Overview: The Federal Reserve delivered its second consecutive 75 bp rate
hike, and Chair Powell left the door open for another large hike at the next
meeting in September. Yet, the market took away a dovish message and the dollar
suffered, rates slipped, and equities rallied. Central banks with currencies
pegged to the dollar had to hike too. This includes Hong Kong, Saudi Arabia,
Bahrain, and UAE, which matched the move in full. Kuwait and Qatar hiked by 25
bp and 50 bp, respectively. With the exception of Taiwan and Hong Kong, equities
in the Asia Pacific region rallied. Europe’s Stoxx 600 edged higher and saw its
best level since June 10 today but has lost momentum as the session progressed.
US futures are modestly lower after the strong gains yesterday and a rash of
earnings today (Amazon, Apple, and Intel are among the highlights after the
close today). Benchmark 10-year yields are quiet today. The US 10-year is
around 2.77%, while European yields are little change and peripheral spreads
are flat to slightly narrower. The dollar is mixed. Of note, the yen is the strongest of the majors, testing its best level in around three weeks. Emerging
market currencies are mixed and central European currencies, led by the
Hungarian forint, are underperforming. Gold traders like what they heard from
the Fed and after falling to $1680 last week approached $1750 today, moving
above its 20-day moving average for the first time this month. September WTU is
up 1.8% after yesterday’s nearly 2.5% gain. It is a little above $95. US natgas
is 1.45% lower today after falling 3.4% yesterday amid signs that the heatwave
may be breaking. After rising for the past six sessions, Europe’s natgas
benchmark is broadly flat today. Iron ore continues its recovery, gaining for
the fifth consecutive session and at new highs for the month. September copper has also firmed and has risen for the past four sessions. September wheat has
recouped yesterday’s roughly 1.7% loss and is up around 2.25% today.
Asia Pacific
The Biden-Xi call today, the
second of the year, is the tip of the proverbial iceberg. It does not appear to be much of a market
factor. It is arguably being overshadowed by two other reports. The first
suggests that the US military is making contingency plans for the Speaker of
the House Pelosi to visit Taiwan. Once she signaled her intentions, and China
objected, it is difficult for American politicians to back down without looking
weak or what would be characterized as kowtowing. The second report says that
the US Ronald Reagan aircraft carrier group left Singapore on Monday and headed
toward the South China Sea after Beijing warned of retaliation for Pelosi's
visit.
Separately, Beijing appears
to be stepping up efforts to support the property sector. Reports suggest that Chinese banks may
extend CNY1 trillion (~$150 bln) loans to builders to finish stall construction
after protests. The Financial Times reported that the PBOC would initially
issue CNY200 bln of low interest rate loans (~1.75%) to state commercial banks,
who, in turn, would leverage it up to five times. Without fully able to assess
the magnitude of the problem, we suspect Chinese officials, like their US and
European counterparts previously under-estimated the magnitude of the problem. Property
prices have fallen for ten consecutive months.
Australia reported softer
than expected June retail sales on the heels of yesterday's slight miss on
headline Q2 CPI. The 0.2%
increase in retail sales was less than half of what was expected, an adding
insult to injury the May series was revised lower (0.7% vs. 0.9%). The June increase
was the weakest since May 2021. Separately, Australia's Treasurer Chalmers
warned that the CPI, which stood at 6.1% in Q2 will likely rise to 7.75% by the
end of the year before slowing to 3.5% by the end of next year, and 2.75% by
mid-2024. The central bank meets next week. The market has about around a 75%
chance of a 50 bp hike, which would bring the cash target rate to 1.85%. The
year-end rate is at 3.15%, down from a little more than 3.50% in the middle of
last week.
What the market heard as a dovish Fed, despite the 75 bp increase in the Fed funds target range, has seen the dollar take another step lower against the Japanese yen. Recall that the dollar peaked near JPY139.40 on July 14. It has worked its way lower and yesterday settled below its 20-day moving average for the fourth consecutive session. Yesterday, the five-day moving average slipped below the 20-day moving average for the first time since early June. The greenback approached JPY135.10 today. The month's low is about JPY134.75. Market talk suggests levered accounts have begun reducing short yen positions. Initial resistance is seen now near JPY136.00. We had suspected a new range phase had been entered and saw the JPY134.50-JPY135.00 as the lower end of the range. The Australian dollar is firm as it tries to establish a foothold above $0.7000. The next upside target is near $0.7055, the (61.8%) retracement objective of the decline from the early June high around $0.7285. However, options for about A$335 mln at $0.7020 that expire today may initially slow the progress. The dollar's sell-off after the Fed's announcement yesterday saw it gap lower against the Chinese yuan today. It fell to about CNY6.7370, just ahead of the 20-day moving average. The gap is found between yesterday's low (~CNY6.7505) and today's high (~CNY6.7490). The PBOC set the dollar's reference rate at CNY6.7411, the tightest in several days against expectations (median in Bloomberg's survey) for CNY6.7409.
Europe
Italy's center-right parties
are so confident of victory in the September 25 election that they met
yesterday to agree on how to pick the next prime minister. The Brothers of Italy is the most popular
party and is a fragmented party system according to polls. The leader of the
largest party tends to be the next premier, and this rule is likely to be
maintained. However, press reports suggest that the League and Forza Italia are
balking at accepting Giorgia Meloni, the leader of the Brothers of Italy as the
leader of the coalition. Forza Italia (Berlusconi) is drawing less than 9%
support in the polls and yet is pushing one of its own, former EC minister and
previously president of the European parliament instead. One takeaway from the
wrangling is that the idea of Italy leaving the EMU has waned and Meloni is
supportive of NATO too.
German states have reported
July inflation readings, and they are a mixed back. Six states have reported. Two states,
North Rhine Westphalia and Bavaria showed an increase in the year-over-year
rate, while two showed a decline (Saxony and Hesse), while one was unchanged
(Baden Wuerttemberg). The national figure, out shortly, was projected to rise
0.4% on the month and tick down to 8.1% from 8.2% year-over-year on the EU
harmonized measure. Tomorrow, the eurozone's preliminary July CPI is due. The
year-over-year headline and core are expected to edge higher (8.7% from 8.6%
and 3.9% from 3.7%, respectively). The first estimate for Q2 GDP will be made
at the same time. It is expected to have expanded by 0.2% after 0.6% growth in
Q1.
The euro is firm. It closed above its 20-day moving average
yesterday (~$1.0180) for the first time this month. While the options for
around 765 mln euros at $1.02 that expire today have likely been dealt with,
another set at $1.0250 (600 mln euros) may still be live. Today's high is about
$1.0235. However, the more important hurdle in the $1.0280 area, where it was
capped last week. A close below $1.0160 would be disappointing. Sterling is
in a half-cent range above $1.2140. It reached its best level of the month,
just shy of $1.22 today. The next important level is near $1.2250, which looks
too far today. Initial support below $1.2140 is seen near $1.2085. The BOE
meets next week, and the swaps market is pricing in around an 85% chance of a
50 bp move.
America
As widely anticipated, the
Federal Reserve delivered its second 75 bp hike in a row, lifting the target
range to 2.25%-2.50%. There
is no doubt that the Fed will continue to hike rates. The Fed funds futures
show a roughly 40% chance that the Fed follows this up with another 75 bp hike
at its next meeting in September. Subjectively, this looks high. The Fed's
statement acknowledged that spending and production had softened. This
statement would be an early candidate to expand on in futures statements,
allowing a more moderate pace of increases going forward. Once again, as the
press conference got underway, the market heard a dovish Chair and took the
dollar lower. He explicitly refused to give the market forward guidance but
saying that the September meeting was data dependent with the Fed funds at
where the Fed regards as neutral. Powell also admitted that the Fed wants to
see the economy grow below potential for some time to take pressure off supply.
With the Fed meeting behind
us, attention turns to today Q2 GDP estimate. What is striking is that the two
touchstones are pointing in opposite directions. After a smaller than expected
trade deficit, stronger than expected wholesale and retail inventory increases
and stronger than expected durable goods shipments, the Atlanta Fed's GDP
tracker is looking at a 1.2% contraction instead of 1.6%. On the other hand,
economists also likely raised their forecasts and the median and average
forecasts in Bloomberg's survey were already looking for a small expansion. One
money center bank doubled its Q2 GDP forecast to 1.4% after yesterday's data. As
a last note, without the drag from the slower inventory accumulation, many
models, including the Atlanta Fed's were show positive growth. For a better
read on the underlying state of the economy, final sales to private domestic
purchasers (GDP, excluding trade, inventories, and government expenditures. It
rose by 3% in Q1. As Powell's remarks yesterday indicate that a negative GDP
print today would be scrutinized, but given the strength of the labor market,
it is not likely to convince Fed officials that the economy is indeed in a
recession. Lastly, we note that the Congress looks like it will approve the semiconductor
sector support bill and a deal apparently struck with Senator Manchin on a
fiscal package that boosts revenues (taxes) by almost $740 bln and lifts
spending by about $435 bln, to cut the deficit by $300 bln.
Although US futures are
trading lower, the Canadian dollar is slightly firmer at its best level since
mid-June. The US dollar
is straddling the CAD1.28 area. Options for $770 mln at CAD1.2810 that expire
today have been likely neutralized. The CAD1.2785 area holds the (61.8%)
retracement of the greenback's rally from around CAD1.2520 in early June. We
suspect the US dollar may test the CAD1.2830-40 area first. Mexico reported
a June trade deficit yesterday that was three-times larger than expected, but
this did not derail the peso, which rose against the US dollar for the fourth
consecutive session. The greenback is consolidating today within
yesterday's range but has holding mostly below the 200-day moving average
(~MXN20.43). Key support is seen near MXN20.29.
Disclaimer
Reviewed by Marc Chandler
on
July 28, 2022
Rating:
