Summary: The market sell-off intensified on Friday after the release of the May US CPI data, which pointed to stickier and higher inflation than hoped and sent US treasury yields rising sharply all along the yield curve, crushing risk sentiment via the higher yields and an accompanying new aggravated rally in the US dollar. Elsewhere crypto assets capitulated through major support. This week’s focus is firmly on the Wednesday FOMC meeting and whether the Fed is set guide for an even steeper rate tightening path.
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures are extending the ugly sessions last Thursday and Friday down 2.4% this morning trading around the 11,585 level. Nasdaq 100 futures will most likely go down and test the lows from the cycle at 11,491 and then the market will reveal the strength of bidders around these levels. Sentiment has changed dramatically as market participants have realised that we have a galloping food crisis due to Russia’s tactics in Ukraine, China could very well move in and out of lockdowns for months causing global supply shocks, and a recession is now very likely as the only option to kill demand and inflation. We remain negative and cautious on the US equity market and reiterating that commodities, logistics, cyber security, defence, and semiconductors are the best themes to be exposed to in 2022.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - gave back most of last week’s gains on fear of re-tightening of lockdown in China and the expectation of a more hawkish Fed after the US CPI figures. Investors are becoming concerned again about the likelihood of reintroduction of lockdown to more cities anytime. Shanghai reported 37 new local Covid-19 cases and 5 of them were outside quarantine on Sunday. Beijing reported 51 new local cases and said that it was hard to control the spread of a recent bar cluster, from which there had already been 166 cases found. Last week, President Xi, during a trip to Sichuan, remarked that China adheres unwaveringly to the Zero COVID policy. As of writing, Hang Seng Index and Hang Seng TECH Index were down around 3% and 4% respectively. CSI300 was 1.3% lower.
USDJPY nears 24-year highs - USDJPY hit the key 135 level in the Asian morning session, near the 24-year high of 135.15. With Fed tightening expectations picking up further after the US CPI overshoot on Friday, there is little reason to believe that the trend will reverse. The verbal and written warnings from Japanese authorities on the decline in the yen will possibly be futile, and the widening yield differential with the US means more pressure on the yen is still in the cards unless the Bank of Japan considers real policy action.
EURUSD and USD pairs – the US CPI data on Friday spooked the market as the Fed is seen as needing to re-up its hawkish stance at this week’s FOMC meeting. And the aggravated USD strength faces an important test as longer US treasury yields are poised just below the highs for the cycle, while the shorter end of the US treasury yield curve has ripped to dramatic new highs above 3.00% not seen since 2008 (more below on US Treasuries). EURUSD has dropped back to below 1.0500 this morning and could test the 1.0350 lows on a solid push higher in longer US treasury yields, while the 0.7000 area in AUDUSD is in focus after the prior probe below that level in May seemed to be rejected, although the 200-day moving average at 0.7250 has so far held as resistance.
Crude oil (OILUKAUG22 & OILUSJUL22) trade lower on growth concerns following Friday’s US inflation and consumer sentiment print (see below). Data which highlights the risk that aggressive US rate hikes may tip the US economy into a recession. In addition, China is starting to re-impose virus curbs as cases rise, just days after sentiment was lifted after measures were eased in key cities. Monthly oil market reports from OPEC on Tuesday and IEA on Wednesday will be watched closely for their updated views on supply and demand. For now, the tightness seen through elevated fuel prices is clear for everyone to see, and only a deteriorating demand outlook may bring some balance to the market, and with that, the risk of a deeper correction. In other words, data related to growth and activity will be key to watch in the days and weeks ahead.
Gold (XAUUSD) initially touched a three-week low on Friday after the stronger than expected inflation print lifted treasury yields and the dollar. However, the risk of breaking the economy by rapid rate hikes, now projected to reach 3% by year end from the current 1%, and steep losses across stocks and cryptos helped attract buyers, not least after US consumer confidence hit a historic low, supporting the risk of a sharp slowdown in US economic growth. Today we have opened softer in response to continued selling of bonds and dollar buying. We maintain our long-held bullish view based on the increasingly limited investments, apart from tangible assets, such as gold, where investors can seek shelter from the current storm.
US Treasuries (TLT, IEF) US treasury yields jumped aggressively all along the yield curve on Friday, but especially at the short-end in the wake of the hot US May CPI data as the market raised the odds of a super-sized Fed rate hike of greater than 50 basis points this week and/or at the July FOMC meeting. The 2-10 yield curve was crushed flat and is back at a mere +2 basis points this morning. At the longer end of the curve, the 10-year Treasury benchmark is poking at the highs for the cycle near 3.20% and not far above that level lies the 3.26% high of late 2018, which represents an 11-year high.
US May inflation overshot spurring more Fed tightening calls - US May inflation print of 8.6% y/y came in above expectations and at a fresh 40-year high, crushing the peak inflation rhetoric in favor of our view of higher-for-longer inflation. Besides the usual food and energy, core CPI at 6% y/y saw largest contributions from shelter, airline fares, used cars and new vehicles. Services inflation was also at its highest since 1991. Rate-hike expectations are soaring to their highest during this cycle with the market expecting Fed rates at 3.00% by year-end. The odds of a third 50bps rate hike at the September meeting are now 100% but more importantly, we are starting to see calls for a 75bps rate hike this week.
US June preliminary University Michigan Sentiment survey sees record low, Long Term inflation expectations break higher - the measure of consumer sentiment reminds the market of the extreme difficulty for the Fed as they attempt to squash inflation without hammering growth. The index plunged to 50.2 in June from 58.4 in the previous month, printing a record low. Importantly, the longer term 5-10 year inflation expectations portion of the survey rose to 3.3%, jumping above 3.0% for the first time since 2011.
Industrial metals trade lower due to the risk of lower global growth and not least renewed restrictions on movement in China following new outbreaks of Covid-19. The BCOM Industrial metal index, which slumped 25% between March and April, gave up three weeks of gains in just two days last week. Aluminum dropped to a six-month low with zinc and copper also falling. Speculators in copper futures (HGN2 & COPPERUSJUL22) are constantly forced to adjust positions, and towards the end of last week they bailed on recently established longs following the failed break above $4.35.
FOMC Meeting this week. On Wednesday, the market expects the FOMC to hike the policy rate by 50 basis points and signal another hike of the same size in July, although despite Fed Chair Powell pushing back against hikes of greater than 50 basis points, the market has priced 118 bps of tightening over the next two meetings. It will depend on the trajectory of inflation in coming months. This is still very uncertain since inflation is very sticky and there are growing questions on the evolution of energy prices. The new macroeconomic and Fed policy projections will be released as well. They should confirm that the labor market is too tight, thus aggravating the risk of inflationary pressures in the economy, noticeably in the services sector.
BoE and SNB on tap on Thursday. The market is split on whether the BoE is set to hike interest rates by 25- or 50 basis points from the current 1.00% level. The consensus forecasts that the 2022 terminal rate will be close to 2.7%. Despite UK policymakers being equally concerned with downside risks to growth as they are with upside risks to inflation (see the May rate decision), we believe that this is too early in the tightening cycle to pause. As for the Swiss National Bank (SNB) decision on Thursday, expect higher volatility on the CHF as the SNB will announce its monetary policy decision. This is usually a non-event. This might be the most interesting central bank meeting of the week, for once. There are growing concerns in Switzerland about the pace of inflation (May CPI was out at 2.9 % year-over-year – the highest level since 2008). Several analysts think the SNB could pull the trigger and decide to hike its policy rate by 25 basis points to minus 0.5 % this week. The last time the SNB hiked interest rates was 177 months ago! And the SNB would be beating the ECB to the punch in actually tightening its policy rate first.
Australia this week: Business and consumer confidence levels on watch Tuesday and Wednesday; are both to show further signs sentiment is falling and cost pressures are rising. Then on Thursday June 16; the all-important Australian employment data will be watched like a hawk with monthly unemployment for May tipped to fall to yet another historical low (3.8% consensus expectation, with 25k jobs expected to be added). The RBA sees unemployment falling to 3.5% by 2023. If the numbers are better than expected, expect the AUD to be bid up and for Aussie bond yields to rise; as stronger employment gives the RBA ammunition to hike rates more aggressively.
Oracle’s cloud earnings to ripen, Adobe revenue to sour? Both tech giants earnings and guidance levels will be on watch, which will give an overall indication as to how much rising costs and a rising US dollar will slowdown earnings following Microsoft’s (MSFT) downgrade to earnings. Oracle (ORCL) is set to release fourth quarter results Monday June 13 after market close. At a business level, we also know Oracle is vying for cloud market share, up against Microsoft (MSFT) and Alphabet’s (GOOGL) Google. But can Oracle’s March cloud revenue continue to rise, along with Microsoft? Oracle’s cloud revenue rose 24% to $2.8 billion in the prior quarter. Overall, consensus expects $1.37 a share profit on sales of $11.62 billion. Later in the week, maker of Photoshop and other creative software Adobe (ADBE) will release quarterly earnings Thursday June 16 after market. The businesses forecasts are not expected to delight as non-discretionary and business marketing spending usually falls as rates rise; especially as Adobe has been suffering increased competition. Consensus expects $3.31 a share profit on sales of $4.35 billion.
Earnings Watch. The list highlights this week’s thin earnings calendar. The two most important earnings releases to watch are Oracle today and Adobe on Thursday; read our earnings preview above.
Economic calendar highlights for today (times GMT)
0800 – ECB's Holzmann to speak
1100 – ECB's Guindos to speak
1800 – US Fed’s Brainard to speak
0130 – Australia May NAB Business Survey2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
