Overview: The US dollar is consolidating with a slight
downside bias ahead of the June CPI report. The euro held above $1.00 but is
still pinned in the trough. The rate hike by the Reserve Bank of New Zealand failed
to have much impact. On the other hand, the JP Morgan Emerging Market Currency Index
is lower for the fourth consecutive session. Most of the large markets in the
Asia Pacific region rose, led by a 2.7% rally in Taiwan after the government
promised to support local equities. However, in Europe, the Stoxx 600 is off
about 0.5%, giving back yesterday’s gains. US futures are firmer, but the CPI will
be released before the local opening. The US 10-year yield is slightly softer
near 2.91% today, while European yields are 2-4 higher with wider spreads. Gold
posted an outside down day yesterday and initially saw a little follow-through
selling that pushed it to almost $1722 before some bids returned. It is
slightly higher in Europe (~$1728-$1730). August WTI fell to almost $93.65 today,
its lowest level in nearly three months. It has recovered a little through $97.
US natgas is up almost 3% after falling 4% yesterday. Europe’s natgas
benchmark is up 4.25% today after a 6.75% gain yesterday. Iron ore snapped a
three-day fall and rose almost 3.90%, today, the most since late June. Copper
is slightly firmer after falling more than 8% over the past three sessions. September
wheat is up almost 1%. It has fallen nearly 9% over the past two sessions.
Asia Pacific
China reported a much larger
than expected June trade surplus, helped by the re-opening of Shanghai. The trade surplus swelled to almost $98 bln
from $79 bln as exports rose faster than expected and imports slowed. Exports
rose by nearly 18% (16.9% in May) and imports slowed to 1% (4.1% in May). The
US accounted for about 42% of China's trade surplus. Of note, news that China's
imports from Russia soared by more than 56% will catch attention too.
US Vice President Harris
announced the latest effort by Washington to fill the vacuum left by the
withdrawal for the Trans-Pacific Partnership and moves by China at the Pacific
Island's Forum. China
has been advocating a regional trade pact, which would exclude the US. However,
it was the deal China struck with the Solomon Islands that seemed to have
caught the Americans and Australians wrongfooted and now they are trying to
make up for it. The US had previously closed its embassy in the Solomon
Islands, seemingly sending a signal of the lack of interest. Harris announced
that the US will open embassies in Kiribati and Tonga. Kiribati withdrew from
the forum. The US plans also call for a renewed presence of the Peace Corp
region as well as $900 mln for fishing assistance over the next decade. The
United States Agency for International Development (USAID) will be established
in Suva and will work with Partners
in the Blue Pacific network, launched last month on climate change.
As widely expected, the
Reserve Bank of New Zealand delivered its second consecutive 50 bp hike to
bring the cash rate to 2.50%. It is seen as the first central bank from a high-income country to
bring its policy rate above neutral. Another 50 bp hike is nearly fully priced
into the swaps market for the next meeting on August 17. Separately, after
hiking its 7-day repo rate five times by 25 bp, the central bank of South Korea
raised by 50 bp today to 2.25%. The swaps market is not convinced that it will
continue at this accelerated pace, but it does have around 100 bp priced in
over the next 12 months.
The dollar is consolidating
against the yen in what appears to be still constructive price action. The greenback is trading within
yesterday's range (~JPY136.50-JPY137.50), which itself within Monday's range
(~JPY135.90-JPY137.75). The price action is often seen as a continuation
pattern. The Australian dollar did manage to rise through yesterday's
$0.6780 high but marginally and is also consolidating. It, too, is in
Monday's range ($0.6715-$0.6860). Despite the rate hike, the New Zealand dollar
remained within yesterday's range against the US dollar (~$0.6145-$0.6200). After
gapping higher against the Chinese yuan yesterday, the dollar eased slightly to
fill the small gap that extended to CNY6.7195. The PBOC set the dollar's
reference rate at CNY6.7280, while the median projection (Bloomberg survey) was
CNY6.7290.
Europe
The latest Bloomberg surveys
found economists have boosted their odds of a eurozone recession. In the May and June surveys, the median
response gave a 30% chance of a recession over the next 12 months. It now
stands at 45% chance. The risk of a German recession increased to 44.5% from
32.5% in June's survey. It was 20% at the end of last year. The odds of a
French recession stand at 50%, but it had been at 60% for the past three months.
The risk of a recession in Italy is seen at 65% down from 80% in June. In
Spain, the risk of a recession appears to have fallen to 40% from 70%. The
caveat is that while the Germany survey had a dozen responses, the probability of
a recession for other EMU members was based on three responses. The UK's survey
has 17 forecasts and the median saw a 45% chance of a recession over the next 12
months, up from 35% in May and June.
The UK's May GDP surprised
on the upside, and that is not something that could have been said recently. The economy expanded by 0.5% in May, well
above the 0.1% expected. The April contraction was revised to -0.2% from -0.3%.
Most of the details were better than expected. Industrial output jumped 0.9%
and the April's 0.6% decline was revised to only 0.2%. Construction output rose
1.5% and April's 0.4% fall was revised to a 0.3% gain. Services rose by
0.4%. Nevertheless, some of the consumption measures showed weakness
including hospitality, retail services, sports, and amusement. This is
consistent, it would seem, with the cost-of-living squeeze. Nevertheless, Bank
of England Governor Bailey appeared to be confirming what the market has large
discounted and that is a 50 bp hike at the August 4 MPC meeting. Meanwhile,
eight Tory candidates to succeed Johnson have made it to today's first round of
voting.
The euro continues to hold
above parity, but barely. After yesterday's probe it snapped back to around $1.0075. Today,
it briefly traded above $1.0050 before sellers appeared. It still looks
vulnerable. The intraday momentum indicators appear neutral prior to the US
open. Sterling fell to two-year lows yesterday, slightly ahead of $1.18. It
staged a modest recovery yesterday and extended it to around $1.1935 today.
However, despite the better GDP figures, sterling is better offered in the
European morning. Initial support is seen in the $1.1850-$1.1870 area.
America
The US June CPI and the Bank
of Canada meeting dominate today's agenda. There seems to be a risk that both are anti-climactic. First,
it has been accepted for a few weeks at least that headline CPI likely
accelerated from 8.6% in May toward 8.8% or a little higher. Second, the market
has nearly fully discounted a 75 bp hike by the Fed later this month. The
market is less sure of what the Fed does at the following meeting in September.
It has about a 1-in-5 chance of another 75 bp move. Third, there is much wood
to chop before that September 21 FOMC decision. There are two more CPI prints
and two more job reports. The June CPI will not be a decisive factor in the
FOMC's September decision. Third, headline inflation gets much of the
attention, though Fed Chair Powell noted that the core measure is a better
measure of where headline inflation is headed. The core measure of CPI is
expected to have slowed for the third consecutive month. This means that
despite the talk and some anecdotal evidence that price pressures have broadened,
the rise in food and energy prices is the reason the headline rate is still
rising. Fourth, largely uncommented upon the average price of retail gasoline
has been falling. In fact, the last day it rose was June 13, when the peaked at
$5.16 a gallon. It is now near $4.65, the lowest since late May.
The market has fully
discounted a 75 bp hike from the Bank of Canada today. It will be the fourth hike in the cycle
that began this year with a 25 bp move in March and two half-point moves
subsequently. The Bank of Canada warned the market that it may need to act
more forcefully and by that the market understood the central bank to signal a
larger hike. The market seems to be pricing in a small chance of a 100 bp move.
Canada is expected to be the fastest growing economy in the G7 this year (3.8%
year-over-year, half again as much as the US's 2.4% pace seen by the median in
Bloomberg's surveys). A strong labor market, where the more important
development over the past two months is a shift from part-time work to
full-time is underpinning domestic demand while a positive terms-of-trade shock
has seen it report increasingly large goods trade surpluses. The May surplus of
C$5.3 bln is the largest since 2008. This year's monthly average is almost
C$3.2 bln. In the first five months last year, Canada recorded an average deficit of
C$300 mln. In the Jan-May 2019 period, Canada recorded an average deficit of
C$2.15 bln. The swaps market is pricing in about a 75% chance of another 75 bp
hike at the next meeting on September 7.
On Monday, the bill auctions
tailed but the 3-year note sale was well received. Yesterday, the $33 bln 10-year note sale
was a dud. The auction was covered 2.34x, less than the average of the past six
re-opening auctions. Direct and indirect interest was less than before, leaving
dealers were left with the most in a year (almost 21%) and the auction produced
a two-basis point tail (difference between highest yield accept and where it
was in the when-issued market). Today, a few hours after the CPI figures, the
US Treasury will sell $19 bln 30-year bonds. At the last auction, indirect
bidders took 69%, while the bid-cover was 2.35. A key observation about the US
Treasury market now is the volatility. The equivalent to the VIX for the
S&P is MOVE for US Treasuries. The volatility reached 148.11 yesterday, its
highest level since August 2009. Yes, that is above the high seen in March 2020
(~138.40). It reached 264 in October 2008.
The greenback is
consolidating against the Canadian dollar and is in a narrow range above
CAD1.30 ahead of the central bank meeting. It is still confined to the range seen Monday of roughly
CAD1.2940-CAD1.3050. The inability of the New Zealand dollar to rally after the
central bank delivered the as-expected hike warns that the Canadian dollar may
need more than a 75 bp hike to rally. A recovery in US equities would help. The
US dollar pushed slightly through MXN20.93 yesterday to reach a new four-month
high. It is in a narrow range so far today of about three centavos on
either side of yesterday's settlement around MXN20.85. It will likely be driven
by the broader risk appetite after the US CPI report. Separately, Chile is
expected to deliver a 50 bp hike later today that would lift the policy rate to
9.50%. That would be the smallest move since the 25 bp hike last July to
initiate the tightening cycle. The swaps market has about another 150 bp of
rate hikes discounted over the next 12 months.
Disclaimer
Reviewed by Marc Chandler
on
July 13, 2022
Rating:
