Summary: US equities rocketed higher still yesterday, encouraged by a further drop of the entire US yield curve and after more soft inflation data on yesterday’s June PPI release. Earnings season kicks off in earnest today with the first of the large US banks reporting and gets into full swing over the next couple of weeks, with the bar now reset much higher for upside surprises after the recent steep rally.
The US June inflation report was a gift that continued to give for equities, with the major US indices rocketing higher still as US treasury yields continued to drop. PepsiCo’s earnings report after hours suggests the US consumer remains resilient, but the heart of earnings season lies ahead, with the big banks beginning to report today and a rather high bar of expectations set for this quarter’s earnings, given the multiple expansions this rally has driven.
European equities rallied to the top of the range in many indices, including the Stoxx 50, on contagion from the strong risk sentiment in US equities. One note of caution: the very strong euro will weigh on exporter profits as the euro trades at its highest trade-weighted level ever.
A solid US weekly jobless claims number could do nothing to brake the greenback’s slide, as the prior day’s soft CPI print continued to weigh, together with lower US treasury yields and firmer pricing of Fed rate cuts next year. EURUSD nearly reached 1.1250, with a major Fibo of the entire sell-off wave from the pandemic highs to last fall’s lows coming in at 1.1275. USDJPY probed lower still and came within 20 pips of its 200-day moving average just above 137.00. AUDUSD traded within a few pips of its range top since February near 0.6900.
Crude oil prices are heading for a third weekly gain with unplanned disruptions in Libya and Nigeria, and together with Saudi and Russian production cuts these developments have helped shift the market attention from demand concerns – which remains robust according to the latest Oil Market Reports from OPEC and the IEA, to supply concerns. Brent extended its gains above resistance-turned-support at $78.50, and further gains will bring resistance at the 200-day moving into focus, in Brent at $82.55, and WTI at $77.60.
Precious metals continued higher on Thursday after the weaker than expected June inflation report was followed by an equally weak PPI report. Gold is heading for its best week since April, up 1.8% on week, but while it has yet to challenge key resistance in the $1980 area where several recent lows and highs can be found, silver has sliced through several resistance levels to gain 7.5% on the week. A continuation above $25.25 could see it challenge the downtrend from the 2011 high just below $50. It is worth noting that gold’s 1.8% advance is less than the 2.2% broad dollar decline this week, highlighting the risk of a pullback should short covering lift the greenback.
US treasury yields fell lower still yesterday, with both 2-year and 10-year yields pushing 10 basis points lower and the 10-year benchmark importantly pushing back down into the range below 3.85% that was a resistance area (the range highs for late May-late June) on the way up.
The US PPI increased by 0.1% M/M in June, below the median forecast of 0.2%. For May, the PPI was revised downward from -0.3% to -0.4%. On a year-on-year basis, the PPI rose by 0.1% compared to the median forecast of 0.4%. May's figure was also revised downward from 1.1% to 0.9%. Excluding food and energy, the PPI increased by 0.1% M/M in June and 2.4% Y/Y. The median forecast for June was 0.2% M/M and 2.6% Y/Y. Both May's figures were revised downward to 0.1% (from 0.2%) and 2.6% (from 2.8%), respectively. Overall, the report indicates a soft trend and potentially reinforces a disinflationary outlook.
In contrast, initial jobless claims for the week ending July 8 came in at 237,000, which was lower than the median forecast of 250,000. The previous week's reading was revised to 249,000.
The Australian government appointed current RBA deputy governor Michelle Bullock to replace Philip Lowe as RBA governor in September for a 7-year term. AUD saw little reaction as she is viewed as providing continuity of RBA policy. She will be responsible for a significant overhaul of the RBA structure, which will now have a policy committee, fewer rate meetings in line with global peers, and a press conference after every meeting.
The Fed’s Christopher Waller, the hawkish Fed Board of Governors member, said yesterday that he expects the Fed will need to raise rates at least twice more this year, although a further softening of inflation could leave a second hike unnecessary.
The Q2 earnings season starts this week with our key focus on US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season today. Read our earnings preview here.
Earnings next week:
1230 – Canada May Manufacturing Sales
1310 – US Fed’s Goolsbee (Voter 2023) to speak
1400 – US Jul. Preliminary University of Michigan Sentiment
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