- Above-trend growth feted for April update on Chicago Fed Nat'l Activity Index
- US political uncertainty and Eurozone growth continue to support EUR/USD
- The oil market is rallying on expectations that Opec will extend production cuts
The week begins with a slow day for scheduled economic news. For the US, the main event for macro reports is the April release of the Chicago Fed National Activity Index.
Meantime, keep an eye on two markets that rallied last week: EUR/USD and WTI crude oil.
US: Chicago Fed National Activity Index (1230 GMT): Political uncertainty in the US has been on a tear lately, courtesy of disclosures in recent weeks that have led to investigations over allegations that President Trump and his staff have colluded with the Russians.
It’s anyone’s guess where this is going, but the economy still looks resilient.
Last week’s update on industrial production, for instance, delivered stronger-than-expected growth for April, lifting the year-over-year trend to 2.2% - the highest in more than a year.
Meanwhile, new filings for jobless benefits fell again in the second week of May, dipping close to a four-decade low.
The broad trend also looks encouraging via a range of indicators, as I discussed on Friday. The US expansion is currently the eighth longest on record, but there’s still no sign trouble on the near-term horizon.
Today’s April update of the Chicago Fed National Activity Index (CFNAI) will likely confirm that recession risk remains low.
TradingEconomics.com’s econometric forecast sees the index dipping to 0.01 in April from 0.08 previously, but that translates to a modestly firmer three-month average: 0.12 vs. 0.03.
A three-month reading above zero points to growth at a rate that’s above the historical trend.
The political travails weighing on the Trump administration could create trouble for the economy down the road, although even in the worst case scenario it’s highly unlikely that a political crisis alone would trigger a recession.
In any case, today’s update from the Chicago Fed will probably show that the macro trend, despite the soap opera playing out in Washington, still looks bullish.
EUR/USD: Trump’s Russia problem doesn’t appear to be weighing on the economic data, at least for now, but there’s at least one exception to the resiliency story: the US dollar.
The US Dollar Index (USD), which tracks a basket of six major currencies, has lost its post-election gains. After rallying in the wake of Trump’s election last November, USD has been trending lower this year. At last week's close, the index fell to a seven-month low.
One of the beneficiaries of the dollar’s weakness is the EUR, which rallied to a seven-month high last week.
Although the Eurozone’s upbeat economic news of late is a factor in the currency’s strength, the blowback for the dollar because of Trump has been playing a role too.
The greenback’s weakness is particularly striking when you consider that US macro data has been quite strong lately. Nonetheless, EUR/USD is enjoying a sharp rally. The bulls are hoping that the political news for Trump will remain negative.
But don’t lose sight of the economic news for Europe in the days ahead, including the flash data for the Eurozone Composite PMI due on Wednesday – a report that will provide an update on the outlook for second quarter GDP.
Based on Friday’s upbeat estimate from Now-casting.com – Q2 growth is expected to pick up to 0.7% from 0.5% in Q1 – it would be surprising if the PMI report brings worrisome news.
The EUR’s rally, in other words, still has room to run.
US: WTI Crude Oil: The US benchmark for crude closed over $50/barrel on Friday for the first time in nearly a month. The catalyst: expectations that OPEC will extend production cutbacks in a meeting scheduled for Thursday.
“We think we have everybody on board,” Saudi Arabia’s energy minister, Khalid Al-Falih, told Bloomberg TV on Saturday.
“Everybody I’ve talked to indicated that [a production cutback extension of] nine months was a wise decision.”
A weaker dollar is also helping prop up oil prices, which are priced in greenbacks.
"The dollar overall, across the board, has been getting beat up this week and a lot of that has to do with the political risk here in DC," said the director of markets at Tempus Inc.
The latest bounce for West Texas Intermediate (WTI) still looks like a rally within a trading range.
Even at just over $50/b, WTI oil is still well below the recent peak of roughly $54/b in February.
Meanwhile, the 50 Day Moving Average for WTI remains well below the 100 DMA (based on daily data), which suggests that the current rally will soon hit a ceiling without a powerful new catalyst.
Even if OPEC decides to extend the cuts, which the market is anticipating, there’s still a joker in the deck. In particular, non-OPEC output – primarily from shale producers in the US – could offset OPEC's cutback.
As a rough proxy for monitoring changes in US production, keep an eye on the weekly oil rig count published Baker Hughes. The US count is trending up, based on data through May 12.
A senior economist at CME Group said last week that changes in the number of operating rigs tend to precede US output by 15-20 weeks. By that measure, US production appears to be on the rebound in the months ahead.
For now, however, the bulls are inclined to overlook the threat from US shale and trade on expectations for an announcement of an OPEC production cut on Thursday.
Disclosure: Originally published at Saxo Bank TradingFloor.com