The Morning Hark - 29 July 2022
Today’s focus……..US GDP Review...EU GDP and EU Flash CPI at 10.00BST and Canadian GDP and US PCE at 13.30BST
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil/Gas – Brent and Crude are having a quiet day at levels of 107.20 and 97.00 respectively. Dropping from their highs as the GDP print hit the wires on fears of a slowdown as US dropped into a technical recession. US administration said they looked for good news from OPEC on 3rd August, but the wires carried a story later the meeting was likely to only maintain production or at most raise production only slightly.
EQ – Nikkei and Hang Seng are down today suffering from the US dip into a technical recession sitting at 27,801 and 20,115, although Hang Seng is having the worst of it down 2.5% while the KOSPI outperforms them, up slightly at 2447.
The US futures are both higher with the Nasdaq and S&P trading at 12930 and 4105 respectively. The US side of the equity equation is profiting from good earnings reported after hours yesterday by Apple(+4.1%) and Amazon(+12.5%).
Gold – Gold is up $10 today, currently $1765 after a $23 rally yesterday. It is looking for consecutive weekly rallies after a 5-week downtrend.
Buoyed by the US GDP miss and traders reducing Fed rate hike expectations, we see small resistance at $1773 before a push onto $1810
FI - US yields are lower in Asia 10yr sitting at 2.6650 and 2yr at 2.8440. GDP miss is obviously the big story and the market rapidly backed out of aggressive fed hikes. The market has taken down September fed meeting from 62bp to 56bp. The 10yr has broken through technical resistance at 2.7500 and we could see lower levels through today.
In Japan, Tokyo core CPI came in at 2.3% above the BOJ’s 2% target although retail sales missed, recording a big drop since last month. 1.5% versus 3.1% last time.
ECB rate hikes for year end dipped below 100bp yesterday as people analysed the US data. Within the Eurozone, Visco spoke and said the ECB would remain calm but if yields went astray, they would intervene aggressively.
The SNB announced they could move rates in between meetings if they saw a reason. That took the market by surprise and if forward guidance wasn’t dead before that might seal its fate. Any of you who remember the “cornerstone” of their policy being yanked out on that fateful day in January 2015 will know that the SNB are a central bank to be wary of.
FX – JPY is again the big winner today in Asia moving up because the big driver, namely 10yr/JGB yield differentials, are narrowing. JPY has rallied 300 pips since yesterdays data print and Tokyo CPI hitting above the BOJ’s 2% target has helped again today. USDJPY currently sits at 132.65, just 15 pips above it’s low. The only true support seems to be 130.00 and not because its supposedly “psychological” nature.
Aud is once again being driven more by commodities than risk as this becomes a growth story and not an inflation story. The final level to watch for now is 0.7060-70 with any talk of a break of 0.7000 as an important level being utter hogwash. That IS purely psychological.
Others –Bitcoin and ETH are slightly lower today after strong rallies yesterday following the number. They sit at 24,200 and 1730 respectively. Eth broke the resistance at 1660 yesterday and never looked back. Some good news on the Ethereum proposed merge may have helped yesterday but as the space is more driven by institutional money that sees it as a risk proxy we suspect that news was just a small driver. I attach an article about the merge below.
So we finally got there not quite what the Atlanta Fed was predicting (-1.2%) but certainly not what consensus was looking for (0.4%) but Atlanta got a lot closer to the -0.9% QoQ Q2 GDP print. Chair Powell commented at his presser that he took first prints with a “grain of salt” but its hard to see 0.9% being revised out over time so we have the two negative prints that history and all my education taught me constitutes a recession. However Biden, Yellen and a slate of CEOs were keen to tell us otherwise pointing to a strong labour market and household spending increasing. They didn’t allude to payrolls being a lagging indicator, the household spending not increasing enough to pull the economy up or business surveys turning south. Rather counterintuitively, if the economy is so robust, Biden’s economic adviser Bernstein stated that a Fed policy pivot was “completely appropriate”. Conveniently Biden got on a call with China’s Xi just after the release in what seemed a “nothing to see here” ploy.
Looking at the survey in a little more detail the housing sector and business investment spending both showed falls and whilst the personal spending increased it did so at its lowest rate of growth since the pandemic and certainly not enough to keep the economy afloat. All in all the survey did little to suggest anything other than momentum is fading and that doesn’t bode well for H2 especially with the Eurozone showing even greater signs of weakness from their ever faltering economic prints.
Markets wise early in the session it felt that we could have that pullback we highlighted yesterday that has occurred in previous occasions post a big FOMC up day but it took the other path we spoke of that this time its different and we are at a pivotal point in the cycle. The dip was short lived and aggressively bought into. Adding some more fuel were Apple and Amazon quarterly earnings beats and we ended up with the biggest two day rally in stocks post a Fed hike since the 1970’s. US yields sold off with the 10y back below the pivotal 2.70% level and further hikes are now being eaten away to under 90bps for the rest of the year. Gold, Crypto and EM all had sharp rallies too. Interestingly a few of the decouplings we have seen this month still remain in place with both oil and Bitcoin remaining decoupled from stocks. Catch up play or do stocks retrace? 4000 remains key for the S&P with 4125 the 100dma the first upside target.
The CTA sector from all accounts appear to be lightly positioned for this move, buyback season is back in play and liquidity is as poor as ever so the ingredients are in place for potentially an explosive upside move.
The market seems to be getting ahead of itself if we look back at what Powell said. He indicated that policy would be on a more meeting by meeting basis and data dependent hence yes the rate of hikes was slowing but there was certainly no pivot. Will he see this move as inappropriate and walk back some of his perceived dovishness? Dare he in the face of the political pressure?
So today we get Powell’s “interesting” ECI measure as well as the Fed’s favourite inflation gauge of PCE. If we get a weakening in these two series and a perceived peaking of inflation then the market will gain further belief that they have the winning ticket and those rate cuts they wish to feast on will come around sooner rather than later.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
German Unemployment Rate Jul consensus 5.4% 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 3.4% vs previous 5.4% (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 3.9% vs previous 3.7% (10.00 BST)
Canada GDP MoM May consensus -0.2% vs previous 0.3% (13.30 BST)
US Personal Spending MoM Jun consensus 0.9% vs previous 0.2% (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 0.9% 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 Employment Cost Index QoQ q2 consensus 1.2% vs previous 1.4%
US Chicago PMI Jul consensus 55 vs previous 56 (14.45 BST)
US Michigan Consumer Sentiment Final July consensus 51.1 vs previous 51.1 (15.00 BST)
US Michigan 5y Inflation Expectations Final July consensus 2.8% vs previous 2.8% (15.00 BST)
Good luck and a good weekend to one and all.
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Fox Business - Treasury Sec. Janet Yellen acknowledges economic ‘slowdown’ but downplays recession fears
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