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US equities (US500.I and USNAS100.I): Strong momentum pushes equities new highs
S&P 500 futures rallied a whopping 1.2% on Friday taking the index futures to their highest level since April 2022 extending animal spirits and expectations ahead of the upcoming Q2 earnings season. Nasdaq 100 gained 38% in the first half of the year which is a new record for the US technology index. The VIX Index remains subdued below 14 and the US 10-year yield failed to extend its rally on Friday. Single stock news that can impact the US equity indices today are the record quarterly deliveries announced by Tesla and production cuts by Apple on its Vision Pro AR/VR headset.
FX: Dollar plunges on US core PCE drop, ISM manufacturing up next
The dollar was sharply lower on Friday as core PCE came in a tad below expectations on a y/y basis, even as market pricing for the Fed was little changed. End-of-month/quarter flows may also have been in play. A holiday-shortened week in the US (tomorrow a market holiday) may now mean lower liquidity, and the US June ISM manufacturing print will also be eyed today, especially the inflation metrics. NZD and AUD were the outperformers on Friday, with AUDUSD touching highs of 0.6672 as RBA rate hike bets for tomorrow are also picking up. GBPUSD rose above 1.27 despite dovish speeches from BOE members Dhingra and Tenreyro. USDJPY still trades above 144 with intervention risks still not completely out of the way.
Crude oil: back to square one
Oil rallied on Friday as easing inflation pressures supported a risk-on tone across markets and led to a decline in USD. WTI trades back above $70 while Brent has returned to $75, close to the average price seen these past two months, highlighting continued confusion about the short-term direction amid conflicting news. Going into Q3, oil prices will continue to focus on demand concerns, but OPEC’s supply cut will start to underpin and may be extended to August. The US CPR refilling is also likely to pick up traction, and keep demand outlook supported, especially if the US recession continues to be fleeting. In addition, speculators have cut their length in WTI and Brent to near the March 2020 Covid panic low, and with nearly 2/3 of the recent selling being driven by fresh short selling, the risk of a short squeeze has grown, and with that in mind we focus on resistance at $75.65, the 50-DMA
Grains: soybean and corn diverge after massive acreage miss
The USDA on Friday delivered a planted acreage shock which saw corn (ZCZ3) plunge by 6.4% below $5/bu, the lowest December price since April 2021, while soybeans (ZSX3) jumped 6.1% to $13.43 before extending its gains today. Against analysts' expectations, the government raised its planted corn acreage by 2.22 million to 94.096 while soybean was cut by 4.18 million to 83.505. The historically large acreage miss saw the Soy/corn ratio spike the most in decades and it concluded a crazy rollercoaster month in the grain market which left soybeans and wheat up by 17.2% and 6.8% respectively, and corn down 5.2%. As highlighted in recent updates, wrong-footed funds also played a key role last month after drought worries forced a major position change from a net-short to a net long. That buying only concluded recently when the outlook for rains helped send corn and wheat prices tumbling. Focus turns to the weekly crop condition report and whether beneficial rains have improved the outlook
Gold: not out of the woods yet
Gold holds above $1900 after being supported by Friday’s softer PCE inflation, a weaker dollar, and a general improvement in risk appetite. Prior to that a bull versus bear battle around $1900 the previous day had left short sellers bruised by the failed attempt to trigger fresh downward momentum. The battle is far from won with concerns about rising rates not going away until weaker economic data or lower inflation changes the mindset within the FOMC. Today, the market will be watching manufacturing purchase managers’ indexes from several economies, including the USA. For now, gold remains stuck in a downtrend with a break above $1938, trendline and 21-day moving average, needed to change that.
FOMC minutes, JOLTS, and non-farm payrolls are likely to push the yield curve to further inversion (2YYN3, 10YN3, 30YN3)
Despite month-end buying, thirty-year yields rose ahead of the PCE data on Friday, showing that long-term US yields remain in an uptrend. In the weeks preceding the July Fed meeting, we anticipate a further flattening of the yield curve, which is likely to break below the March low of -108 basis points. Suppose inflation eases slowly and the economy remains resilient. In that case, long-term yields will continue to rise, with front-term yields soaring faster, contributing to a further inversion of the yield curve. However, weaker-than-expected data on growth might provoke yields to drop on the longer part of the yield curve, providing an even faster flattening. The focus for the bond market this week will be on Wednesday’s FOMC minutes, JOLTS on Thursday, and non-farm payrolls on Friday.
What is going on?
US PCE a touch below expectations
Friday’s US core PCE came in a touch beneath the expected at 4.6% YoY and cooling from last month’s 4.7% YoY. All other measurements revealed prints in-line with expectations with core up 0.3% MoM or headline up 3.8% YoY and 0.1% MoM. The report spurred relief that key inflation metrics continue to cool, although concerns around a tight labor market continue to underpin risks. The market continues to price in about 80% chance of a July Fed rate hike and a terminal rate at 5.4%, unchanged from the pre-PCE pricing.
Japan Tankan survey: improving sentiment across small and large manufacturers
Japan’s Tankan survey is a quarterly gauge to assess the confidence of manufacturers. In the large manufacturers, the index improved to 5 in Q2 from 1 in Q1 with their outlook also improving to 9 from 3 in the previous quarter. The small manufacturer index is also seen at -5 in Q2 from -6 previously with their outlook at -1 from -4 in Q1. This is a clear indication that supply chain pressures are easing and commodity prices are also far more manageable, which together with improving global demand is helping to underpin a recovery in confidence and could provide room to BOJ to tweak policy if inflation pressures accelerate.
Tesla Q2 deliveries beat estimates
Tesla posted its second-quarter vehicle production and delivery report for 2023 on Sunday. The company delivered 466,140 cars in the April to June quarter, up 10% from the preceding quarter to reach a record level, and 83% higher from a year earlier. The numbers beat analyst estimates (Bloomberg estimate 448,350), as Musk’s price cuts paid off to boost volumes and market share even as margins are declining. The company also managed to trim the gap between production and deliveries — a figure closely watched by analysts — to 13,560 units in the second quarter vs. 18,000 in Q1. Q2 earnings is scheduled for July 19.
What are we watching next?
Tesla delivers another record on deliveries
With a blistering growth rate of 84% y/y Tesla increased its quarterly deliveries to 466,000 which is a new record for the EV-maker. Most of the delivered models were Model 3 and the Model Y SUV which have lower margin so it will be interesting to see how Tesla’s Q2 results are impacted from this big shift in the selling mix.
Apple is cutting production target of its new Vision Pro AR/VR headset
The new Vision Pro has proved to be more complex to manufacture for its supplier Luxshare than initially thought forcing Apple to cut production target to just 400,000 units in 2024 down from expectations of 1mn units in the first 12 months.
China: New PBoC chief and rising intervention risks for yuan
Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC), has been appointed Communist Party chief of the central bank. The appointment is seen as a confirmation of policy continuity, with targeted easing measures and encouraging banks to lend more to targeted sectors. However, given the little significance of Pan in the central party committee, the decision is being seen as weakening the influence of the central bank in the overall economic decision making. Pan will also take up the role of PBOC governor. Meanwhile, speculation of a currency intervention has picked up as PBOC warned against big swings in the currency last week.
Australia RBA decision tomorrow
The Reserve Bank of Australia is set to make its rate announcement in Tuesday’s Asian session, with the market and observers divided on the prospects for another hike after two consecutive surprise hikes from Governor Lowe and company. The market is pricing relatively low odds for the RBA to hike tonight, pricing higher, 50/50 odds of a move at the August meeting, while analysts surveyed by Bloomberg were evenly divided on the prospects for a hike tonight. The minutes from the prior meeting were somewhat dovish relative to prior minutes and guidance in the statement will be as important as the decision on whether to hike. The next important Australian inflation report is the quarterly one for Q2 that will be released on July 26.
Important week ahead for US data
The first week of July brings the usual busy data calendar from the US, with the ISM Manufacturing survey for June up today and expected to show a marginal improvement after a subdued 46.9 reading in May. The preliminary June US S&P Global Manufacturing PMI just missed printing the worst level since the pandemic with an initial reading of 46.3. Later in the week, after a Tuesday US holiday, the US reports the June ISM Services survey on Thursday after May’s worst showed . The S&P Global Services PMI on the other hand registered its strongest reading in over a year in April at 55.0 and the initial June reading only dipped slightly to 54.1. Finally, Friday brings the June US labor market data, especially the Nonfarm Payrolls Change number after a strong surge in payrolls of +339k reported in May, while the Unemployment Rate is expected to dip back lower to 3.6% after an odd surge to 3.7% in May. Average Weekly Earnings/Hours are also in focus as these have both been on a declining trend since early 2022.
- S&P500. Likely to move higher to resistance at 4,546
- Nasdaq 100 Close to testing strong resistance at 15,265. Close above potential to 15,653-15,882
- DAX resuming uptrend. Likely to test all-time highs
- AEX25 likely to test key resistance at 777
- CAC40 testing key resistance at 7,403. Above likely move to all-time highs at 7,581
- EURUSD Range bound short-term between 1.08 and 1.10 but uptrend intact. Resistance at 1.11
- GBPUSD below support at 1.2667. Could correct to 0.618 at 1.2515. Uptrend intact
- USDJPY Uptrend to 146.60. Uptrend stretched short-term. Resistance at 145.30
- EURNOK testing rising trendline/Neckline in a possible Shoulder-Head-Shoulder reversal pattern
- Gold testing 1,900. Downtrend could lead to support at 1,870
- Copper bouncing from 0.618 retracement around 370
- Wheat Dec 2023. Seems to be bouncing just above 0.618 correction at 675
- Soybeans bouncing after 50% retracement to test key resistance at 1,378. Could move to 1,416
Earnings to watch
There are no important earnings releases this week. The Q2 earnings season starts in less than two weeks from now with US banks kicking off the earnings season.
Economic calendar highlights for today (times GMT)
- 1400 – US Jun. ISM Manufacturing
- 2000 – USDA's Weekly Crop Condition Report
- 0430 – Australia RBA Cash Target