US equities are weaker after fully digesting the CPI shocker and not helped by weaker earnings from two major banks. The US Treasuries curve has unwound some of yesterday’s flattening, after Fed Governor Waller backed a 75bps hike, with him needing to see stronger data before backing a larger 100bps hike. Italian political manoeuvres saw EUR dip further below parity before recovering. Both the NZD and AUD hit fresh two-year lows before recovering, but CAD has been the weakest of the majors after oil prices fell as much as 5%.
The US earnings season kicked off in earnest with weaker than expected reports from JP Morgan and Morgan Stanley. JPM CEO Dimon said that his previous forecast for a looming economic “hurricane” hadn’t changed but he said “the consumer right now is in great shape…so even if we go into a recession, they’re entering the recession with less leverage and in far better shape than they did in ’08 and ‘09”. MS CEO Gorman described the outlook as “complicated” but suggested that a deep or dramatic recession in the US is unlikely. The S&P opened weaker and was down over 2% in early trading before paring losses, currently down about ½%.
The bond market has been on edge after yesterday’s CPI shocker. Fed Governor Waller said that he backed a 75bps hike at the upcoming July meeting after the CPI report but if data on retail sales and housing came in stronger than expected then he would back a larger hike. This saw the market pare back pricing for the meeting from about 90bps down to 82bps and helping drive the 2-year Treasury rate lower, currently down 2bps on the day to 3.14%.
Later, St Louis Fed President Bullard said that he also backed a 75bps move “as of today”, seeing a lot of virtue to a 75bps move because it brings the benchmark rate to roughly the neutral level as seen by policymakers. Both Waller and Bullard are respected by the market because they have been on the right side of the debate in terms of favouring a faster move to normalise policy.
While short rates are lower, the 10-year rate rose as high as 3.02% but is now currently up only 2bps on the day to 2.96%.
US headline PPI inflation data were stronger than expected, but the core measure was in line, at 8.2% y/y and, unlike yesterday’s CPI report, showed further signs of moderating inflationary pressure over recent months. Initial jobless claims continue to trend higher and rose to their highest level since November. The labour market remains tight, but the data fit the anecdote of rising job layouts.
Political risk has returned to Italy, with Premier Draghi saying that he will offer to resign after the second largest party in his coalition boycotted a confidence vote. President Mattarella rejected the resignation offer and the next step could be asking Draghi to try to form a new workable majority with other parties.
As Italy’s political drama played out, the EUR dived to as low as 0.9952 before returning above parity. Italy’s 10-year rate rose as high as 3.41% before settling down to 3.25%. This sort of drama is the last thing the euro area needs right now, given the energy crisis, and it puts the pressure on the ECB to give more details on its anti-fragmentation tool next week.
As we’ve noted previously, EUR/USD and NZD/USD have been highly correlated and the low in EUR coincided with the NZD falling to a fresh 2-year low of 0.6061, while the AUD suffered the same fate and hit a low of 0.6682. Alongside the recovering euro, now at 1.0030, the NZD and AUD have recovered to 0.6130 and 0.6760 respectively. Also meeting the 2-year low milestone, GBP touched 1.1760 before recovering back above 1.18.
CAD has been the weakest of the majors, falling over 1% and taking USD/CAD up through 1.31, driven by weaker oil prices. As we go to print, oil prices have recovered, with Brent crude back at USD100 after falling as much as 5% to below USD95 overnight on recession fears. The EIA reported that US gasoline demand fell to its lowest level since 1996 after adjusting for seasonality, while crude stockpiles rose by 3.25 million barrels. The yen hit a fresh 24-year low, with USD/JPY up to 139.39, before settling just below 139.
With the USD in charge, the AUD saw little love after a very strong Australian employment report yesterday, even though there was significant reaction in the rates market. Strong employment in June drove a plunge in the unemployment rate to 3.5%, a near-five decade low. Alongside surging headline CPI inflation, the data increase the likelihood of higher wage inflation ahead. The RBA was late in kicking off the rate hike cycle and, given super-sized rate hikes in the US and Canada, the debate will shift to whether the Bank will hike by 50bps or 75bps at its next meeting early next month to quickly get the policy rate, currently only 1.35%, back up to at least neutral. By the end of the day, the market had priced in just under a 60bps hike for the meeting.
That strong employment print and market reaction spilled over into the NZ market, which was also under significant flattening pressure from the prior US move. The 2s10s swaps curve flattened by a chunky 14bps, moving it deeper into negative territory, with 2-year swap up 18bps on the day to 4.06% and 10-year swap up 4bps to 3.84%. A similar move was seen for NZGBs. The OIS market prices in a 64bps hike by the RBNZ for the August meeting, which seems unlikely to us, with the RBNZ revealing a preference to move in 50bps steps, but there are likely some market nerves heading into Monday’s NZ Q2 CPI release, which is likely to see headline inflation break 7%.
There is plenty of potential market moving releases over the next 24 hours. China activity data are expected to show an economic contraction in Q2 making it difficult, if not impossible, for the government to meet its annual 5½% growth target this year. The easing of lockdown restrictions should show up in the form of stronger data for the month of June for industrial production and retail sales. US retail sales should show some growth in June, but likely negative after adjusting for surging inflation. In the University of Michigan survey there will be interest in whether consumer sentiment has slumped further and in long-term inflation expectations, which Fed Chair Powell indicated was a factor in its super-sized hike last month.
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