US data – Strong but not enough.
US June payrolls came in relatively strong, with 850k jobs added vs 720k expected. Most of the increase comes from leisure and hospitality (though the public sector contribution to the print is somewhat higher than usual). Average hourly earnings have somewhat slowed on the month, but annual growth remains solid at 3.6%. The ISM survey on US input prices strongly surprised consensus on the upside, registering the highest print of the past ten years. Overall, US data remain solid, pointing to a continued recovery mostly originating from re-opening sectors and some increasing signs of inflation. Strong data seem not enough for the rates markets though. After the Fed downplayed the 5% CPI print as transitory, the market is back in full carry mode, with rates trading bid and higher-yielding assets seeing increasing demand. US Treasuries are now 10bp tighter over the past month and tightened this week too, despite strong data. Carry expressions, such as high yield credit and emerging markets debt and currencies, are back in vogue and major indexes continue to see inflows. We believe carry trades are now heading towards a “Last Dance”. Over summer, inflation and labour markets may bring more permanent signs of strengths, eventually pushing the Fed towards a hawkish pivot. We believe Jackson Hole at the end of August may be a good occasion for the change.
Oil – Supply pressures and uncertainties.
The OPEC+ meeting ended up without a decision on Friday. Major players favour a small increase (up to 0.5m bpd), but the UAE managed to block an agreement amid requests for a re-calculation of its quota. As a result, August supply is now in a vacuum, with the final decision postponed to this week. If the UAE blockage continues, the meeting may finish without a production hike decision, which would push oil prices higher. An OPEC breakdown seems very unlikely, but would have the opposite effect, as it would trigger a price war. In the baseline case (0.5m bpd hike starting in August), oil pressure would remain on the upside, as the OPEC would not be using its spare capacity in full, and the economic recovery remains ongoing. A gradual re-opening may lead to a pick-up in oil demand of c.5m bpd in 2H21, vs a gradual increase of 3-3.5m bpd in supply due to gradual OPEC+ hikes and a very shallow increase in Iran production. Brent futures are now hovering around 75 $/bbl, the highest level in the past year but still below the 5y high of 80, as opposed to the majority of risk assets. Crude has thus still some room to move and enjoys favourable technicals in the physical markets. We see energy as one of the few sectors where there is still some value across assets, and see the current juncture as an opportunity to gain exposure across commodity currencies, oil credits and convertible bonds.
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