It had been a fairly quiet week in financial markets right up until about 10am Thursday morning local time in Oman when news starled to filter through global media of a reported oil tanker fire in the Gulf between Iran and the UAE. When the press started to report that in fact two vessels were on fire, one of which had been hit by two shells, three hours apart, crude oil prices surged higher.

Brent crude jumped as much as 4.5% on the news, providing a stark reminder of the state of tension in the region. US Secretary of State Pompeo was quick to blame Iran on the basis of “intelligence, the weapons used, the level of expertise needed and recent similar Iranian attacks on shipping”.

Japanese PM was meeting Iranian supreme leader Ayatollah Khamenei at the time of the attack. After the meeting, the Iranian leader said he had “no trust in America”.
About 16.8mbpd of crude oil passes through the Straits of Hormuz per day, emphasising just how critical this ‘chokepoint’ is to the global economy. UN Secretary General Guterres quickly stated that he “strongly condemns any attack against civilian vessels”.

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Away from crude markets, global market sentiment has been more upbeat this last week. The agreement between Mexico and the US to avert tariffs announced after the close Friday last week helped equity markets around the world gain ground, aided by rising expectations that the Fed will cut rates.

While money markets are pricing in more than 60bps of cuts by the Fed by year end, Westpac has changed its Fed forecast and is now forecasting two rate cuts, in September and December, meaning that next week’s FOMC meeting and press conference will be key for financial markets. We expect to see the Fed being open-minded toward cuts; “Patience” potentially replaced with a promise to “act as appropriate” and the so called ‘dots’ likely see a clear dovish tilt.

Here in Australia, we have had a wealth of information on the Australian economy. We saw a rather mixed result in the May NAB business survey, with confidence up post-election but trading conditions, forward orders and employment all soft. The Westpac June consumer sentiment was also quite patchy but overall disappointing, with the index down slightly, compared to the usual sharp bounce on a rate cut. Australian consumers seem understandably more concerned about why the RBA cut rates.

The eagerly awaited May labour force data also saw a mixed set of results. On the positive side, jobs growth beat consensus for the 3rd straight month, up 42k. Over the year, jobs growth continues to run faster than GDP, with full-time employment +3.1%yr. However, the jobs surge has encouraged more potential workers to return to the jobs market and thus a record high participation rate which kept the unemployment rate at 5.2%.

The RBA says it would like this to be nearer 4.5% so there is extra interest in Governor Lowe’s speech on “The Labour Market and Spare Capacity” next Thursday, two days after the RBA minutes from the June 4 meeting are released. Market pricing for a July rate cut rose to 75% as markets focused on the higher than expected jobless rate. Heightened expectations of RBA rate cuts added to the weaker price action in the Australian dollar, which hit two week lows at 0.6902 Thursday and dropped below 0.69 today.

This was despite renewed tightness in global iron ore markets which saw prices in Singapore futures hit fresh 5 year highs. Given the focus that Governor Lowe is likely to apply to ‘spare capacity,’ the A$ may continue the slide below 0.69 next week.

Aside from the RBA minutes, Lowe’s speech and the FOMC meeting next week, we also have the Bank of Japan and Bank of England policy meetings on Thursday too. Neither central bank will touch policy, though comments from Governor Carney will be closely watched coming as the Tory leadership process continues.

Boris Johnson saw a commanding lead in the first round, adding to risks of further confrontation between the UK and Europe on Brexit. And finally, of course, Trump and Xi will be watched closely through the coming week for signs that they will or will not meet at the following week’s G20 meeting. Trump yesterday said he expected to meet Xi in Osaka; he did describe trade relations at the moment as a “bit testy”.

Event risk: US Jun NY Fed Empire State manufacturing survey (Mon), RBA Board Jun minutes (Tue), UK May CPI (Wed), US Fed policy decision (Wed local, 4am Thu AEST), NZ Q1 GDP, RBA governor Lowe speaks, Policy decisions in Japan, Indonesia, Philippines, Taiwan, UK May retail sales, Bank of England MPC meeting (Thu), Japan May CPI (Fri)

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