MARKETS

Asian stocks are poised to rise in early trading, mirroring the late session recovery seen in US markets on Friday. This optimism comes as the Federal Reserve’s preferred inflation measure indicates a steady decline, boosting rate-cut expectations. However, it’s not all smooth sailing—there are signs that the famously resilient US consumers are finally feeling the pinch.

Signs of a slowdown are becoming increasingly hard to ignore, much like that last slice of cake in the office break room. While the Fed may not adjust its calculations until this slowdown is more evident in the monthly payroll numbers, the early indicators are already flashing warnings and are not subtle. April's payroll report showed some slowing, with 175,000 jobs added. This is still respectable, but it’s like bragging about a “participation trophy” when you’re used to winning gold. The May report, due out on Friday, will be closely watched by everyone, from investors to armchair economists.

However, labour market developments are notoriously lagging indicators, often revealing shifts later than other economic signs. It's like waiting for a slow friend to catch up while you’re already at the finish line. Despite this, the early signals of a downturn hint at potential challenges ahead. On Friday, regional US business activity data came in much lower than anticipated, reinforcing the belief that the Federal Reserve will soon cut rates. It’s like getting an unexpected bill in the mail just when you thought you were financially stable.

The Atlanta Fed's Q2 GDP Nowcaster growth tracker also dropped from 3.5% to 2.7%, indicating a slowdown in economic growth. This shift is like realizing your car’s fuel gauge has been overly optimistic right before a long drive.

The Fed has recently been fixated on the employment side of its dual mandate, making labour market conditions a hot topic for investors. With several updates coming up, including May payrolls, everyone’s on their toes. Economists predict the US added 190,000 jobs last month—a decent recovery from the previous report’s underwhelming numbers. However, signs suggest the US economy, which has been chugging along like the Energizer Bunny, is starting to lose its pep.

If the consensus holds, the three-month moving average would drop to 226,000, the lowest for 2024. That’s still too fast for the Fed’s liking regarding price stability. It's like trying to slow down a runaway train with a handful of confetti. And who knows? Immigration might have nudged that threshold higher.

The Fed is also crossing its fingers for another mild rise in average hourly earnings, totalling only 0.2% in April. Expectations are for a 0.3% increase this time. The unemployment rate is expected to stay steady at 3.9%, still half a percentage point above its lowest point. In summary, the economic landscape is akin to a rollercoaster ride—thrilling but full of unexpected twists and turns.

OPEC 

Oil prices slipped in early Asia trading after OPEC+ announced an extension of its production cuts to prop up a fragile market.  While it surpassed market expectations by agreeing to extend group-wide output cuts until the end of 2025, the cartel also threw a curveball by planning to roll back voluntary cuts starting in  October 2024.

Amid signs of waning influence on oil markets, delegates report that OPEC+ has agreed to extend group-wide output cuts until the end of 2025 and begin to walk back voluntary cuts later in  2024. However, as always, individual country production capacity debates and loose pledges regarding compensation cuts from countries that have failed to meet earlier targets—such as Iraq, Kazakhstan, and most recently, Russia—are likely creating issues below the surface.

Despite the absence of traditional post-meeting media scrums—replaced by carefully curated sound bites—it feels like intra-cartel friction remains high. Notorious overproducers within the group may be less enthusiastic about output curtailments. While they might support the voluntary extension on paper, the real impact will depend on the follow-through in the physical markets in the second half of 2024.

Traders are left to speculate in the face of these limited insights. Still, one thing is sure: the effectiveness of OPEC+'s strategy will hinge on the collective commitment and actual implementation of the agreed cuts. The next meeting will be held on December 1, so we will likely get more clarity on how OPEC plans to allow more supply back into the market as the voluntary cuts get walked back.

This is good news for non-OPEC+ crude oil producers: the voluntary output cuts won’t be rolled back until December. This extension gives non-OPEC+ producers a chance to capitalize on the market conditions without the immediate pressure of increased competition from OPEC+ countries.

With the current dynamics, non-OPEC+ producers can adjust their strategies and increase their market share before OPEC+ cuts are reconsidered. They have a window of opportunity to strengthen their positions and gain a competitive edge in the market before the landscape shifts again.

More By This Author:

Are US Consumers Finally Feeling The Pinch?
The Dollar's Dance And The Data Dilemma
US Market Rollercoaster: Between A Rock And A Hard Place