In the spotlight:
- Minutes of the Fed Meeting Macrostatistics
- The Iran Nuclear Deal
The market's focus last week was on the prospects for the Fed's asset purchase program. The minutes of the Fed meeting published on Wednesday note that a number of participants propose to start discussing plans to wind down QE at the next meetings, while maintaining the current trends in economic growth and approaching the implementation of the DCT goal. However, most of the Fed representatives last week habitually stated that the economy is still far from the goals of the regulator, and it is too early to start winding down the program. At the same time, the "hawk" Robert Kaplan is now supported by the president of the Federal Reserve Bank of Philadelphia, Patrick Harker. So, he believes that it is better to start discussing the curtailment of QE earlier, and the process itself should be launched when the labor market shows a prolonged recovery, and inflation exceeds the regulator's goals. Thus, the weak recovery of the labor market today reduces the risks of an unexpected tightening of monetary policy. However, the number of applications for unemployment benefits fell again last week, and the May statistics on the labor market may be stronger. The inflation data released after the Fed meeting, due to the heterogeneity of price growth, do not yet allow us to judge the stable nature of inflationary pressure. At the same time, some participants in the meeting note that the price pressure from the supply side may be longer than expected. Earlier, Fed officials said that the market will be prepared in advance for the beginning of the winding down of the asset purchase program, and probably last week we saw the first serious steps towards achieving this goal. So far, the market reaction has not been particularly strong – the yield of ten-year treasury securities after the publication of "minutes" increased by 3 bps, but today they are already about 1.62% per annum.
In addition to the weekly data on the number of applications for unemployment benefits, which showed a decrease of about 35 thousand. to 444 thousand, on Friday, preliminary data on the Markit PMI business activity indices in May were published. Both the manufacturing index and the US services index continued to rise and updated historical highs. At the same time, business activity in the service sector grew at a faster pace and the index was 70.1p. against 61.5p in the manufacturing sector. In other countries, there is also an increase in the index for the service sector, however, the values of the production index remain higher. In general, in May, the Markit composite PMI in most of the world's major economies continues to be above 50p, which indicates an increase in business activity. This week, the market will pay special attention to Friday's data on personal income and spending in the United States – the PCE price index will shed light on the current price dynamics and the possible reaction of the Fed.
In the first half of the week, Brent crude futures attempted to gain a foothold above $70/barrel. However, according to the results of the week, oil declined significantly, and today Brent futures are trading around $67,7/barrel. The driver for the decline in prices was the news of significant progress in the negotiations on the Iranian nuclear deal. The lifting of sanctions against Iran can, according to estimates, increase the global oil supply by 1-1.5 million barrels per day, which is negative for quotations. It is expected that the final decision will be made this week, and the market will pay special attention to the news background. In particular, investors will be waiting for any signals from OPEC+ - assurances that the world supply will be adjusted to take into account additional Iranian supplies can support oil prices. At the weekend, the US Secretary of State quite unexpectedly said that there is still no confidence that Iran will fulfill its obligations under the deal, and possible complications in the Iranian negotiations support oil prices today. The positive for prices is also associated with the forecast of a storm in the Gulf of Mexico, which can hinder oil production and refining. The epidemiological situation remains controversial – Western countries continue to relax restrictions, but the increase in infections in a number of Asian and Latin American countries continues, which limits the prospects for a recovery in demand. This week, Brent futures are unlikely to return to levels above $70/barrel. without the support of OPEC+.