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U.S. Review

Buckle Up for the Oil Price Roller Coaster Ride

• Brent crude oil, the international benchmark, and West Texas Intermediate (WTI) fell below $45 per barrel during the week amid renewed angst about persistent oversupply. Since the beginning of the year, prices are down more than 20 percent. If sustained, the drop in oil prices presents downside risks to our business fixed investment forecast in the coming quarters.
• Following the sluggish reading in housing starts and permits, existing home sales rebounded in May, with median home prices edging higher relative to a year earlier.
• The Leading Economic Index climbed higher in May suggesting continued gains in U.S. economic activity.

What Is Feeding the Bear?

During the week, oil prices declined sharply to a 10-month low, falling below $45 per barrel. Since the beginning of the year, prices for Brent and WTI oil prices have fallen more than 20 percent as concerns resurface about rising production, especially in countries that are exempt from the original and extended agreement between OPEC nations and other oilproducing countries to curb output. Much of the angst is focused on U.S. oil production, but growing output in Nigeria and Libya are also fueling uneasiness.

Whether the drop in oil prices would have a net positive effect on the U.S. economy is an open question. Indeed, the drop in oil prices in 2015 and 2016 was largely evidenced in the energyrelated components of structure investment, namely mining exploration, shafts and wells, and lower net exports which over time offset increases in consumer spending. Regarding the labor market, the energy sector is capital intensive, which suggests any additional downside risks in energy exploration could have only a modest impact on job growth. We continue to keep an eye on the weekly U.S. rig count which could provide an early warning for business fixed investment. Indeed, the rig count has risen over the past year, reaching its highest level in over two years in May.

Also fueling angst is the housing market, especially as singlefamily and multifamily starts and permits fell in May despite the still-elevated level of builder sentiment. Relieving some of the worries, existing home sales came in stronger than expected in May, rising 1.1 percent to a 5.62 million-unit pace. Existing home sales are used to calculate broker commissions in the residential investment component of real GDP growth.

We also learned that median home resale prices continued to increase in May, with single-family climbing 6.0 percent relative to a year earlier. That said, the housing market still faces wellknown challenges, namely tight inventories, an insufficient number of finished lots and shortage of available construction workers. Mortgage purchase applications fell for the second straight week in the week ending June 16; the drops follow a huge 10 percent spike a week earlier, however.

We maintain our forecast for sales activity and starts, especially as the pace of owner-occupied household growth accelerates relative to rentals. Multifamily construction is moderating following a multiyear run-up. Single-family construction continues to gain traction and builders have an eye on the firsttime buyer market. Moreover, there is a larger shift to more affordable housing toward the suburbs and markets where home prices are less expensive. We expect new home sales to rise in the low double-digits in 2017 and existing home sales should rise moderately and contribute to real GDP growth this year.

Also released this week was the Leading Economic Index (LEI), which is a forward-looking indicator for the U.S. economy. LEI rose in May, registering its ninth straight monthly gain. Eight of ten components added to the top line figure, with the interest rate spread making the largest contribution.

U.S. Outlook

Durable Goods • Monday

April marked the end of a four-month run up of durable goods orders, slipping 0.8 percent, though March's gain was revised up to 2.3 percent on the month. Consensus had estimated a larger drop as payback for the recent hot streak, which did not materialize in the April report. The subsequent rise in shipments, which would logically follow a period of strong orders, also did not materialize. Shipments declined 0.3 percent in April, even after stripping out volatile transportation and defense goods. Non-defense capital goods shipments, ex-air, or core goods, the gauge that closely tracks business fixed investment in GDP, was down 0.1 percent.

Orders of core goods have been flat for the past two months, which casts doubt on a significant boost to GDP growth from the sector in the next few months. Our call for a gradual firming remains in place, even though the hard data have yet to signal a major pickup for the factory sector is imminent.

Previous: -0.8% Wells Fargo: -1.0% Consensus: -1.0% (Month-over-Month)

Consumer Confidence • Tuesday

The Conference Board's index of consumer confidence continued to decline from the cycle-high of 124.9 in March, falling from 119.4 in April to 117.9 in May. The overall index rose 17.9 points since the U.S. election, but the driving factors have shifted in recent months. The surge from October to December was largely the product of a jump in the expectations index, while the rise from January to its March peak was pushed by consumers' growing confidence in their present situation. Confidence peaked for both the present situation and expectations indices in March, at 143.9 and 112.3, respectively. Much of the give back since then has been in consumer expectations, which now stands about 10 points lower. The present situation measure fell slightly in April but inched higher in May to end at 140.7. The strong job market and improving economic fundamentals should continue to support this measure, while fiscal policy uncertainty may continue to dampen expectations.

Previous: 117.9 Wells Fargo: 117.0 Consensus: 115.4

Personal Spending • Friday

Personal spending started the second quarter off with solid momentum, rising 0.4 percent in April after a revised gain of 0.3 percent in March. Adjusted for inflation, consumer spending rose at an annual rate of 2.8 percent over the past three months, supporting our call for the consumer spending component of GDP to rise 2.9 percent in Q2 after a soft Q1 print. Personal income also rose 0.4 percent in April, though inflation trimmed growth to just 0.2 percent. That was still an improvement from the first two months of the year when inflation-adjusted income declined.

The PCE deflator, the Fed's preferred gauge of inflation, rose 0.2 percent in April after declining in March, which helped support the Fed's case for a rate hike last week. Still, other readings of inflation in May have disappointed, with declines in both the CPI and import prices. We will watch next week's print for the PCE deflator closely.

Previous: 0.4% Wells Fargo: 0.1% Consensus: 0.1% (Month-over-Month)

Global Review

Global Economy: Stable as It Goes

• The next best thing to a strong improvement in economic activity is sustainable, but relatively weak economic growth. This is what seems to be happening across the global economy. Our expectation is for global growth to improve a bit this year but remain slightly below the historical average.
• This week we saw Taiwan's exports orders post a notable 9.1 percent increase compared to a consensus forecast of a 7.5 percent improvement, year over year. We have also seen an improvement in export and import growth in the Chinese economy, which tends to indicate that China is doing its part in generating stronger economic activity across the globe.

Global Economy: Stable as It Goes

The next best thing to a strong improvement in economic activity is sustainable, but relatively weak, economic growth and this is what seems to be happening across the global economy. Our expectation is for global economic growth to improve a bit this year but remain slightly below its historical average (see graph on first page). Signs that economic growth continues to proceed along these lines have included improvements in industrial production as well as exports (top graph). To this end, this week we saw Taiwan's exports orders rise by a notable 9.1 percent compared to a consensus forecast of a 7.5 percent improvement, year over year. We have also seen an improvement in export and import growth in the Chinese economy, which tends to indicate that China is doing its part in generating stronger economic activity across the globe. Although we are far from the days in which the Chinese economy was calling the economic shots and driving global demand, a better than expected increase in economic activity by the Chinese economy is a welcome sign for the rest of the world. This is especially true for those economies that are very open, i.e., economies that are large exporters, as in the case of the Taiwanese economy.

Argentina's Economic Recovery Strengthened in Q1.

The Argentine economy grew 1.1 percent in the first quarter of the year, quarter on quarter, marking the third consecutive quarterover- quarter improvement in economic activity. The quarter showed an important improvement from domestic demand, especially personal consumption expenditures (PCE) and gross fixed capital formation. PCE grew 0.9 percent on a year-over-year basis, the first year-over-year increase since the first quarter of 2016. Meanwhile, gross fixed capital formation improved 3.0 percent during the first quarter of the year, the first yearover- year increase since the last quarter of 2015. Both measures show that the economy is on the mend and that the effects of the severe adjustment implemented by the Macri administration are finally abating.

The question for the Macri administration as the mid-term elections approach is: will this recovery in economic activity be enough to keep his political alliance in place? As we have been saying for several quarters, the Macri administration needs the economy to surge this year in order for the governing coalition to be able to keep the reform process in place. The recent return of ex-President Cristina Fernández de Kirchner to the political fray will probably add some risks to the political environment. However, the Macri administration is likely betting that Mrs. Kirchner's irruption into the political scenery will help him and his coalition by dividing the Peronist party instead of unifying it behind the ex-President, as other individuals within the party position themselves to try to contest her leadership. It is too early to tell whether this new leadership will be successful in unseating her. For now, President Macri is counting on an improving economy to do the trick. This is a very risky strategy for Mr. Macri but perhaps it is the only one that he has at his disposal as the country prepares for the next political fray.

Global Outlook

Japan CPI • Friday

The Bank of Japan (BoJ) is somewhat unique among world central banks as it has clung to a policy of unabashed policy easing, even as other major foreign central banks have begun to at least talk about eventual policy normalization.

It is easy to understand why policymakers in Tokyo are reticent on the matter of normalization, considering the fact that CPI inflation remains well below its 2.0 percent target.

Given the dovish bias at the BoJ, our currency strategists expect modest near-term weakness for the yen. Talk of an eventual exit policy could be yen supportive. Until that time, a widening U.S.- Japan interest rate spread should weigh on the yen. The eventual pass-through effect of that yen-weakness could be helpful to the BoJ in achieving its target. The May CPI number for Japan prints on Friday of next week.

Previous: 0.4% Wells Fargo: 0.6% Consensus: 0.5% (Year-over-Year)

China PMI • Friday

The great moderation in Chinese economic growth has stabilized recently; in fact, first quarter GDP came in a shade above consensus expectations.

The somewhat faster pace of growth was partly attributable to a pick-up in secondary sector activities like mining, manufacturing and construction.

The end of next week will bring a June number for the Chinese manufacturing PMI—a key barometer of manufacturing activity that mostly reflects the state-owned enterprises in China. The less widely followed non-manufacturing index also prints on Friday. Early in the following week the Caixin PMI will offer an update on factory activity in the Chinese private sector.

Previous: 51.2 Consensus: 51.1

Eurozone CPI • Friday

The Eurozone economy continues to expand and there are few signs of it losing momentum in the near term. In fact, just this morning the manufacturing PMI for the Eurozone came in at 57.3—the fastest pace of expansion in six years.

Despite indication of firming in the economic outlook, the European Central Bank (ECB) offered only modest changes to its policy guidance in June. The reason for that may have to do with a puzzling situation that is not unique to Europe: despite a firming economy and expansionary monetary policy, sustained inflation at or above 2.0 percent has been a fleeting objective.

On Friday of next week, bourses in Europe will be watching the wire for the release of June CPI data to gauge how well the ECB is doing in terms of achieving its inflation target.

Previous: 1.4% Consensus: 1.3% (Year-over-Year)

Point of View

Interest Rate Watch

Tension in the Tumult

Within the ongoing tumult of financial market surprises, the rising tension between market expectations of policy actions and the stated intensions of the FOMC creates the potential for a sharp shift in asset prices.

In recent months, the pattern of the 5Y/5 year forward inflation expectations (top graph) has indicated that market expectations have declined and these expectations have moved in the opposite direction from FOMC expectations that inflation will approach 2 percent ahead.

As for measured inflation, the data have indicated a slower pace of inflation. The overall CPI has moderated over recent months and it is not just wireless communications. Used car prices are down significantly while core goods in the CPI have declined 0.8 percent year-over-year. Core goods prices have experienced deflation for the past three years—not a transitory phenomenon.

Policy Persistence?

When viewed through the dot-plot lens, the FOMC is committed to continue on a path of raising the funds rate based upon their model of how inflation works. Yet markets have certainly not priced in the same view of inflation (middle graph). This price discrepancy will be resolved and we expect the market is underpricing the FOMC's commitment to raise the funds rate a few more times in the year ahead.

Implications for Treasuries

Given the assumption that the FOMC will follow its intentions with action, the Fed will raise the funds rate once more this year, begin its balance sheet reduction program in Q4 and signal its intention to raise rates a few more times in 2018.

Therefore, our expectation is that both the two and ten year benchmark Treasury rates will move up as the second half of 2017 unfolds. We have the two-year and 10-year benchmark at 1.85 percent and at 2.6 percent in Q4 (bottom graph). Higher rates are also consistent with our expectations for a stronger dollar by Q4. Yet we expect the PCE deflator to remain unchanged—a signal that real rates will rise.

Credit Market Insights

Loan Growth, Delinquencies Down

The FDIC Quarterly Banking Profile report showed generally healthy net income growth and modestly improving loan quality for the banking industry during the first quarter.

The noncurrent loan rate declined to 1.3 percent, marking a new cycle-low. All loan types saw a decline in delinquencies except for credit cards, which after bottoming out in mid-2015 have crept modestly higher in the past couple years.

Noncurrent loan rates for commercial and industrial (C&I) loans, which more than doubled after peaking in mid-2016 amid the slump in energy prices and the manufacturing sector, declined for the third consecutive quarter. The improvement has generally come in less energy-centric districts, such as the San Francisco and Chicago regions. The Dallas region, which includes Texas and Oklahoma, has seen little improvement in C&I delinquencies over the past few quarters.

Loan growth continued to slow in Q1, decelerating to 4 percent year-over-year. The slowdown has been broad based, with lending growth slowing the most in the C&I space. Higher rates following the election may have dampened borrowing demand. Tighter lending standards in some sectors, such as commercial real estate, could also be playing a role. Even with the slowdown, however, loan growth is still a bit faster than nominal GDP growth, which was up 3.4 percent year-ago in Q1.

Topic of the Week

PMIs Support Case for Eurozone Expansion

Data released this morning provided further confirmation that the expansion in the Eurozone is becoming increasingly self-sustaining. The manufacturing PMI in the euro area rose to 57.3 in June, its highest reading in six years. The comparable index for the services sector edged down a bit in June, but it remains at an elevated level. The manufacturing PMI in Germany softened modestly in June, but stands at 59.3—the second highest reading since the series began. Likewise, the manufacturing PMI in France climbed to 55.0 in June, eclipsing the consensus expectation which called for 54.0. Furthermore, the manufacturing confidence index for Italy, slated to be released next week, is expected to remain at an elevated level.

The strength in European PMIs is consistent with the pickup in global export activity, which was up 3.2 percent in April, on a year-over-year basis. Likewise, global industrial production continues to gain momentum, rising 2.8 percent in April. Continued firming in global growth should support European exports, manufacturing activity and overall growth.

Sentiment indicators in the Eurozone are also at elevated levels. In Germany, the single largest economy in the euro area, the current situation index climbed to 88.0 from 83.9, its highest reading in six years. Likewise, the Ifo index of German business sentiment rose in May to its highest level since German reunification occurred in 1991. However, some of the hard data coming out of Germany is not as robust as one might expect. Industrial production was up only 1.1 percent on a year-ago basis in the first quarter. The manufacturing PMI figures point to some acceleration in production going forward.

The expansion in the Eurozone is becoming increasingly self-sustaining. Accordingly, we look for real GDP in the Eurozone to accelerate modestly in coming quarters and expand 1.8 percent and 2.0 percent in 2017 and 2018, respectively.

HIGHLIGHTS OF THE WEEK

United States

• Equity markets started off the week on a positive note. But the advance proved transitory as oil prices slid into bear territory, sending energy stocks and the main indices lower.
• With little in the way of economic data, Fed speeches took center stage. While echoing support for last week's decision, some Fed speakers appeared to take on a more dovish tone, with Harker and Evans putting an emphasis on waiting for further proof to hike again.
• The only significant economic data releases this week pertained to housing activity. Existing home sales surprised on the upside. Meanwhile,sales in the smaller and more volatile new home market, also rebounded in May.

Canada

• For those trying to time the next Bank of Canada rate, this week's economic data brought mixed signals with inflation easing for a fifth straight month and momentum retail spending holding strong into the second quarter of the year.
• While soft inflation is likely to keep the Bank of Canada on hold through July, the pick-up in economic momentum offers good grounds for an October rate hike. Inflation is a lagging indicator, and May's reading likely reflects soft economic conditions from late 2015 to early 2016. But inflation may be nearing a trough, as slack is being eaten up at a quickened pace.

UNITED STATES - FED SPEECHES TAKE CENTER STAGE

Markets started off the week on a positive note. Tech stocks bounced back on Monday as industry leaders met with President Trump at the first gathering of the American Technology Council. Meanwhile, financials were buoyed by comments from FOMC voting member Dudley that didn't seem too concerned with the slowdown in inflation. Sentiment was also supported by Macron's majority-win of the French parliamentary elections.

Unfortunately, the advance proved transitory. Oil prices slid into bear territory on account of rising production among the U.S., Libya and Nigeria and doubts as to whether recent OPEC cuts would be sufficient to manage the supply glut. This sent energy stocks and the main indices lower and enabled a move toward safe heaven assets (Chart 1).

With little in the way of economic data, Fed speeches took center stage. Given that last week's decision to hike was not unanimous and the fact that inflation has drifted lower, FOMC members appeared to be on the defensive. Vice-Chair Fischer pointed to "high and rising" home prices as one of the hazards of keeping rates low for long. While echoing support for last week's decision, other Fed speakers appeared to take on a more dovish tone, with Harker and Evans putting an emphasis on waiting for further proof to hike again. Bullard (non-voter) suggested that the expectation for rates rise to 3% over the next two and a half years is "unnecessarily aggressive."

Still, the Fed is sticking to its guns in expecting another rate hike by the end of this year, betting that the factors weighing on price growth will prove temporary and that a tight labor market will pull up wages and buoy inflation.

They may also get some help from a lower U.S. dollar, which is well off its peak level set earlier this year and is on track to end lower again the week. A lower dollar should help put upward pressure on goods prices, which have been consistently negative over the past year.

The only significant economic data releases this week pertained to housing activity. Existing home sales rose 1.1% m/m, surprising on the upside. Tight inventory levels and rising prices have weighed on momentum recently. But, declining mortgage rates contributed to the positive print and should provide further support in June, with the volume of mortgage applications on an upswing during the month. Sales in the smaller and more volatile new home market, also rebounded in May, with both series retaining an upward trajectory (Chart 2).

Rising interest rates, combined with robust price growth on the bigger resale segment are expected weigh on affordability. Still, households are likely to withstand the incremental increases in borrowing costs thanks to a solid labor market that is poised to deliver continued job and income gains. An improvement in the homeownership rate is also expected to provide a gentle tailwind as outlined in our recent report, with resales expected to advance by 3.4% this year and 2.6% in 2018 to nearly 5.8 million by the end of the forecast horizon. Price growth should remain strong this year, holding near 6%. But a rebound in for-sale inventory, which is expected to be more of a factor next year, will help keep price growth in check at around 4% in 2018.

CANADA - MIXED SIGNALS

Those trying to time the next Bank of Canada move received mixed signals this week. Retail sales in April started the second quarter off on a strong note, suggesting the continuation of strong economic momentum. But, then Friday's weaker-than-anticipated consumer price report showed that inflation continued to decelerate into May. Most of the Bank of Canada's preferred measures of inflation eased for a fifth straight month, and are well below the Bank's 2% target. While the soft inflation report helped curb enthusiasm over the possibility of a July rate hike, there are still grounds to believe the Bank of Canada will begin raising interest rates in October.

The weakness in inflation was fairly broad based and it was difficult to find signs of any significant price pressures in this morning's report.The biggest decline was in clothing and footwear prices, which fell 1.5% year-overyear in May. This was followed by a 0.1% y/y contraction in food prices. Price growth for household operation and furnishings slowed to just 0.3% y/y in May, after averaging between 1.5% and 2% earlier this year. Transportation price growth also decelerated to just 2.2% y/y from 4.2% in the prior month as gasoline price growth slowed to 6.8% from 15.9% in April.

While the downward trend in inflation was broad, it likely reflects the lagged effect of past soft economic conditions from four to six quarters ago. Given the strength in economic growth over the past several quarters we are likely nearing a trough. Economic growth picked up considerable over the second half of 2016 and early 2017. Real GDP growth averaged 3.5% annualized between the third quarter of 2016 and the first quarter of 2017, up from an average sub- 1% in early 2016. Based on the Bank of Canada's measures of the output gap, the amount of economic slack peaked in the second quarter of 2016 (four quarters ago), and has been eaten up fairly quickly since.

Looking forward, a healthy pace of consumer spending is likely to continue to underpin robust economic momentum. While housing related items were at the top of household shopping lists, consumers have been spending on just about everything at a healthy rate - a trend that will likely continue through most of 2017. Households are still carrying a lot of debt, but the low interest rate environment has kept the carrying costs of that debt low, giving them some financial wiggle room to continue to support retail spending. Meanwhile, the strength in housing activity through the last quarter of 2016 and into early 2017 is likely to continue to boost spending on house-related items as those buyers renovate and furnish their homes. The slowdown in housing activity currently underway will likely not feed into a slower pace of retail spending until the end of this year and early next year.

Overall, the low inflation backdrop is likely to keep the Bank of Canada on hold through July's rate announcement, but given that monetary policy acts with a long and variable lead, improving economic conditions are likely to give the central Bank motivation to start gradually raising rates in October of this year.

Improving European manufacturing balanced euro against dollar

The dollar is mixed against major pairs after a week where Fed speakers offered a mixed narrative. The majority of policy makers agree that the massive balance sheet accumulated during the quantitative easing program from the US central bank should start shrinking sooner rather than later. The point of debate remains the number of rate hikes in the horizon, with St. Louis Fed President James Bullard calling it "unnecessarily aggressive" and the CME FedWatch tool showing a 50 percent probability of a hike in December.

Flash manufacturing purchasing manager surveys boosted the euro on Friday with improvements in France, Germany and Europe overall. The German Ifo business survey released on Monday, June 26 at 4:00 am EDT could be inline with the perception of European recovery even as inflation struggles to gain momentum. The European Central Bank (ECB) forum will also kick off on Monday with plenty of speaking opportunities for President Mario Draghi. The European calendar will close with inflation data on Thursday and Friday expected with little improvement as the market ponders what the next move will be for the ECB before the end of the year which could include a rate hike, the start of QE tapering or both at the same time.

The US calendar will feature events like the release of core durable goods orders on Monday, June 26 at 8:30 am EDT. The Conference Board's Consumer Confidence index on Tuesday, June 27 at 10:00 am EDT which is expected to have declined slightly from last month and the Final Q1 GDP release on Thursday, June 29 at 8:30 am EDT confirming the slowdown of the economy in the first quarter compared to the last two periods of 2016. Hopes for tax reform and infrastructure spending in 2017 have faded and with it the possibility of a 3 percent GDP growth this year putting downward pressure on the USD.

The EUR/USD gained 0.037 percent in the last five days. The single pair is trading at 1.1202 and will end the week near where it started on Monday. There was little in the way of economic releases that involved the pair. European manufacturing flash PMI data on Friday helped the EUR overcome the USD strength from Fed member comments suggesting the US central bank will raise the interest rate more this year. Economic fundamentals in the US have been questionable but the resolve of the Fed remains solid. Europe on the other hand is riding a wave of optimism form strong data and a reduction of political risk after the Emmanuel Macron victory in the French elections.

The last week of June will be devoid of major indicators with the spotlight once again directed at US political drama with only the German Ifo business climate survey to give insight into Europe.

The USD/CAD gained 0.275 percent on Friday. The currency is trading at 1.3263 after a disappointing CPI reading of 0.1 percent putting inflationary pressures at a slow pace. The soft inflation data reduced the possibility of a July interest rate hike by the Bank of Canada (BoC).

The loonie is being guided by X factors. 1)The price of oil has historically shared a strong correlation given the importance of the commodity as part of GDP. Oil prices have been weaker as low demand has been met with steady supply creating a glut. 2)NAFTA renegotiations are hovering over the currency as the Trump administration started the process in a combative mode. Three quarter of Canadian exports go to the United States and a change in that trade relationship would be significant on either direction. 3) Monetary policy winds have shifted starting the Fed. Single rate hikes per year in 2015 and 2016 have been followed by 2 rate hikes this year by the Fed putting the Fed funds rate in a 100-125 basis points. The BoC first put another rate cut off the table earlier in the year as the economy had a strong first quarter and hints of a continuation of the trend in the second quarter triggered the hawkish comments. Rising household debt could trump weak inflation as the central bank would rather introduce gradual change to avoid a sudden impact to Canadians.

The USD/CAD has gone from a high of 1.3350 to a low of 1.3220 after the BoC comments only to slowly climb back as Fed speakers have mostly been repeating the same comments. More rate hikes coming and a reduction of the balance sheet sooner rather than later. Only a few dovish members have strayed from those comments, and even then only walking back the aggressive rate hike path, but agreeing on the need to reduce the 4 trillion accumulated during its quantitative easing program.

The price of energy fell 4.184 percent in the last 24 hours. West Texas Intermediate is trading at $42.79 due to oversupply concerns. The weakness of the USD has kept the price of oil near the $42 price level, but growing supply from US producers has been offsetting the effect of the oil production cut extension between OPEC and other major producers.

Oil started the week around the $44.59 price level before losses accumulated on a daily basis and not even the drawdown of US crude inventories on Wednesday was enough to reverse the trend. Uncertainty about the stability of the Organization of the Petroleum Exporting Countries (OPEC) after the appointment of the new Saudi Arabia crown prince did not boost prices as OPEC members Libya and Nigeria have sorted their supply disruptions leaving the market still caught in a glut of crude.

Market events to watch this week:

Monday, June 26

• 4:00 am EUR German Ifo Business Climate
• 8:30 am USD Core Durable Goods Orders m/m
• 1:30pm EUR ECB President Draghi Speaks

Tuesday, June 27

• 10:00 am USD CB Consumer Confidence
• 1:00pm USD Fed Chair Yellen Speaks

Wednesday, June 28

• 10:30 am USD Crude Oil Inventories

Thursday, June 29

• 8:30 am USD Final GDP q/q
• 8:30 am USD Unemployment Claims

Friday, June 30

• 4:30 am GBP Current Account
• 8:30 am CAD GDP m/m

*All times EDT

USD/CHF - 0.9692

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 0.9699

Kijun-Sen level                    : 0.9704

Ichimoku cloud top                 : 0.9739

Ichimoku cloud bottom              : 0.9730

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Dollar’s breach of previous support at 0.9695 dampened our bullishness and erratic fall from 0.9771 top may extend weakness to 0.9660, however, as broad outlook remains consolidative, still reckon downside would be limited to 0.9641 support, risk from there is seen for another rise to take place next week.

On the upside, expect recovery to be limited to the upper Kumo (now at 0.9739) and bring another decline. Only a firm break above resistance at 0.9743 would revive bullishness and signal an intra-day low is formed, bring test of 0.9766-71 resistance first. Once this resistance is penetrated, this would confirm recent rise from 0.9613 low has resumed for test of resistance at 0.9808, then towards another previous resistance at 0.9825.

GBP/USD - 1.2726

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2726

Kijun-Sen level                    : 1.2700

Ichimoku cloud top              : 1.2673

Ichimoku cloud bottom        : 1.2649

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Cable’s intra-day rebound dampened our bearishness and suggests a temporary ow has been formed at 1.2589, hence upside risk remains for this move to bring retracement of recent decline to 1.2755-60, however, reckon upside would be limited to 1.2780-85 (50% Fibonacci retracement of 1.2978-1.2589) and price should falter well below resistance at 1.2818, bring another selloff next week.

In view of this, would not chase this move here and would be prudent to stand aside for now. Below 1.2690-95 would bring weakness towards 1.2640-50 but break of latter level is needed to signal the rebound from 1.2589 has ended, bring retest of this level later.

Growth data are due from two of the world's largest economies - the United States and the United Kingdom. Japan will also be releasing a flurry of data.

United States

A slew of data are expected from the US next week. The Personal Consumption Expenditure (PCE) price index is one of the most important indicator as well as personal income and spending. The May PCE figure is due on Friday and it is a closely monitored indicator as it is the Federal Reserve's most preferred gauge of inflation. The April PCE index rose 0.2% for April following a 0.2% decline the previous month. Any increase in the May number would add to expectations of the Fed hiking interest rates again later this year.

Final GDP for the first quarter is due on Thursday, which is also a very important piece of data. It is expected to show growth at 1.2%, the same as the previous estimate. Other data such as durable goods orders for May are expected to come in at -0.5% versus the prior month's -0.8%. The June final reading of the University of Michigan consumer sentiment index will also be looked at for indications of the US economy's health and is forecast at 94.5 as the previous reading.

May building permits are due on Monday, while the April number for the Case Shiller House Price Index will be released on Tuesday. The May report for pending home sales is out on Wednesday.

United States

Final GDP data for the first quarter are due on Friday. The figure is expected to be the same as previous at 0.2% growth quarter-on-quarter and 2% year-on-year.

It has been a year since the Brexit vote and overall, the UK economy has performed relatively well in terms of GDP growth during the second half of 2016 following the referendum. However, more recently there have been signs of a slowdown in economic activity. The fall in real average wages could have serious consequences on growth in the future.

Eurozone

The flash CPI reading is expected to show inflation falling. The June reading is due on Friday and is expected at 1.3% year-on-year. May's final CPI was confirmed at 1.4%, which was unchanged from the flash reading and also in line with consensus forecasts. A lower reading would support the ECB's view that underlying price pressures remain subdued.

At the ECB's June policy meeting, the inflation forecast for 2017 was cut to 1.5% from 1.7% previously.

On Thursday, the June economic sentiment report is expected to improve further and is expected at 109.5 versus 109.2 in the previous reading. The German Ifo business climate is due on Monday.

Japan

There will be flurry of data releases out of Japan next week, starting with retail sales on Thursday, then household spending, unemployment figures, CPI and industrial production due on Friday

Japan's CPI numbers are expected to show core inflation rising in May to 0.4% year-on-year versus 0.3% previously. The preliminary industrial production number is expected at -3.2% month-on-month versus the prior month's reading of 4%.

China

China PMI for manufacturing and non-manufacturing sectors are due on Friday.

• Markets overly bearish GBP - Peter Rosenstreich
• Switzerland's Trade Activity Picked Up - Arnaud Masset
• Oil prices continue to slide; below $40 within a few weeks?
• Biotech Revolution

Economics - Markets overly bearish GBP

We continue to suspect that markets are underpricing the probability of a BoE policy adjustment. We believe that as with the Fed, the threshold for removal of emergency measures is significantly lower than standard interest rate hikes. Central banks would like to get to "normal" conditions in order to have tool to defend and economic downturn or worse. While interest rates in the UK never went negative, it's difficult for MPC members to justify ultra-easy policy given the economic momentum. BoE Governor Carney's Mansion House speech dented our expectations of a 2017 rate hike. However, his argument that consumer cant handle higher rates due to large debt load feels akin to teasing a bull.

However, BoE chief economist Haldane indicated that solid economic data (although still below trend) and inflation risks would suggest hikes in 2H (most likely November). This was a surprising development since Haldane is a known dove. This is not the first time Haldane's view diverged from the MPC, but is especially interesting since Haldane is not part of the three MPC members which dissented last week. The wide majority advantage the MPC doves have enjoyed has quickly erod€ed. This change will put the markets on alert for shifts in doves Broadbent and Vlieghe and improving domestic data.

Last week UK manufacturing firms reported export and total order books has improved to multi decade highs. This CBI reports supports expectations for firmer 2H of economic growth. As with the rest of the G10 wage inflation remains subdued but at 1.7% wage grow is not terrible considering the Brexit induced threat of mass exodus. Outside Brexit negotiations, Friday release of 1Q final GDP read will the focus of sterling trader.

Markets are now pricing in 12bp of hikes by end of 2017. We would avoid EURGBP as Europe is enjoying an accelerating cyclical growth uptrend and ECB nearing reducing emergency measures which is likely to give Euro a boost. To materialize our constructive GBP view, we see long GBPCHF as the ideal position. Outside improving economic data and increase probably of near term rate hike, Brexit negotiating have taken a friendly turn with PM May decision to offer EU citizens right in UK. Switzerland is struggling with weak economic data driven by overvalued CHF. The SNB is unlikely to even entertain the notion of exiting from extreme monetary policy and stands ready to intervene should CHF appreciate further.

Economics - Switzerland's Trade Activity Picked Up

After the usual March-April contraction, Switzerland's trade surplus bounced back in May amid a sharp recovery in exports. The trade surplus rose to CHF 3.4 billion in May from CHF 1.96 a month earlier. Exports - in real terms - increased 2.9% m/m while imports eased to 2% m/m. On a year-over-year basis, exports rose 7.5% and imports 8.7% amid solid growth in chemical and pharmaceutical products.

Exports to China passed the CHF 1bn threshold to print at 1.16bn while imports reached 1.02bn, leaving a trade surplus of CHF 139 million. Trade activity with the European Union also accelerated substantially with exports and imports rising 1.47bn and 2.12bn respectively, adding evidence that the European economy is on the right track.

It was quite a pleasant surprise for the Swiss watch industry as exports rose 9% in May compared to a contraction of 5.7% in the previous month. The sharp recovery was mostly driven by a surge in exports to Hong Kong, China and Italy, while Gulf countries reduced sharply their imports amid falling oil revenue and geopolitical uncertainties.

All in all, the report showed that the Swiss economy is still right on track but continues to suffer from the strong CHF. The recovery pace is solid especially given the slower than expected recovery in Europe and the United States. Swiss companies already optimised their functioning and no more gains can be expected on this side. Investments have been reduced to the minimum, costs have been cut. Economic improvement of Switzerland's main trading partner is more necessary to see a substantial growth acceleration.

In the FX market, the Swiss franc continued to move higher against the single currency as investors sit on the sidelines assessing the potential effects of Macron's upcoming economic reform and the renewed positive dynamic between France and Germany. EUR/CHF held above the 1.08 threshold but short sellers will most likely try to push the pair lower, which force the SNB to give a warning shot.

Economics - Oil prices continue to slide; below $40 within a few weeks

Since May 23, bearish pressures on oil have been stronger. The black commodity is largely declining. Crude oil is approaching $40 a barrel. This represents lowest levels since August 2016. For now, we believe that the decline is set to continue. Indeed, since the Qatar diplomatic issue, there are growing concerns that other OPEC members will not respect the production cut and therefore oversupply.

Why the decline will continue? When looking specifically to Saudi Arabia, the largest oil exporter in the world, we may believe that there are supporting evidence to this. In our view, the Arabic country really needs to have higher oil prices. For us its FX reserves are declining too sharply, 27% from its 2014 peak. We recall that only for this year, it has diminished by $36 billion.

Current oil prices seem then way too low for Saudi Arabia, which is in return obliged to liquidate its FX reserves to assume its running costs. On top of that, Saudi Arabia is willing to let investors buy 5% of its oil reserves in a clear effort to get cash as soon as possible. By the way, at current oil prices, this seems like a deal for bullish buyers.

For the time being, Saudia Arabia looks unable to prevent the decline of its FX reserve at oil prices below $55 a barrel. Consequences will be catastrophic for the country and this is why see Saudia Arabia opening its reserves to investors despite their reserves are scarce and should last, according to most analysts, no more than 60 years.

Another solution appears nonetheless possible. That would be to convince other OPEC members to cut their production and prices would certainly go back up. Yet, geopolitical issues are important as Qatar is accused to finance terrorism.

The foreseeable future does not look so bright for Saudi Arabia. In addition, the US shale gas industry is booming back and is putting deeper downside pressures on oil. In the medium-term, we believe that oil prices should head below $40.

Themes Trading - Biotech Revolution

The pharmaceutical industry is going through a minor revolution. Biotechnology has a broad mandate, covering a wide range of processes for transforming living organisms for human purposes. However, this theme focuses on a new breed of companies that have joined the race to use modern technology to create healthcare products.

These companies harness cellular and bio-molecular processes to develop technologies and products to fight disease. Exploding R&D costs have forced traditional pharma companies to look to smaller, more agile, technology-driven firms as the primary pipeline for innovation. With public and private investors and big pharma all expecting the next big breakthrough to come from this dynamic sector, valuations are on the rise.

We built this theme by filtering on firms with a market capitalization of over $1 billion and positive sales growth over the past two years, ensuring that they have sufficient cash flow to fund the next blockbuster.

Market movers ahead

• Inflation readings for both the US and the euro area will be clearly below central bank targets, both on actual and core measures.
• European growth indicators have remained high while others have weakened, but we expect to start seeing a decline in IFO numbers this week.
• China's official PMI may start to show more weakness.
• We are optimistic on Swedish exports this year, and hopefully that will be reflected in the upcoming trade data.
• Lower unemployment and higher consumer spending could add to the increasing optimism in Norway.

Global macro and market themes

• Supply/demand dynamics suggest the oil price may fall further near term.
• Falling inflation expectations are driven by weaker demand and the lack of a monetary policy response.
• A hard Brexit is still the most likely outcome.
• Stay tactically long USD, slightly bearish equities.
• Expect core global yields to range trade, possibly with a slight upside bias in the US

Full Report in PDF

Among the highlights in today's European session were flash Markit PMI estimates out of the eurozone and the US, Canadian inflation figures and US new home sales data. Beyond economic releases, the pound maintained yesterday's momentum on rising expectations of a rate hike by the Bank of England.

Flash eurozone PMI numbers for the month of June showed the manufacturing sector performing strongly and the services sector surprising to the downside. Specifically, the manufacturing PMI number came in at the more than six-year high of 57.3, exceeding forecasts for a reading of 56.8 and May's 57.0. The respective figure for the services sector stood at 54.7, the lowest since February of this year and below the 56.2 projected by analysts as well as the 56.3 from the previous month. The composite PMI, which blends the two sectors, also fell to its lowest since February, reaching 55.7 and failing to meet expectations for a reading of 56.5 and May's 56.8.

Despite the not so strong composite and services readings, overall the numbers are suggesting that the euro area growth rate would reach 0.7% quarter-on-quarter during the second quarter of the year, its highest since 2015. The euro posted some gains relative to the dollar as the data hit the markets, rising to $1.1187, its highest for the day at the time. Those gains were short-lived though. Euro/dollar gained momentum later in the day, rising above the 1.12 handle. In afternoon European trading hours, the pair was up 0.5% compared to where it started the day.

Weaker inflation figures led the loonie to reverse gains it made versus the US dollar earlier in the day on the back of oil prices picking up. In particular, inflation rose by 0.1% month-on-month in May, below the 0.2% expected and April's 0.4%. On an annual basis, CPI rose by 1.3%, negatively comparing to the projected 1.5% and the 1.6% from the previous month. Annual core inflation, which strips out volatile items in its calculations and which is closely watched by the Bank of Canada, fell to 0.9%, its lowest in almost twenty years. April's respective figure stood at 1.1%. The BoC's target for inflation is 2% annually and today's numbers might pose a challenge to the Bank's recent rate-hike talk, which significantly boosted the loonie.

In terms of reaction in the forex markets to Canadian inflation numbers, dollar/loonie surged, rising to as high as 1.3296 within the first few minutes of data release. The pair was trading at 1.3219 before. As the European trading session is getting closer to its end for the day, dollar/loonie is up 0.3%.

Turning to data out of the US released later in the day, the June flash manufacturing PMI was released at the nine-month low of 52.1. Moreover, this was at a negative surprise compared to the 53.0 expected and below May's 52.7. The services flash PMI was also below expectations, standing at the three-month low of 53.0. Dollar/yen fell as the data hit the markets, though it quickly recovered.

Other data out of the US pertained to new home sales during May. Those rose by a more-than-expected 2.9% to reach 610,000 units from April's upwardly revised 593,000 (from 569,000 before). Dollar/yen experienced volatility upon data release, showing no clear direction. It last traded at 111.26, slightly down on the day. The dollar index looks set to finish the day lower and was last down 0.3% on the day.

Sterling continued gaining versus the dollar today after Kristin Forbes, the Bank of England Monetary Policy Committee (MPC) member who is to complete her term at the MPC by the end of the month, urged fellow MPC members to raise rates immediately. Pound/dollar was last up on the day, reaching a three-day high of 1.2744 at its highest.

A weaker US currency spurred demand for gold which is on track for its third straight day of gains. At its highest for the day, the precious metal hit a one-week high of $1258.73 an ounce. WTI and Brent crude were trading at $42.94 and $45.49 a barrel, up 0.47% and 0.60% on the day respectively.

FOMC voting member Jerome Powell will be giving a speech at a Federal Reserve Bank of Chicago Symposium at 18:15 GMT.

• US stocks slipped somewhat in the opening, but European equities encountered more substantial losses today (between 0.3% and 1%). The dollar lost some minor ground against the euro and was more or less stable against the Yen. Oil failed to rebound and hovers near the sell-off lows around $45/barrel.
• The ECB is pushing for a change to the EU-law as it seeks "clear legal competence in the area of central clearing" of euro-denominated financial contracts, giving it more control over non-EU clearinghouses, also in the UK after brexit, that are deemed systemically important to the bloc's financial markets.
• EC president Tusk said that the UK's offer on citizen's rights was below expectations. "If we compare the current level of citizens' rights to what we have heard from the British prime minister, it's obvious that this is about reducing the citizens' rights --I mean the EU citizens in the U.K.".
• According to a poll, British households are not expecting a major upsurge in inflation over the next 12 months, despite growing rancour within the ranks of the Bank of England over rising prices.
• Unidentified sources close to the matter point out that the growing scarcity of German government bonds makes any major extension of the ECB's asset buying scheme difficult and this will be a key consideration when policymakers decide whether to extend the buys.
• During a joint summit press conference, Macron and Merkel said to be fully committed to a free market economy IF it respects multilateral rules. By September, the two will also present plans to expand their cooperation.
• Eurozone PMI data were mixed today with services surprising to the downside and manufacturing to the upside. General levels stay high however. Combined with the strong consumer confidence figures yesterday, Eurozone economic growth in the second quarter promises to be strong. Price components of the PMI's disappointed.
• French Q1 growth was upgraded again to 0.5% from 0.4% in the second reading and 0.3% in the first. Consumption remained flat over the quarter, but businesses ramped up their investments, with grossed fixed capital formation increasing by 1.2 %. Meanwhile, the PMI surveys indicated French job creation hit near decade highs in June.

Rates

PMI's can't influence bond trading

Global core bond markets ended the week in the same vein as the previous 4 trading sessions: with a range-bound, technically-inspired, neutral trading session. In contrast with previous days, the eco calendar was interesting with the release of EMU PMI's. The composite declined more than forecast in June, driven by a disappointing services PMI. The PMI remained at an elevated level from an absolute point of view though and suggests EMU growth to accelerate in Q2 to 0.7% Q/Q. Price components fell to the lowest level in 5 months and confirm the ECB's reluctance in normalising monetary policy. Markets didn't react on the release and seem to be counting down to the Summer holidays. Brent crude made a second miserable attempt to correct higher, but remains near the sell-off lows. European equity market got off in a swoon around European noon, but didn't trigger safe haven flows. Sources indicated that scarcity of German government bonds is a key consideration for the ECB when deciding on extending its QE-programme. This scarcity limits the possibility of a major extension. Markets didn't react today, but if this idea gains traction it could trigger repositioning higher especially in the German bond market.

At the time of writing, changes on the German yield curve range between +0.3 bps (5-yr) and +1.8 bps (30-yr). The US yield curve shifts up to 1.6 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany were close to unchanged with Portugal (-3 bps) and Greece (-9 bps) outperforming.

Currencies

FX markets close the week in peace

Dollar cross rates didn't show much spirit either today. Traders are already looking forward to next week's more interesting eco calendar with a Yellen speech (Tuesday) and crucial inflation data on both sides of the Atlantic on Friday (US PCE and EMU CPI). USD/JPY kept a perfect tight sideways trading range near 111.30 in the final session of the week, while EUR/USD moved slightly higher, from around 1.1150 to 1.1180. The short term (2y) rate differential moved slightly in favour of the euro this week, explaining the small gains in an uneventful week. The US/German 2-yr yield spread narrowed from 200 bps on Monday to 196 bps today. The above mentioned Reuters rumours could, if reinforced eventually underpin the single currency, but for now it's still a long shot.

Sterling initially profited from BoE Forbes' farewell speech last night. The resigning policy maker tried to boost the hawkish' wing in the central bank's momentum one final time. The recent sequence of events (BoE meeting – Carney comments – Haldane speech) triggered a significant rethinking in rate hike expectation. The probability of a 25 bps hike by the BoE this year rose from 6.5% on June 14 to 50% today. Sterling still has difficulties to gain decent ground though as official Brexit-talks started on a bad note. EU Tusk said that PM May's opening offer on EU nations is below expectations. He added that Brexit took up only very little time at today's EU Summit. Sterling's fortunes changed throughout the day with EUR/GBP returning to opening levels around 0.8790.