Overview: The higher-than-expected
US CPI and the strong expectation of a 100 bp hike by the Fed in two weeks is
propelling the dollar higher. It jumped to almost JPY139.40 and the euro is off more than a cent
from yesterday's high (though holding above parity). Even where there has been
favorable economic news, like the strong jobs report in Australia, it failed to
dent the greenback. Most of the large bourses in the Asia Pacific regions
advanced. Hong Kong is a notable exception, and the Singapore and Philippines'
stocks fell after the surprise tightening moves. Europe's Stoxx 600 is
extending yesterday's 1% slide and is off around 0.8% in late morning turnover.
The S&P and NASDAQ futures are trading lower. They have fallen in the first
three sessions this week. The US 10-year yield is a few basis points higher around
2.96%. European benchmark yields are 8-18 bp higher, with Italian bonds getting
hit by political concerns. But the peripheral premium more generally is widening. Gold
is returning to its lows after being turned back from around $1750 yesterday.
August WTI is trading at its lowest level in three months near $93.40. Higher
gasoline prices in the US have seen demand slump to around 8 mln barrels a day
last week. In seasonally adjusted terms, it is the lowest since the mid-1990s. After
surging 8.5% yesterday, US natgas is off around 1.2% today. Europe’s benchmark
is off 2.5% today after rallying 10% in the past two sessions. Iron ore prices
collapsed 8% today after rising 3.6% yesterday. September copper is giving back
yesterday's 1% gain plus some. It fell more than 6.5% Monday-Tuesday. Lastly, September
wheat is trying to snap a three-day decline. It is near five-month lows.
Asia Pacific
Australia's much stronger
than expected employment report and news that China is considering lifting the
almost two-year ban on its coal failed to lift the Australian dollar. After edging higher in the past two
sessions, the Aussie is trading a little lower, though in yesterday's range. Australia
created 88.4k jobs last month, almost three-times more than the median
projection in Bloomberg's survey, and of them, nearly 53k were full-time posts.
The participation rate rose to 66.8%, a new record high, while the unemployment
rate tumbled to 3.5% from 3.9%.
The city of Tokyo has lifted
its Covid alert to the highest level as cases surge. According to reports, Tokyo has around
3.5k infections on July 1. Yesterday, it reached around 17k. Separately,
foreign investors, who sold a record amount of Japanese government bonds,
returned in a big way last week. Ministry of Finance figures show foreign
investors bought JPY2.07 trillion (~$15 bln) last week, the second highest
since the time series began in 2005. And that shocking 7.2% contraction in May
industrial output (month-over-month) was revised to a 7.5% drop. Capacity use
fell a stunning 9.2%. The weakness in household spending and this dramatic
weakness warns that Japan's recovery from the contraction in Q1 stalled.
There were two surprise
central bank moves in Asia today. First, the Monetary Authority of Singapore signaled tighter
monetary policy by allowing the Singapore dollar to appreciate. The exchange
rate is the main channel of monetary policy. Although the economy appeared to
have stalled in Q2, inflation is rising, and MAS lifted its inflation forecast
from 4.5%-5.5% to 5%-6%. Second, at an unscheduled meeting, the Philippines
central bank announced a 75 bp hike of the key borrowing rate to 3.25%. After
raising rates last month, the central bank was not due to meet until August 18.
The US dollar slipped slightly against the peso, losing about 0.2% on the day.
The US dollar has jumped to
around JPY139.40. There
were options for nearly $1.5 bln at JPY139 that expired today and may have
spurred more dollar buying as the greenback rose through the figure. The JPY140
level is the next target, however, the frenzied buying appears to have dried up
for the time being. Below JPY139, support is seen in the eJPY138.60 area. US
Yellen and Japan's Suzuki's statement earlier this week downplayed the
likelihood of material intervention. The Australian dollar is
languishing in its trough. Yesterday's attempt to resurface above $0.6800
was greeted with fresh selling. It is holding above the week's low set on
Tuesday near $0.6710. The Chinese yuan slipped to its lowest level in a
month as the greenback's strength proved too much. The US dollar rose to
almost CNY6.75. which it has not seen since June 14 when it briefly traded
above CNY6.76. The high for the year was in mid-May closer to CNY6.8125. The
PBOC fixed the dollar tightly near expectations (CNY6.7265 vs. CNY6.7267. The
PBOC indicated that there was plenty of liquidity and the overnight rate fell
to an 18-month low.
Europe
The Tory Party is in the
middle of picking Johnson's replacement. After yesterday's vote, eight candidates remain. Sunak got
the most votes with 88, followed by Mordaunt with 67 and Truss with 50 to lead
the field. Another vote will eliminate someone else today. There is scrambled
to draw the supporters of the candidates that were eliminated or that dropped
out. After the party votes get it down to two candidates by the July 21 summer
recess, some 175k rank and file members will vote for and a new leader of the
part and Prime Minister will be announced on September 5. A YouGov poll shows
that among Tory members, Sunak would lose in a face-off against either Mordaunt
or Truss.
While concerns about Italy's
ability to cope with higher rates and the heatwave in the north, it is
old-fashioned politics that is threatening it today. Former prime minister Conte, complaining
that Five-Star Movement is not being listened to in the coalition government,
threaten to boycott confidence vote (over an aid bill). The current prime
minister Draghi has threatened to resign if Conte makes good on his threat. The
political tension as Italian stocks and bonds underperform.
Deputy US Treasury Secretary
Adeyemo suggested that the design of the cap on Russian oil prices will be so
attractive that there is "a natural incentive for countries to join this
coalition." Rather than ban insurers from covering any tankers that
carry Russian oil, the US has been championing a cap slightly above Russia's
production costs. Banning the insurers but not capping the price of Russian oil
would likely lead to a surge in oil prices. The idea is that, if for example,
India and China continue to buy Russian oil, they would likely demand lower
prices too if the proposal were implemented. The use of secondary sanctions on
countries that do not adhere to the cap is not envisioned now, Adeyemo said. Secondary
sanctions are particularly odious to those who are subject to them as it often
looks like extraterritoriality--the applying of US laws outside of the US.
The euro remains stuck near
parity. After dipping
slightly and briefly below parity yesterday, the euro bounced a little above
$1.0120. However, the upticks provided a new selling opportunity, and it
returned to a low today near $1.0005. While the euro is pinned near its
lows, so is sterling. This week's two-year lows were set Tuesday, slightly
above $1.1805. Yesterday, it recorded a high near $1.1965. Today, it has been
capped below $1.19 So far today, it is holding above $1.1820, where options for
almost GBP620 mln have been struck that expire today.
America
For the fourth consecutive
month, US headline inflation surprised on the upside. Although the 9.1% rise in the headline was
less than Tuesday's rumor of a double-digit print, it was the third month in
the past four that the monthly increase was 1.0% of more. The market concluded
two things, though most observers focused on one or the other. First, at the
close yesterday, the Fed funds futures moved priced in a 60% chance of 100 bp
hike later this month instead of 75 bp. Second, the market concluded that the
more aggressive the Fed is in the short-term, the more likely it will
"break something" and have to reverse itself. The implied yield of
the December 2023 Fed funds futures contract settled 65 bp below the December
2022 contract. That is full confidence of 50 bp cuts and a 60% chance 75 bp. Today's
PPI pales in comparison with the yesterday's CPI. And the modest increase in
weekly jobless claims in recent weeks, while continuing claims remain near its
trough, draws little attention, especially in light of last week's sharper than
expected jump in nonfarm payrolls.
The US budget balance for
June was reported yesterday. Fiscal policy is not getting the attention we think it should. Fiscal
policy is tightening aggressively. Consider that in the first six months of the
year, the US recorded a shortfall of about $137.5 bln. In the first six months
of 2021, the deficit was nearly $1.67 trillion. The median forecast in
Bloomberg's latest survey sees the US budget deficit falling from 10.8% of GDP
last year to 4.5% this year. This appears to be the largest decline in
percentage terms for more than half a century.
The Bank of Canada became
the first high-income country to hike 100 bp. The target rate now stands at 2.50%. Governor
Macklem explained that the hikes were being front-loaded to boost the chances
of a soft-land, which is becoming more difficult. The Bank of Canada cut it GDP
forecast to 3.5% this year from 4.2% and next year to 1.8% from 3.2%. He said
the forceful action was needed to avoid a wage-price spiral. Macklem seemed to
imply the rate hike did not mean a higher terminal rate. The market had been
leaning to peak around 3.50% and now closer to 3.75%. The swaps market is
pricing in about an 88% chance of a 75% hike at the next meeting on September
7. We are not persuaded by claims that the Bank of Canada move put pressure on
the Fed to hike 100 bp. Given the Fed's reaction function to the June CPI
report and the initial conditions, i.e., that the market had largely priced in
a 75 bp hike, one does not need to even know what the BoC did to arrive at what
the Fed is more likely to do.
The US dollar is trading at
new highs for the week against the Canadian dollar near CAD1.3075. The high for the year was set on July 5
around CAD1.3085, which is where the upper Bollinger Band is found. A
convincing break of CAD1.3100 were strengthen the US dollar's medium-term
technical outlook, perhaps targeting the CAD1.33-CAD1.34 area. The greenback
approached MXN21.00 yesterday for the first time in four months
yesterday. It eased to settle near MXN20.73, but it has come back
higher today and traded to almost MXN20.89. The high for the year set in early
March around MXN21.4675. The upper Bollinger Band is slightly below
MXN20.9450.
Disclaimer
Reviewed by Marc Chandler
on
July 14, 2022
Rating:
