Summary: The official US June jobs data on Friday failed to confirm the wild ADP payrolls numbers from the prior day and the US dollar lost considerable altitude, particularly versus the Japanese yen, even as longer US yields held up, well above 4.00% in the case of the 10-year treasury benchmark. Risk sentiment remained on the defensive, as the main US indices surrendered all of their gains from earlier in the session into the weekly close. Key focus this week ahead of US earnings season is Wednesday’s US June CPI number.
S&P 500 futures have continued their slide lower in today’s session down 0.4% trading around the 4,413 level in early trading hours following weak trading session in Japan. This week’s key event is the US June inflation report on Wednesday which is going to be important for the direction in the US 10-year yield this week. On Thursday, the Q2 earnings season starts with key earnings reports from Delta Air Lines and PepsiCo followed up by Wells Fargo, Citigroup, and JPMorgan Chase on Friday.
The Hang Seng Index rallied 0.6%, snapping a three-day consecutive loss as investors welcomed the People’s Bank of China’s (PBOC) statement last Friday evening that indicated the end of the scrutiny of financial services businesses of China’s internet giants after it imposed fines on Alibaba’s Ant Group and Tencent’s Tenpay. Alibaba (09988:xhkg) gained 2.8% and Tencent (00700:xhkg) added 1.2%. The Hong Kong Monetary Authority relaxed mortgage financing ratios last Friday but Hong Kong developers pared all the early gains and turned into losses on today’s trading. China’s June CPI inflation decelerated to unchanged while PPI fell 5.4% from a year ago, diving deeper into deflation.
The US June jobs report (more below) failed to confirm the wild surge in payrolls registered by the ADP payrolls data the prior day. This triggered a steep slide in the US dollar even as risk sentiment remained on the defensive. USDJPY was the biggest mover Friday, trading nearly to 142.00 before finding support. Elsewhere, GBPUSD rose close to cycle highs well above 1.2800 and EURUSD traded to 1.0973 before the USD consolidated its losses in Monday’s Asiasn session. Focus this week for USD traders is on Wednesday’s US June CPI release (more below).
Crude oil prices rose by more than 4% last week in response to tightening market conditions supported by the Saudi production cut and a general improved risk sentiment. Brent crude, stuck in a six-dollar range since May, is currently challenging resistance in the $78.50-75 area and despite continued macroeconomic headwinds, a break may attract additional short-covering and fresh momentum buying from funds. OPEC and the IEA will issue their monthly oil market reports Thursday while the EIA will release its Short-term Energy Outlook on Tuesday.
Gold remains stuck in a downtrend with support at $1900 and resistance at the 21-day moving average currently at $1928 ahead of $1935, last week’s post-FOMC peak. Having shown resilience amid rapidly rising US real yields, the market is looking to Wednesday’s US CPI print for further guidance. Until then and after, yield and dollar movements remain the key source of inspiration for traders.
Last week, amid solid labor numbers, two-year yields hit 5.10% for the first time since 2007, and 10-year real yields rose to 1.8% for the first time since 2009. This week, investors’ attention turns to the core CPI numbers on Wednesday and PPI data on Thursday, even if they might not steer away the Federal Reserve from hiking this month. Indeed, with the unemployment rate stable and inflation elevated, more tightening might be suitable in the eyes of the central bank. That means that front-term yields will continue to soar till the FOMC meeting. Long-term yields are also poised to rise, however recession fears coming from Yellen’s recent comments might weigh on them.
This week’s labour data are expected to see the unemployment rate unchanged and wage data remaining stable at 7.2%. That could be enough to see yields resume their rise ahead of the BOE August’s meeting, where the central bank is expected to hike by 25bps. The 2-year UK swap spread remains elevated indicating that there might be more room for 2-year gilts to rise to 5.50%. The real BOE base rates remains at -200bps, and the central bank needs to hike the benchmark rate at least by 100-150bps overall, assuming that inflation will decline in the meanwhile. Only when the real BOE base rate will be in positive territory the central bank will have achieved a restrictive posture. However, we are uncertain whether the BOE will be able to hike that much due to financial instability. Gilts are the backbone of the UK financial system. As their value decreases, margins calls will increase. Therefore, we are likely to go towards another mini-budget crisis. Yet, this time around the BOE might not be able to pivot to support market stability.
The headline non-farm payrolls came in below expectations, falling to 209k in June from 306k (revised down from 339k) in May, versus the median forecast of a June reading of 230k. Private payrolls rose only 149k versus 200k consensus expected in June and versus 259k in May (revised down from 283k). However, the growth in average hourly earnings surprised on the upside with a gain of 0.4% (0.356% unrounded) M/M and 4.4% Y/Y, higher than the median forecast of 0.3% and 4.2%, and this despite a +0.1 uptick in Average Weekly Hours. The number in May was also revised upward to 0.4% M/M (0.36% unrounded) and 4.4% Y/Y from the previously reported 0.3% and 4.3%. The unemployment rate fell to 3.6% in June, in line with expectations, from 3.7% in May.
The Danish infrastructure investment firm CIP raising €12bn for a renewable energy fund which will become the biggest in the world. The announcement could lift green transformation stocks in the European session.
China’s inflation data continues disinflationary trend. The June CPI number came in a 0.0% YoY v. +0.2% expected and 0.2% in May, the lowest level since the pandemic. Similarly, the June PPI was out overnight at –5.4% YoY vs. -5.0% expected and –4.6% in May.
At the weekend, the often-dovish ECB Governing Council member Mario Centeno said he is confident that inflation has peaked and is now falling quickly. “Core inflation stands out as a very important indicator...It’s not coming down as fast as headline inflation, but we also need to remember that in the way up it played exactly the same trajectory. So we need to remain confident too in the way we are fighting inflation” The Eurozone headline inflation rate peaked at 10.7% YoY in October before falling to 5.5% in June, while core inflation peaked at 5.7% in March and came in at 5.4% in June. ECB Governing Council member Villeroy said this weekend that ECB will soon be done hiking rates but will keep them at a “high plateau” to ensure they are achieving full effect.
Norway Jun. CPI out this morning at +0.6% MoM and 6.4% YoY (vs. 6.3% expected), but the core inflation rose once again to a new cycle high of 7.0% YoY vs. 6.6% expected and 6.7% in May, posting a MoM rise of +0.9%.
The US is set to report June CPI on Wednesday this week, with the headline number expected to drop all the way to 3.1% YoY from 4.0% in May due to basing effects, as the worst of the spike in gasoline prices hit in June of last year. The core inflation is expected at +0.3% MoM and +5.0% YoY vs. 5.3% YoY in May and a peak rate last September of 6.6%. The PCE data series has shown somewhat stickier core inflation than this BLS’ CPI data series.
The Q2 earnings season starts this week with US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season on Friday. Read our earnings preview here.
This week’s earnings releases:
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
