure of the 570,000-bpd pipeline, while a thorough environmental impact statement is completed, will likely divert some oil flows to transportation by rail.