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US equities (US500.I and USNAS100.I): S&P500 flat after the FOMC
After fluctuating between gains and losses to digest the message from Powell in the post-FOMC news conference, the S&P500 finished Wednesday nearly unchanged. The data-dependent stance was offset by Powel’s comment on the stickiness of inflation. The communication services sector topped the performance within the S&P500, paced by a 5.8% gain in Alphabet (GOOGL:xnas) after reporting strong results the day before. The Nasdaq 100 slid 0.4% as Microsoft (MSFT:xnas) declined 3.8% on slower cloud-computing growth. Meta’s shares were up nearly 7% in late trading after it reporting earnings after the close.
Union Pacific (UNP:xnys) jumped 10.4% after the rail transportation company announced a change in CEO. Boeing (BA:xnys) surged 8.8% after reporting revenue, earnings, and cash flows beating estimates and a strong orders book. Coca-Cola (KO:xnys) added 1.3% after raising full-year guidance.
FX: Yen outperforms as yields drop
The US dollar was modestly lower with Fed Chair Powell’s data-dependency comments being taken as dovish at the margin by markets on anticipation that the recent disinflationary trend will continue. Lower Treasury yields brought some gains to the Japanese yen, with USDJPY testing the 140 handle from ~142 at the start of this week. BOJ meeting tomorrow could upset those expecting a tweak and could bring back yen weakness. EURUSD reversed back higher to 1.11 overnight but ECB meeting today will have a tough job of maintaining its hawkish rhetoric. AUDUSD slid lower to 0.6730 on softer-than-expected Q2 CPI but was back at 0.6750+ in Asia morning today.
Crude Oil: inventory data upsets oil bulls
Crude oil prices reversed some of the recent gains overnight after crude inventories fell less than expected. EIA’s weekly inventory report showed US commercial stockpiles fell by 600kbbl last week. However, the losses were limited and gains returned in the Asian session as inventories at Cushing, the pricing point for WTI, remain near their lowest levels since May. The Fed decision to hike rates by 25bps was as expected and the crude market will likely remain focused on supply tightness for now. ECB meeting will be on watch today and US Q2 GDP and PCE data also on the radar.
Gold: Fed pause signals underpin
With Fed Chair Powell leaving out any clear signals of a rate hike beyond July 25bps that we got yesterday, Gold extended its recent gains to $1978. Minor resistance at $1980 and clearing that will bring the next test at $1998 in focus which is the 61.8% retracement from the June lows. Even if no more Fed rate hikes were to come, real yields will continue to expand due to disinflation, suggesting the path for Gold may be less clear until clear Fed rate cut signals appear. Gains in equities are also reducing the safe-haven appeal of the yellow metal.
US Treasuries (2YYU3, 10YU3, 30YU3): the yield curve bull steepens amid FOMC meeting
The Federal Reserve hiked rates by 25bps yesterday and said that future rate decisions will be data-dependent. Yet, the bond futures market was fast at removing expectations for another rate hike this year and pricing a first rate cut in May 2024. Such a move caused the yield curve to steepen, with the belly of the curve outperforming the wings. We expect that to continue and to accelerate tomorrow if the monthly core PCE comes at 0.2%. However, a bear flattening of the yield curve might soon resume as the inflationary problem might resurge in the fall. The Fed’s peak rate might be higher than what the market envisions, but the Fed will get there at a slower pace.
EU sovereigns (D5BC:xetr, IS0L:xetr): ECB and German inflation in focus
Germany is in a recession. The Bank Lending Survey shows that corporate loan demand fell most on record due to high interest rates. Yet, we don’t expect the ECB to turn dovish today as it will prioritize inflation over the economy for now. Another rate hike in the fall is in play, that means that although German yields might adjust lower in the short term, a further flattening is likely, with 2-year Schatz moving towards 3.5%. At the same time, Bunds yields have the potential to drop amid recession fears. If bunds break support at 2.40%, they will find support next at 2.30%.
What is going on?
Fed hiked 25bps as expected, further rate increases to be data-dependent
The Fed hiked rates by 25bps to 5.25-5.50%, as expected, with the statement nearly unchanged from the June FOMC. Powell has emphasized a data-dependent approach and is not ruling out the possibility of a rate hike in September. But that will mean taking into account two more CPI reports and two non-farm payroll reports. With base effects colling off in H2, it is likely that inflation could see some modest upsides, but Fed will likely be cautious of that. Powell noted that full effects of tightening are yet to be felt. He still does not expect inflation to come back to 2% until 2025, but mentioned that if we see inflation coming down credibly, the Fed could move down to a neutral rate level and then below neutral at some point, albeit he pushed back on any rate cuts this year. Upside risks to inflation from economic growth were also noted. Market is now pricing in only 20% chance of a September rate hike and a 40% chance for November.
Volkswagen reports weak earnings, investment in Chinese EV maker XPeng
Yesterday, Volkswagen said it is investing USD700 million into the Chinese new energy vehicle maker XPeng and will jointly develop two mid-size electric vehicle models with XPeng. The German automaker plans to eventually hold a 4.99% stake in XPeng and get an observer board seat. This morning, Volkswagen reported its Q2 results, with top line slightly beating estimates at EUR 80.1 billion vs. 78.6 billion consensus, but operating margins weaker than expected and operating profit coming in at EUR 5.6 billion vs. EUR 6.1 billion consensus. The company maintained it prior guidance on targets for the 2023 financial year
Meta reports strong revenues and upbeat guidance
Meta reported Q2 revenue of USD32 billion, an 11% increase from Q2 last year and 3% above consensus. GAAP EPS grew 21% Y/Y to USD2.98, 2% above consensus. Total advertising revenues of USD31.5 billion, a 12% Y/Y increase, were better than expectations. Excluding restructuring changes and others, the Adjusted EPS rose to USD3.95 versus the consensus estimate of USD2.87. The company also raised the sales guidance for Q3 to USD32-34.5 billion, better than the USD31.2 billion expected by analysts. Meta’s shares rose nearly 7% in late trading yesterday.
Coca-Cola Q2 results beat, volume momentum picks up in Q3
Coca-Cola’s Q2 revenue came in at USD12 billion, increasing 5.7% Y/Y and 2% above the consensus estimate. While volumes were flat sequentially in Q2, the Company said that volume growth had picked up every month in Q3. It raised the full-year revenue organic growth rate to 8-9% from the previously guided 7-8%. For Q2, Adjusted EPS grew nearly 11% Y/Y, beating the consensus estimate by 8.5%. The management lifted the full-year EPS growth guidance to 9-11% from the prior 7-8%.
What are we watching next?
ECB meeting: Less hawkishness than previously.
The European Central Bank is widely expected to deliver another 25bps rate hike at its upcoming meeting on Thursday and that would take the deposit rate to 3.75%. However, ECB members have started to turn somewhat cautious in their outlook beyond the July rate hike. Economic data out this week, particularly from Germany has also signalled caution. But the market has been pricing in another rate hike beyond July with 50% odds. The June meeting encompassed comments like there was still “more ground to cover” and the ECB is “not done” on rate hikes from President Lagarde. Absence of such statements may mean a clear dovish shift and lead to the market repricing the ECB path lower. Since the prior meeting, headline inflation has cooled to 5.5% from 6.1%, however, the super-core metric ticked higher to 5.5% from 5.3%. Two more inflation readings for July and August will be out before the September meeting so a data-dependent approach may be highlighted, which will trigger the market to expect that we are nearing the end of the ECB tightening cycle. A close below 1.10 in EURUSD could mean a stronger EUR reversal may be in the cards.
- S&P 500. New high but not higher close. Top & reversal pattern still intact. If closing above 4,579 it will be cancelled. Could happen today Thursday driven by Meta
- Nasdaq 100. Correction down to 15K-14,687 likely
- DAX closed above 16,210 i.e., uptrend but not confirmed by indicators
- AEX25 Range bound between 781 and 748
- CAC40 Back below 7,403 i.e., in range bound area
- EURUSD Correction likely over. Uptrend resuming
- GBPUSD correction over at 1.28 support and uptrend resuming
- USDJPY Rejected at facing resistance at 142. Likely range bound next few days
- EURJPY rejected at key resist at 158. Testing rising trendline
- EURGBP Double bottom pattern cancelled. Downtrend resumed. Could test 0.85
- Gold uptrend but short-term correction to 1,940-1,930 could occur
- Copper could be building uptrend. Minor resistance at around 395
- Brent above resistance at 83. Next resistance at 87.25
- WTI above resistance at 79.20. Next resistance at 83.35
- Wheat testing June peak at 784. Likely higher prices next few weeks after set back
- US 10-year Treasury yield resuming uptrend. Likely to get back to 4%
Earnings to watch – heavy day of earnings ahead
Earnings season rumbles on today, with high profile names including Mastercard after rival Visa reported strong earnings, but a volatile market reaction (shares closed less than a percent lower but after odd intraday volatility and a downside gap at the opening). Other key names reporting today include McDonalds and Mondelez on the consumer side, automaker Ford, and Intel also reports after the close, with interest in whether the post-pandemic slump in PC demand is nearing its end.
Earnings this week:
- Thursday: Samsung (reported overnight), Nestle (reported this morning), Roche (reported this morning), Kering (after European close), L’Oreal (after European close), AbbVie (Before market open), MasterCard (Before market open), McDonalds (Before market open), Ford (2005 GMT), Mondelez (2005 GMT), Intel (after close)
- Friday: ExxonMobil, Procter & Gamble, Chevron, Hermes, AstraZeneca, Sanofi, Keyence, ITC
Economic calendar highlights for today (times GMT)
- 1215 – ECB Rate Announcement
- 1230 – US Q2 GDP Estimate
- 1230 – US Jun. Durable Goods Orders
- 1230 – US Weekly Initial Jobless Claims
- 1245 – ECB President Lagarde Press Conference
- 1430 – US Weekly Natural Gas Storage Change
- 1700 – US Treasury auctions 7-year notes
- 2330 – Japan Jul. Tokyo CPI
- 0130 – Australia Jun. Retail Sales