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Energy & precious metals - weekly review and outlook - OPEC is counting on more crude buying from China in the second half of the year than it initially forecast, despite a slowing in the world’s number two economy. The cartel also thinks the greater risk to the oil trade is political wrangling over the U.S. debt ceiling crisis. Some analysts believe OPEC may have got its bets mixed up.

Data out of Beijing on Thursday showed Chinese consumer inflation barely grew in April, while producer inflation sank to its weakest level since the peak of the pandemic in 2020.

Chinese trade data from earlier in the week was also disappointing, with a 1.4% decline in imports and an 8.5% drop in exports growth. It was testimony of an economy struggling to gallop despite various stimuli put into place since China abandoned all caution over COVID-19 early this year.

The sluggish China data was probably what prompted energy traders to shrug off OPEC’s latest monthly report which had a slight upgrade on Chinese oil demand. China is now expected to require 800,000 barrels daily, up from the 760,000 forecast last month, the 13-member Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, said.

“Oil appears to have stabilized in the lower trading range it briefly entered into in March, between $70-$78 in Brent or roughly $64-$74 in WTI,” Craig Erlam, analyst at online trading platform OANDA, said, citing a “less inspiring Chinese Covid recovery” as one reason for the malaise.

Meanwhile, in the United States, employers added 253,000 jobs in April, way above economists’ expectations, while the jobless rate moved a notch lower to 3.4% from a previous 3.5%, according to Labor Department data that appeared to make it harder for the Federal Reserve to stop raising interest rates.

Economists polled by U.S. media had expected a jobs growth of just around 180,000 for April, from a previously published 263,000 for March which the Labor Department revised down to 165,000. Fed officials have said employment and wage growth have to cool significantly to effectively restrain the worst inflation the United States has experienced in four decades.

The labor market has been the juggernaut of U.S. economic recovery from the pandemic, with hundreds of thousands of jobs being added without fail since June 2020 to make up for the initial loss of 20 million jobs to the pandemic. Average monthly wages have also grown with barely a stop since May 2021. The Fed has identified robust job and wages growth as two of the key drivers of inflation.

Inflation, as measured by the Consumer Price Index, or CPI, hit 40-year highs in June 2022, expanding at an annual rate of 9.1%. Since then, it has slowed, growing at just 4.9% per annum in April for its slowest expansion in two years. The Fed’s favorite price indicator, the Personal Consumption Expenditures, or PCE, Index, meanwhile, grew by just 4.2% in March.

Even so, those numbers were more than twice the Fed’s appetite for inflation, which stands at just 2% per annum. The central bank has raised rates 10 times since the end of the coronavirus pandemic in March 2022, adding a total of 5% to the previous 0.25%. Until the release of the overwhelmingly strong jobs data for April, there had been strong speculation that the Fed would stay at its June 14 decision on rates.

Many are still expecting a Fed pause next month. But some are not so sure.

“This [jobs number] is undoubtedly hawkish and puts the Fed in a real bind,” economist Adam Button said in a post on the ForexLive forum. “The Fed wants to pause and may soon even need to cut but the jobs market isn't cooperating. Now, jobs are certainly a lagging indicator but 3.4% unemployment is extraordinarily tight and this is the 13th straight month of non-farm payrolls beating the consensus estimate.”

Notwithstanding the jobs numbers, an advance reading for U.S. gross domestic product in the first quarter showed an anemic 1.1% growth on the year versus the 2.6% in the fourth quarter of 2022. A crisis of confidence among regional and mid-sized U.S. banks, which first broke out in March, has also resurfaced. Adding to those are concerns about a potential U.S. debt default, the first ever, if Republican lawmakers in Congress continue their political wrangling with the Biden administration instead of having the debt ceiling raised.

But each of these have their offsets. For several quarters now, U.S. GDP numbers have gotten better between the first and final reading. The Fed, in its most recent assessment of the banking system, said public confidence had been shaken but not shattered. And the political wrangling in Congress would likely be solved before the government runs out of money by June, as the Republicans probably don't want to be blamed for causing the catastrophe of the first-ever U.S. debt default.

Erlam of OANDA sums it up nicely: “You could throw U.S. debt ceiling drama and default into the mix but I'm only inclined to focus on remotely plausible events at this stage.”

So, is OPEC betting correctly? The next few months will tell.

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