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.
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A myriad of data feeding the beast that is today's economic world. Thank you Jason. There are literally thousands of sets of data you could use to construct any narrative you wish, depending how you ''feel'' in the moment, but I appreciate your commentary as part of it. Tick interest.co
I think we are probably half way through (the covid reset) with another fall of similar proportions to unfold, pretty much everywhere, & worse in some places over the coming year or so. Just like the Rotorua motel owner getting an 8 figure offer from the govt to buy his property, there are winners & losers out there, even from amongst us & this multi-speed, multi-levelled economy (economies) will open up further over the next 12 months, with some nations/economies/people fearing better than others.
Europe is staring down the barrel, economically & literally. 40 years of woke leadership has led to this. America is proving once again it is flexible, but it's working classes pay a high price for their ''mobility'' shall we say. Australia & the ASEAN nations are holding their own and with a high human productivity rate alongside a huge set of natural resources in its own back yard, looks to be well balanced & well set up, if they can keep the larger egos in check.
Africa is opening up & the Chinese are taking huge risks in there, with their debt based diplomacy(?) which will piss the Africans off eventually, whilst in the middle of the big continent (mid Asia) & the boiling point countries that go into making it up, things are all up for grabs, so it is good to see Europe making noises in their direction recently. China is beginning to understand that they are limited without global contact so they need to decide whether they will be nice about it or will they play hard ball? Or both? Time will tell.
As for the northern lights(?) I believe this too is up for grabs, as their dated dictator leads them down the path of self-destruction. So what will unfold as the border conflict gets uglier by the day? I think the military muscle that is the US of A has decided to make a stand & will slowly strangle the aging bears from the north. Winter is coming for them & the good guys & gals in Europe & I wonder how long it will take (or many many lives will be lost) before they realise that they need each other, more than they hate each other? Putin needs to go.
As for the woke west socialist/communist leaders(?) continuing to undermine everything that we've ever worked for over the past 1,000 years, well, what can we say? Listen. The rest of the world still wants to come & live in the western nations. Why? Because it has taken us 1,000 years to get our society as good as this & everybody outside the west can see it, but everyone inside the west is told we're killing the planet. The last time I looked the planet looked pretty good from my office. The planet doesn't look very good from many countries views but not from the west. We've done more to clean up our act than the rest of the planet (read the other 75%) combined. We've won. They lost.
Could we do more to clean up our act? Sure. And we are. But to say the last 250 years of industrialisation has been a bad thing for the planet I say BS. The last 250 years has provided more opportunities for more people than the last 40,000 years combined. It is a truly remarkable time to be living on planet Earth & I for one am grateful. Depending on who you follow & what you believe, there is currently between 7-8% of the total human population EVER, currently dwelling herein. Planet earth has saved its very best for last. How cool is that? Yes, I know this leads to a whole other discussion but just remember, nothing physical lasts forever. We are all born, live, love, grow up, grow old & pass away into the dust we came form. Nothing that is physically created can last forever. That is physics 101.
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