Can Rig Data Deal Another Blow to Oil?

US equity markets are expected to open a little higher on Friday after three days of small losses, with the focus on an otherwise quiet day falling on the PMI data for June and comments from a few Federal Reserve officials.

It’s been a relatively quiet week on the whole so far from an economic data perspective. The flash manufacturing, services and composite PMIs will give us something to look out for, with all three expected to notch up moderate improvements while doing little to convince people that the economy is recovering from its slow start to the year. Should the soft data continue into the third quarter, it may force the Fed into considering slowing the pace of tightening – as markets already appear to be pricing in – which they seem very reluctant to do.

We’ll also get new home sales data which has been on a nice uptrend since the start of last year and comes after a decent beat on existing sales earlier in the week. Three Fed officials are lined up to appear today including Jerome Powell – a permanent voter on the FOMC – Loretta Mester and James Bullard. Mester and Bullard are both non-voters this year and the latter, as was evident by comments on Thursday, is among the more dovish officials. Still, it will be interesting to see how they interpret the recent data and whether they see any downside risks that will influence the pace of tightening.

Late on in the day we’ll get the latest rig count data from Baker Hughes, which comes as oil claws back some of the substantial losses suffered earlier in the week. Brent and WTI may be higher for a second day but as it is, there’s little reason to believe this is anything more than a dead cat bounce and that next week may be another painful one. Traders are clearly unconvinced by the cuts that are intended to bring inventories down to their five year average, particularly against the backdrop of rising output from the US, Libya and Nigeria. A clear break below $44.50 in Brent and $42 in WTI could trigger further downside for oil, with $40 being the next big test.

Sterling is making small gains again this morning, aided once again by hawkish comments from Kristin Forbes who supports a rate hike but will leave the Bank of England at the end of the month. While traders still appear at ease with the recent hawkish turn but with Andy Haldane voicing his concerns on inflation this week, perhaps they shouldn’t be. Still, even with recent gains, the pound remains range-bound against the dollar with 1.26 providing solid support below and 1.28 resistance above.

The euro is also trading a little higher today, supported by good PMI numbers from the eurozone, Germany and France. While some of the numbers have come off their recent highs, they still remain well above 50 – the level that separates growth from contraction – and point to stronger growth for the region. It’s also encouraging that the manufacturing PMI for the euro area hit a multi-year high in June, which bodes well heading into the second half of the year.