The Morning Hark - 25 July 2022
Today’s focus……..German IFO 09:00 BST + The week ahead (FOMC, US Q2 GDP, Eurozone flash CPI)
Daily roundup - all prices are at 7.30 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude are both falling in early trading sitting at 102.45 and 93.75 respectively. The Canadian-US Keystone pipeline is now back online and working at normal levels. Libyan production rose again to 860k Bpd, although the country has seen attacks carried out over the weekend by several groups in Tripoli.
EQ – Equities are showing weakness this morning following on from the disappointing PMI’s on Friday. Tie that in with US-Sino tensions over Pelosi’s visit to Taiwan, Russia striking Odesa and an uptick in US yields you can see why Nikkei and HangSeng are both down at 27,700 and 20,555. The Kospi is the winner in Asia with a healthy rally so far this morning and sits at 2408, up 0.75%.
The US futures are lower with the Nasdaq and S&P trading at 12,405 and 3955 respectively.
Gold – Gold is trading near the highs of the day at $1722/oz.
Finally posting an up week after a 5-week downtrend. It seems that central banks hiking rates while the market prices in a recession would be the perfect scenario for Gold but as of yet there is no significant upswing. Still like the long side with stop down below $1650
FI - US yields have risen in Asia trading with the 10yr sitting at 2.7950 and 2yr at 3.00. The BTP/Bund spread will be watched again this week as the ECB meeting will now be fully analysed, understood, and acted upon by the market. Currently at 2.28, another look up towards 2.50 would not be good for Italy or the Euro.
FX - The USD is seeing strength in Asia, and with US yields starting the week higher, it’s performing best against the NZD.
Friday’s price action in USDJPY was interesting with the pair breaking a previous support level at 136.70-75 and dipping down below 135.70 to have a 230-pip range on the day. Long positions getting wiped off the board means a much cleaner USDJPY market and we wait to see where it goes from here. Currently it sits at 136.40 up 20 pips on the day so far.
Others – Asia started the week by selling Bitcoin and Ethereum aggressively. They are trading at 21,890 and 1525 respectively.
ETH now has a double top at 1640 and to be honest if 1500 goes then a more aggressive pullback towards 1330 could be on the cards.
The Week Ahead
The FOMC looms large over the week with the July meeting and the last for 8 weeks as we head into the summer although breaking that gap will be the Jackson Hole Economic Symposium in late August which is often seen as an additional Fed meeting just without the rate decision.
Anyway, given the gap the tone of the statement and Chair Powell’s presser will be important. In some ways, having a two month gap between decisions could prove to the Fed’s advantage as it lets the economy and its data catch up with the Fed’s aggressive rate path and hence it should be a closer read on actually where we are in terms of inflation/recession.
Wednesday’s meeting is now largely expected to deliver a further 75bp hike in rates after the 100bp which, had been all but priced in, was somewhat clumsily taken off the table by Waller & co. The hike is widely accepted at bringing the Fed Funds target range to “neutral”; 2.25/50%. As such expectations are for future Fed hikes to be smaller in magnitude especially with recent data showing a cooling in growth expectations, especially via the recent surveys, and what is seen to be a topping in CPI expectations moving forward.
Perhaps this was the game all along from the Fed; get to summer at neutral and use the gap to see where we are? One issue is where the market is compared to the Fed with the market looking at a terminal rate of 3.25/50% vs the Fed’s June dots of 3.75/4%. Perhaps it’s too early for the Fed to break cover on that disconnect so we’d expect them to stick to the hawkish tone. Any mention of the neutral rate and a slowing pace of future hikes will encourage the market that they are on the right path.
Later in the week we get the Fed’s favoured gauge for inflation with the release of the Core PCE MoM which is seen rising by 0.5% vs 0.3% previously.
US Q2 GDP
The much talked about US q2 GDP is upon us and is the Atlanta Fed ‘s call for a second quarter decline, and hence a “technical” recession in the US, going to prove correct?
The expectations have been slowly dwindling with consensus now at 0.4% (q1 -1.6%). The latest Atlanta reading is for -1.6% for the quarter. The Fed have shown no sign of implying that this is their base case and given the 2% gap between the market and the Atlanta Fed’s gauge it would be a surprise to the market too.
Treasury secretary Janet Yellen was interviewed over the weekend and dismissed the idea that the US would be in recession if the number comes in negative. With the standard economic thinking being two negative quarters signals such an event, she explained that wasn’t the case this time saying, “even if that number is negative, we’re not in a recession now, and should not be characterising that as a recession”. The full article is posted at the bottom.
Eurozone flash CPI
Eurozone flash CPI for July is up on Friday with YoY expected to tick up slightly from June’s reading at 8.7% from 8.6%.
ECB inflation expectations from last week’s meeting stated that they would remain “undesirably” high for some time especially with the EUR’s recent depreciation. With some of the recent inflation surveys in the US and prints in other large economic regions starting to show a topping in inflation albeit at extreme levels it will be interesting to see if the Eurozone remains the outlier.
The recent July Eurozone survey pointed to a moderation in inflation whilst all commodities, which have been affected by the war in Ukraine, are lower than when the war first started so let’s see. If it does it’ll be a small crumb of comfort for the ECB and certainly won’t turn the dial for the expected further rate hike from them in September. In any case it feels like all eyes are on Italian BTPs and the long summer they face ahead of the elections in late September.
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📅⠀The main highlights for the week ahead in terms of data and speakers:
German IFO Business Climate Jul consensus 90.1 vs previous 92.3 (09.00 BST)
German IFO Expectations Jul consensus 83.0 vs previous 85.8 (09.00 BST)
BoJ Monetary Policy Meeting Minutes (00.50 BST)
US New Home Sales Jun consensus 0.664M vs previous 0.696M (15.00 BST)
Australia Inflation Rate YoY q2 consensus 6.3% vs previous 5.1% (02.30 BST)
US Durable Goods MoM Jun consensus -0.3% vs previous 0.7% (13.30 BST)
US Pending Home Sales YoY June consensus vs previous -13.6% (15.00 BST)
US FOMC Rate Decision expectations for a 75bp hike (19.00 BST)
US FOMC Chair Powell press conference (19.30 BST)
German Inflation YoY Prel Jul consensus 7.3% vs previous 7.6% (13.00 BST)
US GDP QoQ Adv q2 consensus 0.4% vs previous -1.6% (13.30 BST)
US GDP Price Index QoQ Adv q2 consensus 8% vs previous -8.3% (13.30 BST)
US PCE Prices QoQ Adv q2 consensus vs previous 7.1% (13.30 BST)
US Core PCE Prices QoQ Adv q2 consensus 4.5% vs previous 5.2% (13.30 BST)
Japan Unemployment Rate June consensus 2.5% vs previous 2.6% (00.30 BST)
Japan Tokyo Core CPI YoY July consensus 2.2% vs previous 2.1% (00.30 BST)
Japan Retail Sales Y0Y Jun consensus 2.8% vs previous 3.6% (00.50 BST)
Japan Industrial Production YoY prel Jun consensus vs previous -3.1% (00.50 BST)
German Unemployment Rate Jul consensus 5.3% vs previous 5.3% (08.55 BST)
German GDP YoY Flash q2 consensus 1.7% vs previous 3.8% (09.00 BST)
EU GDP YoY Flash q2 consensus 5.4% vs previous 3.4% (10.00 BST)
EU Inflation Rate YoY Flash Jul consensus 8.7% vs previous 8.6% (10.00 BST)
EU Core Inflation Rate YoY Flash Jul consensus 3.8% vs previous 3.7% (10.00 BST)
Canada GDP MoM May consensus -0.2% vs previous 0.3% (13.30 BST)
Canada GDP MoM Prel Jun consensus vs previous -0.2% (13.30 BST)
US Personal Spending MoM Jun consensus 0.2% vs previous 0.9% (13.30 BST)
US Personal Income MoM Jun consensus 0.5% vs previous 0.5% (13.30 BST)
US PCE Price Index MoM Jun consensus vs previous 0.6% (13.30 BST)
US Core PCE Price Index MoM Jun consensus 0.5% vs previous 0.3% (13.30 BST)
US Chicago PMI Jul consensus 55.4 vs previous 56 (14.45 BST)
US Michigan Consumer Sentiment Final July consensus 51.1 vs previous 50 (15.00 BST)
US Michigan 5y Inflation Expectations Final July consensus vs previous 3.1% (15.00 BST)
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Sounds fairly typical for the Biden admin.... there is no inflation... there is no recession.... take the vaccine you wont get covid.
Apologies - the email sent out only contained the data highlights for Monday.
The full list of highlights for the week ahead is available on latest version of the post here: https://harkster.substack.com/p/the-morning-hark-25-july-2022