OPEC meets June 2 following the longest run of monthly gains in five years that boosted prices by 85% in four months to over $50 barrel. The potential outcome from this meeting is varied with some suggesting an unexpected cut to an increase in production to total dissolution of the group.
I think none of the above; a status quo with production declining the result of geopolitical tensions and lack of funds required for infrastructure investment.
I believe the odds are over 50% oil will have a “six handle” by winter,, the result of strong demand and falling capacity both within and outside of OPEC. In other words, a potential perfect storm that may alter the docile inflationary outlook.
Speaking of pricing pressures, inflation linked to spending increased 0.3% from the month before, the most since May 2015, partially the result of consumer spending climbing by 1.0% in April, 30% higher than expected and the greatest increase since August 2009. Incomes also rose, consistent with the progress in the labor market.
It is generally accepted consumer spending tracks housing values. Home values rose by 5.4% from March 2015 and increased 0.9% from February, which was the most in four months. The gains were led by limited inventory and strong demand.
How will this data impact inflation, jobs and economic outlook? Today the Fed releases the Beige Book or the compilation of statistics utilized at the upcoming Fed meeting.
As noted earlier, I think the Fed will not act in June but rather July if the data continues to improve. All must remember interest rates are still at crisis level and I think a 0.25% to 0.50% increase will have no negative impact.
Commenting about yesterday’s market activity, the Dow declined about 0.50% and the NASDAQ gained about 0.25% on quiet trading, a decline led energy and financials and an advance led by technologies. The Treasury market was flat.
Last night the foreign markets were down. London was down 0.95%, Paris down 0.91% and Frankfurt down 0.90%. China was up 0.76%, Japan down 1.62% and Hang Sang down 0.26%.
The Dow should open moderately lower ahead of a heavy data week, concerns that the global economy is still sluggish and general uncertainty and lack of conviction. The 10-year is up 7/32 to yield 1.83%.