OPEC+ agrees to extend production cuts

OPEC+ ministers agreed to extend production cuts from baseline levels until the end of 2025, at their meeting on Sunday. Alongside the ministerial agreement, however, those countries that are making additional voluntary cuts agreed to extend them until the end of September 2024 and then phase production back in over the remainder of the year and into 2025. For the UAE, the target with the voluntary cuts in 2025 becomes 3.234m b/d. OPEC+ also extended the assessment period for reference production levels until the end of November 2025 rather than the end of June 2024 and these reference levels will apply for 2026. The extension implies that OPEC+ intends to continue managing production levels while also pushing any debate on allocating baseline production among members well into 2025.

The Fed’s preferred measure of US inflation held steady in April at 2.7% y/y, consistent with expectations. The core PCE deflator, similarly, remained unchanged from the March reading of 2.8% y/y. While the annual measures have remained sticky in recent months, the Fed will likely take some comfort that on a monthly-basis core PCE gained just 0.2%, the smallest rise this year. Markets are currently anticipating only one 25bps cut to US interest rates this year, with a just under 60% chance of it being as early as the September meeting.

Separately, inflation-adjusted personal spending amongst US consumers fell 0.1% m/m in April. The outturn fell below the 0.1% m/m gain that had been expected, and the 0.5% gain seen the month prior. The decline was driven by weak spending on goods and less support from spending on services. A measure of US personal income gained 0.3% m/m in April, in line with expectations, but weaker than the 0.5% m/m gain in March.

Eurozone consumer price inflation rose 2.6% y/y in May, up from 2.4% in April, and higher than consensus expectations for a 2.5% y/y increase. The headline figure is being supported by still-high services inflation, which rose to 4.1% y/y from 3.7% in April. There was also an unexpected rise in core inflation, which rose 2.9% y/y. The ECB is widely expected to cut interest rates on Thursday, with markets pricing in a 96% probability of a 25bps cut.

Petrol prices in the UAE will be lower in June, with the price of Special 95 petrol falling 6.2% to AED 3.02 per litre from AED 3.22 in May. The move reflects the decline seen in oil prices between April and May and reverses the rise in petrol prices seen the month prior. On an annual basis the June petrol price, nonetheless, remain 6.3% higher.

Final results from the recent South African election show the African National Congress (ANC) securing 40.2% of votes, down from 57.5% in 2019. The main opposition, the Democratic Alliance (DA), accounted for 21.8% of the vote, while the new break-away MK party received just short of 15%. The ANC will now need to enter into a coalition with one or more opposition parties. The ANC’s spokesperson, on Sunday, suggested that they were open to talks with all parties, but would not entertain discussions about the current president, Cyril Ramaphosa, stepping down as a pre-condition.

The Caixin manufacturing PMI rose to 51.7 in May from 51.4 in April, suggesting a faster pace of expansion in the Chinese manufacturing sector. The results are in contrast to the official manufacturing PMI numbers which last week showed an unexpected contraction.

Today’s Economic Data and Events

11:00 TU CPI (May), forecast: 74.8% y/y

18:00 US ISM manufacturing (May), forecast: 49.7

Fixed Income

US treasury yields declined on Friday, following the April outturn in the Fed’s preferred measure of inflation matching expectations. Both the 2yr and 10yr yield fell by 5bps to reach 4.8727% and 4.4985%, respectively. On a week-on-week basis the 2yr yield was over 7 bps lower, while the 10yr yield was 3bps higher.

Moves in major European bond yields were more mixed at the end of the week. The UK 10yr Gilt declined 3bps to 4.3175%, and the 10yr Bund yield rose 1bps to 2.663%.

FX

The USD spot index fell marginally on Friday, declining 0.04%. EURUSD gained 0.15% to 1.0848, while GBPUSD rose 0.08% to 1.2742.

Commodity currencies were also stronger against the dollar, with AUDUSD gaining 0.3% to 0.6653, NZDUSD rising 0.46% to 0.6143 and USDCAD falling 0.39% to 1.3628.

Equities

US equity markets rallied late in the day on Friday, with the Dow Jones gaining 1.51%, the S&P 500 rising 0.8% and the NASDAQ remaining broadly flat. Despite the late surge, all three indices, ended the week lower.

European equity indices were generally up, or at least flat, on Friday. The CAC 40 gained 0.18%, while the EuroStoxx 50 and DAX moved sideways. The FTSE 100, in contrast, gained 0.54%.

Locally, the DFM gained 0.17% and the ADX rose 1.17%.

Bloomberg reports suggest a USD 12bn share sale by Saudi Aramco sold out shortly after opening on Sunday. The order book was covered within the 26.70 to 29 Riyal price range.

Commodities

Oil futures declined on Friday, ahead of the OPEC+ meeting on Sunday. Brent declined 0.29% to USD 81.62/b, while WTI fell 1.18% to USD 76.99/b. Prices were also weaker w/w, with Brent 0.61%, and WTI 0.94% lower, respectively.