Daily Comment (June 2, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] At the time of this writing, ECB President Mario Draghi is holding his press conference.  The ECB did give the markets a modest surprise by announcing it will begin buying corporate bonds almost immediately.  Policy will remain easy.  The EUR has weakened during his comments.

At the Geneva OPEC meeting, Saudi Arabia has apparently offered a cartel-wide production target.  This proposal is seen as an attempt by the kingdom to improve relations with the rest of the cartel.  Iran has flatly rejected the offer, wanting individual quotas to return.  Iran’s plan is not going to happen; we expect that Saudi Arabia wants to fill any gaps that develop from civil disorder in various cartel nations.  Individual quotas would make grabbing this market share more difficult.  According to most recent comments, OPEC was unable to agree on an output target.  The other item on the cartel’s agenda is to appoint a new general secretary.  The odds-on favorite is Mohammed Barkindo, the former head of Nigeria’s state oil company.  If a general secretary isn’t appointed, it will be taken as further evidence that the OPEC cartel is dysfunctional and would be modestly bearish for crude oil prices.

Finally, we look for a fairly quiet trade today in front of tomorrow’s employment data.  The current Bloomberg consensus calls for a 160k rise in non-farm payrolls and a 4.9% unemployment rate, which would be down 0.1%.  Wage growth is expected to rise 2.5% over the past year.  One key uncertainty surrounding the data is the telecommunications strike, which probably reduced payrolls by 30k.  These workers have returned to work but were still on strike during mid-May when the surveys were conducted.  If we get a 160k number despite the strike, it would suggest that the June data will be significantly stronger.  Simply put, a weak number does not necessarily mean the FOMC won’t move in June, but a strong number will almost certainly dictate a rate hike.  The ADP data (see below) suggests a good number but it isn’t clear how ADP handled the strike.

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