Friday’s trading saw gains in the Dow Jones index (+1.51%) and S&P 500 (+0.8%), while the tech-heavy Nasdaq Composite remained unchanged (-0.01%). The PCE inflation data in the U.S. matched expectations, indicating a stabilization in the pace of price increases. The dollar lost value, and U.S. government bond yields declined. OPEC+ representatives, as expected, extended their additional voluntary supply cuts and presented plans for a gradual easing of these cuts starting in the fourth quarter. This week, attention turns to the NFP report and the ECB decision.
The market responded to Friday’s report on U.S. consumer spending with a weaker dollar and gains on Wall Street. The PCE deflator came in at 2.7% year-over-year and 0.3% month-over-month. The core index was 2.8% year-over-year and 0.2% month-over-month, slightly lower than the forecast (0.3%) and the weakest monthly result this year. The market reaction suggests that there was concern about a negative surprise, and investors breathed a sigh of relief. The data somewhat alleviates worries about persistent inflation, but the Fed will likely want more evidence that the pace of price increases is on a deflationary path. Focus now shifts to the labor market. This week we will get the JOLTS survey on job demand and turnover, the ADP employment report, and the all-important monthly NFP report.
This week, the ECB is likely to cut interest rates by 25 basis points, despite recent weaker inflation data and stronger wage growth. It will be difficult for European policymakers to backtrack on their pledge to ease monetary conditions at the June meeting. However, last week’s publications may impact the pace and scale of further rate cuts. The first reduction in the cost of money in the eurozone is almost certain, as indicated by market pricing and recent statements from ECB Governing Council members, even the hawks. The market will not receive further guidance on how the entire cycle will unfold, but will likely hear the familiar statement that future decisions will depend on incoming data, avoiding commitment to a specific rate path.
The OPEC+ decision was also unsurprising. The group extended their additional voluntary supply cuts and simultaneously presented plans for their gradual reduction. This is expected to result in a supply deficit in the oil market in the coming months. The market was most interested in the status of the additional voluntary cuts of 2.2 million barrels per day, set to expire at the end of June. These cuts have been extended for another quarter, with a gradual phase-out planned until September 2025. Investors quietly hoped that the cuts would be extended until the end of the year.
The group’s overall production cuts (approximately 2 million b/d) have been extended to the end of 2025 (previously set to expire at the end of 2024). The voluntary supply reduction of 1.66 million b/d by nine OPEC+ members, introduced in May 2023, has also been extended to the end of 2025.
Brent crude oil prices fell below $81 this morning. Overall volatility is low, and prices continue to hover around local lows, within a significant horizontal support zone.
Łukasz Zembik,
Oanda TMS Brokers
