Runaway inflation leaves central banks chasing from behind
APAC Strategy Team
Summary: US inflation clocked 9.1% YOY vs 8.8% expected, taking market expectations towards a full percentage point rate hike later this month when the FOMC meets. Bank of Canada shocked markets with exactly this magnitude of hike yesterday.
What’s happening in markets?
White-hot US inflation soared to the highest level seen since 1981, raising odds for a full percentage point hike on the July 27 FOMC
June U.S. headline CPI and Core-CPI (ex-food & energy) jumped to 9.1% YoY and 5.9% YoY respectively, much higher than the median forecast from economists. The notable strength in rent inflation, which tends to be sticky, will be a key concern for the Fed when they meet later this month. Short-term money market yields shot up and market expectations have shifted from a 75bp hike towards the now significant probably of a 100bp hike on the July 27 FOMC. None of the three Fed officials who spoke yesterday rule out the possibility of a full percentage rate hike. Atlanta Fed President Bostic said that “everything is in play”. Cleveland Fed President Mester suggested at least 75 basis points but declined to comment if she would favor going even bigger. What does this mean for shares? History tell us when CPI is hotter than expected, markets fall, pre-empting more aggressive rate hikes. And this is very real right now. Last month’s markets fell 8% to the day inflation came out to a new trough. So we see selling pressure ahead in stocks, meaning we could fall back to a new low.
US stocks fell after US inflation had surged to its hottest read since 1981
S&P 500 (US500.I) fell for the 4th day, slipping 0.5%, while the Nasdaq 100 (USNAS100.I) didn’t fall as much 0.2%, falling for the 3rd session. Equities plunged initially (S&P eMini futures and NASDAQ100 futures were once down as much as 1.9% and 2.5%) post the larger-than-expected CPI data but pared losses to end the day in New York only modestly losses. While the mood remains bearish with the Fed given ammunition to hike more aggressive, we saw a bit of technical short term trades overnight support some tech stocks/ facing heavy headwinds; move higher. Tesla (TSLA) shares rose 1.7%, moving its shares off its July low. Amazon (AMZN) rose 1% in anticipation of an announcement about Amazon Prime day 2022 sales. Chip makers like AMD (AMD) and Nvida (NVDA) were bid after Susquehanna affirmed both stocks with positive ratings for the year ahead, but downgraded their price targets to $220 and $120 respectively. Earlier this week, research firm IDC announced worldwide shipment for PCs fell 15% in the June quarter from the prior corresponding period, while warning a difficult macro environment, and supply chain challenges will continue. Mega caps, Apple (AAPL), Microsoft (MSFT), Tesla (TSLA) and Amazon (AMZN) all fell in afterhours trade, suggestion the bearish tone will return when trade results.
Bond markets flash more recessionary warnings
From early July the curve between the 2 year and 10-year treasury yield became inverted. It went further inverted from minus 8 bps a day ago to minus 24 bps after yesterday’s CPI data. In other words, at 3.19%, 2-year treasury notes are yielding 24 basis points more than 10-year notes which are at 2.95%. This is watched by the market as a recessionary indicator. The 3-month vs 10 year spread, as being perhaps a more reliable precursor to a recession according research from the Fed, has also sharply contracted to 53 basis points, trending toward zero. It last fell below zero back in March 2019 (11 months before the Feb-Apr 2020 recession) and July 2006 (17 months before the Dec 2007-Jun 2009 recession).
Bank of Canada raises the policy rate by an unprecedent full percentage point
Yesterday we first had the Bank of Korea raising policy 7-day repo rate by 50bps to 2.25% and the Reserve Bank of New Zealand lifting official cash rate by 50bps to 2.50%. The shock however came from the Bank of Canada with a unexpectedly large 100bp rate hike. The Canadian dollar strengthened moderately and more so versus most currency crosses and nearly 1% versus the Japanese yen.
Euro and the Japanese Yen made new lows
Overnight Euro briefly broke below parity to 0.9998 before reportedly trading accounting short-covering and buying from banks and corporate pushing the single-currency back to as high as 1.01 and then fell back again towards parity versus the dollar at 1.0030. USDJPY rose above 138 this morning in Asia and is not hovering just a touch above 138.
Singapore dollar strengthened and stocks fell after the Monetary Authority of Singapore tightened policies despite weaker than expected GDP data
Instead of targeting interest rates, Singapore’s monetary policy is being conducted through exchange rates. This morning, the Monetary Authority of Singapore announced to re-centre the midpoint of the Singapore dollar’s band versus other currencies. SGD strengthened 0.6% versus the dollar and 1.2$ versus the yen. The Strait Times Index declined 0.8%. Singapore released Q2 GDP coming at 4.8% YoY, weaker than expectations (Bloomberg consensus: 5.4%) but Q1 GDP was revised upward from to 4% from previously reported 3.7%.
Chinese and Hong Kong equities consolidated with modest gains
Opening with a weak tone, stocks in Hong Kong and mainland China bourses rallied modestly. Technology stocks led, with Hang Seng TECH Index (HSTECH.I) climbed 1.7%. %. Chinese healthcare service providers and autos did well. Hygeia Healthcare (06078:xhkg) and Aier Eye Hospital (300015) gained around 6%. A-share Electric equipment stocks had notable gains.
What to consider?
Food prices on watch; EU wheat exports to fall. But talks are underway to return Ukraine’s wheat supply to the market
Wheat prices have fallen about 36% from their May 2022 record, on recessionary concerns, but also as the EU began to rise wheat exports (up 27% this July). However now supply issues could be a focus. Record high temps in France, and extremely low rainfall (drought) are threatens to reduce supply again. The EU’s biggest exporter of wheat (France) faces wheat output falling 7% to 32.9 million tons this year, which is below the 5-year average (according to Agricultural ministry). France’s weather is the direst and warmest spring on record, which is why yields are likely to worsen amid its critical development period. That being said, US crop conditions are also worsening, would could add to supply pressure. However, there could be clarify soon with some of the world’s largest wheat supply coming back to the market. Talks between the UN, Ukraine , Russia and Turkey were held yesterday to unblock millions of tons of Ukraine’s grain exports. With the parties meeting again this week. If the outcome is positive, it means could return to being world’s biggest wheat, corn and vegetable oil supplier.
US earning season pulse check please?
Delta Airlines (DAL) reported results for the quarter. Falling short of expectations. The company guided for higher operating costs that will dampen profits until year-end, despite travel rebounding. The news sent other US airlines stocks lower, reversing gains from the day before. Tonight in the US, two of Americas largest banking groups JPMorgan and Morgan Stanley report results. The banking sector is down 24% this year as savings have fallen from their highs and lending is slowing. The market will pull apart their outlooks for clues. We expect some banks to announce bad debts will rise and disappointing guidance levels. This earnings season; so far 19 of the S&P500 companies reported earnings; average sales growth is up 13%, earnings growth is up 21%. With industrials (airlines) seeing the most growth.
Potential trading and investing ideas to consider?
Australian jobs soar and unemployment hits brand new historical record low; giving RBA reason to hike rates more than expected. But AUDUSD will remain bearish till China comes out of lockdown
Australia’s unemployment rate falls to 3.5% in June, a brand new historical record low monthly read. This also beat expectations that unemployment would fall to 3.8% expected. It comes as more jobs were added to the Aussie economy, with 88k jobs added in June (+30k expected.) the AUDUSD moves off its low, this give the RBA room to hike rates more than expected. But we caution that the AUDUSD is likely to resume its bearish tone with the Fed to hike rates more than the RBA can. This support the USD moving up, vs the AUD..
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