US encounters some reopening fatigue

• The Bank of England voted to keep policy unchanged at its June meeting with interest rates held at 0.1% and its asset purchase target maintained at GBP 895bn. The bank cautioned against tightening policy too early amid the UK economy’s recovery out of the pandemic while also upgrading its outlook on inflation, which it now estimates will rise to as much as 3%. This was the final meeting for Andy Haldane, the BoE’s most prominent hawk and its outgoing chief economist, who voted to pull back on asset purchases. Even as the UK economy stands to benefit from a post-Covid reopening we would expect the BoE to maintain a dovish stance and keep policy accommodative well into next year.
• Durable goods orders in the US rose 2.3% m/m in May thanks to an uptick in vehicle orders, particularly aircraft. When transport is stripped out of the estimate though, orders rose just 0.3% with core goods declining. The slide in activity may be an early indicator of ‘re-opening fatigue’ with the US economy having bounced so sharply in the early months of the year and data is increasingly mixed with the nonfarm payrolls at the end of this week in focus. Market estimates are for a gain of 700k jobs for June and the unemployment rate to tick lower to 5.7%.  
• US President Joe Biden managed to reach agreement on a USD 579bn infrastructure plan between Democrat and Republican senators. The spending, if approved, would focus on hard infrastructure assets such as public transport, roads and bridges and improving the power grid across the country. A spending plan is also being proposed by Democrats that would cover a wider scope of projects, including affordable housing. There is a risk that neither spending plan gets approved as Democrats caution the bipartisan plan doesn’t go far enough and Republicans won’t support the Democratic-proposed plan.
• The UAE is reportedly considering a net-zero carbon emissions target by 2050 in an effort to contribute to the global fight against climate change. A plan could be announced at the UN climate summit to be held in the UK later this year according to press reports. Going to net-zero would require substantial investment in non-carbon sources of power generation or offsetting technologies such as carbon capture and storage. There were no initial details in how the UAE would operate as a net-zero economy, particularly as investments into upstream oil production are still underway.
• The UAE cabinet has appproved a new framework to boost the UAE's non-oil foreign trade, promote Emirati products abroad and access new markets abroad. The UAE aims to increase exports by 50% in the coming years.  No detail was provided on which new markets the UAE is targeting. 

Today’s Economic Data and Events

18:30 US Dallas Fed Manufacturing Activity (June)

Fixed Income

• US Treasuries fell last week as markets repositioned for risk as dovish Fed commentary seems to have won out. A broad index of USTs fell for the first week in six and at a decline of 0.57%, endured its sharpest drop since March. The longer-end of the curve provided the bulk of the move higher in yields: 2yr UST yields rose just 1bps to 0.2661% on the week while the 10yr yield added almost 9bps to move to 1.5241. That helped to steepen the curve back to around 125bps although it remains flatter than its pre-FOMC levels.
• The steepening trend was mirrored across most other benchmark bond markets with long-end yields showing more upward movement than the near-term bonds. The BoE kept policy unchanged at its June MPC which initially prompted a rally in gilts though that faded by the end of the week and yields recovered their post-BoE move lower.
• In emerging markets, Turkish government bonds were the outperformer. Yields on 10yr bonds fell 40bps to 16.81% last week, their lowest level since the abrupt change in central bank governor at the end of March. Elsewhere, EM bonds were weaker: Indian 10yr yields edged up 2bps to 6.029% at the end of trading while South African 10yr yields rose almost 7bps to 9.324%.
• S&P has revised its outlook on Emaar to stable from negative while affirming the rating at ‘BB+’.

FX

• The dollar was bid generally as risk appetite returned to market. The DXY index fell 0.4% to 91.851 although it has held on to most of its post-Fed gains. A potential easing of economic activity in H2 as the US encounters some ‘reopening fatigue’ may be a risk for dollar downside.
• The Euro recovered much of its poise, gaining 0.6% last week to settle at 1.1935. German inflation data for June will set the tone for the Euro this week when it gets released on Tuesday. Expectations are for price gains of 2.4% compared with 2.5% a month earlier. However, we would still expect to see dovish commentary from ECB officials in the near term.
• Elsewhere the yen continues to weaken against the dollar with USDJPY comfortably holding above the 110 level after encroaching on 111 mid-way through the week. Sterling was another notable gainer, rising 0.5% even as the BoE kept its dovish policy stance intact.
• Commodity currencies were the other big gainers with USDCAD down 1.39% over the week and AUD up 1.48% and NZD gaining almost 2%.

Equities

• The positive moves on Joe Biden’s infrastructure spending plan gave US equities a boost at the close of last week. While the tech-heavy NASDAQ, the constituent shares of which are less likely to be driven higher by the spending plan, closed flat in the last session of the week, the S&P 500 (0.3%) and the Dow Jones (0.7%) both ended higher. This resulted in w/w gains of 2.7% for the S&P (resulting in a new record high) and 3.4% for the Dow Jones. The NASDAQ gained 2.4% over the week.
• It was a risk-on environment globally last week, with almost all major equity indices closing higher (Brazil’s IBOV was the outlier with a w/w drop of -0.9%). The Shanghai Composite had a particularly strong week as it closed up 2.3%, and India’s NIFTY continued to move higher as the Covid-19 situation ameliorates there – the index gained 1.1% w/w.
• In Europe, the UK’s FTSE 100 was the major gainer, adding 1.7% over the week. The CAC (0.8%) and the DAX (1.0%) also closed higher.
• Within the region, the ADX lost -1.1% w/w and the DFM -0.2%. The Tadawul closed up 0.6% and the EGX 30 lost -2.4%.

Commodities

• Oil prices had another week of healthy gains. Brent futures rose 3.6% to USD 76.18/b at the close while WTI added 3.4% at USD 74.05/b and Murban was up by 3% to USD 74.58/b. Time spreads still point to considerable tightness in the months ahead with the backwardation structure in the Brent and WTI markets remaining well intact. Time spreads on 1-6 month contracts in Brent started June at around USD 2.40/b in backwardation and have moved up to more than USD 3.6/b toward the end of the month.
• OPEC+ meets at the end of the week to decide output levels from August onward. The producers’ bloc will have increased production by around 2m b/d by the end of July and will be looking at a particularly tight oil market for the second half of the year. That would suggest there is room for OPEC+ countries to increase output gently without threatening oil prices holding on to their current high levels. However, as always there is a risk that some producers will want to increase more and some many want to keep holding output back. We would expect a choppy week of trading in oil this week in the lead up to the OPEC+ meeting on July 1st.

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