Top 5 things to watch in markets in the week ahead

Investing.com — Friday’s all important non-farm payrolls report will be the highlight of the economic calendar in the coming week as markets try to gauge the future direction of U.S. interest rates. The European Central Bank is likely to deliver a rate cut that will put the Eurozone on a diverging rate path from the U.S. Meanwhile, OPEC is to decide on output cuts and the Bank of Canada will deliver its latest rate decision. Here’s your look at what’s happening in markets for the week ahead.

Jobs numbers

Fridays closely watched nonfarm payrolls report is expected to show that the U.S. labour market remained strong again in May. Economists are expecting the economy to have added 185,000 jobs, a modest uptick from the prior month.

Investors had been worried that an overly strong economy might prevent the U.S. Federal Reserve from lowering rates this year at all, or even require a rate rise. But those concerns were alleviated last month, albeit temporarily, by data showing slowing inflation and a cooling labour market.

Still, policymakers have urged patience on rate cuts, saying they would like to see several months of data to be sure inflation is heading back towards their 2% target. The employment report could prove the economy is losing steam if it shows the slowdown in job creation has continued.

ECB rate decision

The ECB is all but certain to become the first major central bank to cut interest rates this cycle on Thursday.

With a 25 basis point rate cut all but promised by policymakers market watchers will be focusing on what ECB President Christine Lagarde has to say about what comes next.

Inflation in the bloc’s dominant services sector remains sticky and its economy is recovering faster than expected, while a closely watched wage growth figure accelerated last quarter, leaving the outlook beyond June less certain.

Markets are still expecting the ECB will cut rates multiple times this year compared the Fed and the Bank of England though bets on future moves have been trimmed back.

They now expect two cuts and less than a 50% chance of a third – compared with three when the ECB last met and at least five at the start of the year.

OPEC output cuts

OPEC+ will likely agree on Sunday to prolong its deep oil output cuts into 2024 and possibly 2025 Reuters reported, as the group seeks to shore up the market amid tepid global demand growth, high interest rates and rising rival U.S. production.

Oil prices are trading near $80 per barrel, below what many OPEC+ members need to balance their budget. Worries over slow demand growth in top oil importer China have weighed on prices and oil market analysts expect OPEC+ to extend cuts to balance supply.

The Organization of the Petroleum Exporting Countries and allies led by Russia, together known as OPEC+, has made a series of deep output cuts since late 2022.

OPEC+ members are currently cutting output by a total of 5.86 million barrels per day (bpd), or about 5.7% of global demand.

Wall Street

Despite all three major U.S. stock indexes posting losses last week they still ended the month higher, with the S&P 500 rising about 4.8%, the Nasdaq jumping 6.9% and the Dow climbing 2.4%.

While it’s been a banner year for the major U.S. stock indexes, one economically sensitive corner of the market remains a sore spot.

The Dow Jones Transportation Average has fallen about 5% so far this year and some investors have said the struggles for the 20-stock transport index – which includes railroad operators, airlines, package shipping companies and trucking firms – could signal weakness in the economy or prevent the broader market from making significant further gains unless they bounce back.

The Dow transports are “a barometer for future economic activity,” Chuck Carlson, chief executive officer at Horizon Investment Services told Reuters. “They may be indicating that while a recession isn’t imminent, that there is probably a slowdown in the economy that’s ahead here.”

Bank of Canada

The BoC is widely expected to deliver a 25-basis point rate cut at its upcoming meeting on Wednesday after data on Friday showed the country’s economy expanded at a slower than expected pace in the first quarter.

The GDP report indicated that Canada’s economy did not rebound from a soft patch last year as strongly as data initially suggested and may convince the central bank to start lowering borrowing costs.

“All ducks appear to be in a row for the Bank of Canada to kick-start the policy easing cycle and lower the overnight rate by 25 basis points to 4.75% on Wednesday,” RBC said in Friday note.

At the central bank’s last meeting in April Governor Tiff Macklem noted that the requirements for a rate cut appeared to be in place but that officials needed to see more evidence on slowing inflation.

–Reuters contributed to this report