Morning Brew July 7 2023

Good Morning,

Much better than expected ADP Employment and PMI Numbers out of the US caused rates to jump and the key 2 and 10 year rates to breach the 5% and 4% respectively. This caused equities to fall and puts todays labor market data into the spotlight. If we see better than expected data and hawkish sentiment gets even stronger, we are looking at a paradigm shift. Peter describes in his note

Key points

• Long-term bond yields are breaking higher with the US 10-year yield pushing above 4% introducing a new dynamic in the US equity market that most had been downplaying for months during the AI rally.
  
  
• The VIX Index has jumped significantly today coming out of its hibernation and the VIX futures forward curve is getting closer to inversion signaling nervousness.
  
  
• With the cost of capital on the rise the stakes have been raised going into the Q2 earnings season. Higher discount rate on cash flows can only be offset by higher growth outlook so the Q2 earnings season is now paramount maintaining the strong equity sentiment this year.

The Dow fell by 1% yesterday, the S&P and the Nasdaq 0.8% and the Dax lost 2.6% in the official close. At the moment we are trading at 15560 in GER40, the US 500 4408 and the USTECH 100 15084. The Vix gave a sign of life again at 15.6

The USD Index gained less than maybe expected, 103.03 EURUSD is at 1.0891, GBPUSD 1.2741 and USDJPY 143.70. Gold and Silver fell to 1913 and 22.70 in a volatile session.

10 year yields are at their highest in the EU, the UK and the US and the weekly closes will be closely watched – likely driven by the US Data at 14:30

• Non-Farm Payroll expected at 225k
• Average Earnings expected at 0.3%
• Unemployment Rate expected at 3.6%

At 8:00  we expect the German Industrial output, the UK Houseprice Index and Swedish GDP, at 14:30 also Canadian labor market data. 

The rate path of the Fed now prices in more than one hike, the peak is seen at 5.44 in November, 36 basis points above current level, the ECO peak is traded for January, two and a half hikes away, the Bank England is expected to hike a whopping 6 times until May 2024.

In other news:

• China is banning imports of foods from 10 Japanese prefectures officially due to fear of radioactivity
• Janet Yellen is in China and meeting with officials today.
• Meta`s Threads attracted 30 mio users on its first day
• Samsung reports a fall in profits by more than 90% on weak chip sales – it expects pickup again in Q3 but the quarterly profit was the lowest since 2009.

Expect a volatile day that could see significant moves any way depending on the data.

Trade Safely.