Global equities higher, although US 10-year rate also higher; USD broadly weaker. Lower European gas prices. Hopes that US CPI tonight is another soft print

The new week has begun as last week ended, with positive risk sentiment that sees solid gains in global equities and broad-based weakness in the USD. The US 10-year rate continues to see some upside yield pressure. The NZD traded above 0.6150 overnight, since retreated a little, and the AUD traded as high as 0.69.

Risk sentiment has risen over the past week reflecting a number of factors – the election of new PM Truss in the UK that ended the political hiatus as she moved quickly to address the country’s energy crisis, falling European gas prices as policy makers in the UK and EU look to introduce regulations to cap prices and ease the burden for households and businesses, a major win for Ukrainian forces seeing an embarrassing retreat for Russian troops in the North-East of the country, and hope that US CPI data tonight will show another month of easing inflation.

The financial price at the vanguard of these forces is the USD, which continues to head south after trading at a fresh 20-year high last week. The ECB’s hawkish pivot last week has been another reason for the move to those alluded to above. Traders have been long the USD and there is a hint of some profit taking.

The DXY USD index is down 0.6% taking its fall since last week’s peak to 2.3%.  EUR and GBP are two of the best performers, both up 0.7-0.8% to 1.0115 and just under 1.17 respectively. The NZD is up 0.4% to 0.6135 while the AUD has made a similar gain and briefly touched 0.69 overnight. JPY has been a laggard again, with USD/JPY up slightly to 142.70.

The S&P500 is currently up about 1%, following its 3.7% gain last week.  The Euro Stoxx 600 index rose 1.8%. As we noted yesterday, a new tail risk could be that the war ends on Ukraine’s terms, which would be a significant game-changer for financial markets. It is too early to fully embrace that view, but the market sniffs a change in the war’s momentum and developments in the war are the lead articles in both the WSJ and FT. Russia is putting on a brave face, with its military leader saying the “special military operation…will continue until all the goals that were originally set are achieved”.

The US yield curve has steepened a little, with upside pressure on the 10-year rate, not helped by a $32b 10-year auction that cleared 3bps higher than the when-issued yield. It currently sits at 3.36%, up 5bps since last week’s close, and closing in on the June peak just under 3.5%. The key economic release tonight is the US CPI, with the consensus picking another soft print at minus 0.1% m/m for headline and 0.3% m/m for the core. While another 75bps hike seems locked in by the Fed next week, a big surprise either way in the report would likely affect the policy outlook beyond next week and an outsized move in the USD.

The NY Fed’s monthly survey of consumer expectations showed a drop in inflation expectations across all horizons. The 3-years-ahead figure dropped from 3.2% to 2.8%, the fourth consecutive monthly drop and now well down from the 4.2% peak just under a year ago. The 5-years-ahead figure dropped from 2.3% to 2.0%. The Fed will be happy that inflation expectations are moving in the right direction.

In other economic news, UK monthly indicators for July were on the weak side of expectations, with GDP up 0.2% m/m in July and the rolling 3 month change at 0.0%, consistent with an economy on the verge of recession. Germany’s Ifo institute offered a sobering outlook for the German economy.  It ramped up its inflation forecast, seeing 9.3% inflation next year after 8.1% this year, and a recession that sees growth of minus 0.3% next year, a classic case of stagflation.

A draft report on the EU’s energy plan includes a mandatory cut to power demand during selected peak hours, an “exceptional and temporary” levy on companies in oil, gas, coal and refinery industries based on their extra profits, and capping excessive revenue of companies producing power from sources other than gas via a limit on the price of the electricity generated from the likes of nuclear and renewables. The proposals will need approval by member states and there will be plenty of debate around this.  A firm plan might not be agreed until October.

The market remains hopeful on developments and European gas prices continue to steadily fall, with the Dutch benchmark down another 8% on the day to EUR190/Mwh, its lowest level in over a month.

The domestic rates market was well contained yesterday, with little change in swap rates and a small lift in NZGB yields, a good performance as Australian rates were heading higher through the afternoon.

The economic calendar for the day is full. First up, REINZ housing market data are likely to show further declines in house prices and poor levels of activity while the food price index will likely show another substantial increase. The key global release is the US CPI report as noted above.