Summary: Market sentiment weakened again yesterday, with the US Nasdaq 100 index interacting with the pivotal 13,000 area that was so pivotal on the way up ahead of today’s US July CPI release, which could prove important in either confirming or rejecting the complacent market’s expectations that a slowing economy and peaking inflation will allow the Fed to moderate its rate hike path after the September meeting. A surprisingly strong core CPI reading would likely unsettle the market today.
US interest rates are moving higher again and US equities lower with the S&P 500 at 4,124 yesterday with today’s price action testing the 100-day moving average around the 4,110 level. The past week has delivered more negative earnings surprises and weak outlooks impacting sentiment and the geopolitical risk picture is not helping either. In the event of a worse than expected US CPI release today we could take out the recent trading range in S&P 500 futures to the downside and begin the journey back to 4,000.
Hang Seng Tech Index (HSTECH.I) fell 3%. China internet stocks declined across the aboard, losing 2-4%. Shares of EV manufacturers plunged 4-8% despite the China Passenger Car Association raised its 2022 EV sales estimate yesterday to 6mn, 9% higher from its previous estimate. Hang Seng Index plunged 2.4% and CSI300 fell 1.1%.
The USD remains largely stuck in neutral and may remain so unless or until some incoming input jolts the US treasury market and the complacent view that the US is set to peak its policy rate in December, with the potential to ease by perhaps mid-next year. Technical signs of a broad USD recovery, whether on yields pulling higher or due to a sudden cratering in market sentiment on concerns for the economic outlook or worsening liquidity as the Fed QT schedule is set to continue for now regardless of incoming data, would include USDJPY pulling above 136.00, EURUSD dropping down through 1.0100 and AUDUSD back down below 0.6900. Today’s July US CPI could prove a catalyst for a directional move in the greenback in either direction.
... before retracing lower as the recent support from rising silver and copper prices faded. With the dollar and yields seeing small gains ahead of today’s US CPI print, and with key resistance levels in all three metals looming, traders decided to book some profit. The market is looking for US inflation to ease from 9.1% to 8.8% and the outcome will have an impact on rate hike expectations from the Fed with a a higher-than-expected number potentially adding some downward pressure on metal prices. Silver (XAGUSD), as highlighted in recent updates, has been outshining Gold and in the process managing to mount a challenge above its 50-day moving average, now support at $20.33 with focus on resistance at $20.85.
US grain futures led by soybeans and corn trade higher on the week in response to worsening crop conditions. Just like central Europe, soaring heat and drought have raised concerns about lower production and yields. USDA will publish its monthly supply and demand estimates on Friday and given the current conditions a smaller yield could tighten the ending stock situation. The crop condition report, published every Monday by the USDA throughout the growing season, shows the proportion of the US crop being rated in a good to excellent condition. Last week the rating for corn dropped by 3% to 58% versus 64% a year ago.
US 10-year yields are poised in an important area ahead of the pivotal 3.00% level that would suggest a more determined attempt for yields to try toward the cycle top at 3.50%. Of late, the yield curve inversion has been the primary focus as long yields remain subdued relative to the front end of the curve, a development that could deepen if inflation remains higher than expected while economic activity slows. The three-year T-note auction yesterday saw solid demand, while today sees an auction of 10-year Treasuries.
Foxconn announced a $800 million investment in mainland China’s Tsinghua Unigroup last month, but national security officials want the company to drop the investment, likely in connection with recent US-China confrontation in the wake of the visit to Taiwan from US House Speaker Pelosi and the ensuing Chinese military exercises around Taiwan.
These number suggest a very tight labor market as companies are beset with rising costs for work and less output per unit of worker effort. This number was down from the Q1 levels, but in many past cycles, rising labor costs and falling productivity often precede a powerful deceleration in the labor market as companies slow hiring (and once the recession hits begin firing employees which registers as lower unit costs and rising productivity).
Japan’s July producer prices came in slightly above expectations at 8.6% y/y (vs. estimates of 8.4% y/y) while the m/m figure was as expected at 0.4%. The continued surge reflects that Japanese businesses are waddling high input price pressures, and these are likely to get passed on to the consumers, suggesting further increases in CPI remain likely. The government is also set to announce a cabinet reshuffle today, and households may see increased measures to help relieve the price pressures. That will continue to ease the pressure on the Bank of Japan to tighten policy.
After Nvidia, now Micron has issued warning of a possible revenue miss in the current quarter and ‘challenging’ memory conditions. The company officials said that they expect the revenue for the fiscal fourth quarter, which ends in August, “may come in at or below the low end of the revenue guidance range provided in our June 30 earnings call.” The company had called for $6.8-7.6bn in revenue in its June earnings report. Moreover, they also guided for a tough next quarter as well as shipments could fall on a sequential basis, given the inventory build-up with their customers.
The world’s largest wind turbine maker has posted Q2 revenue of €3.3bn vs est. €3.5bn and EBIT of €-182mn vs est. €-119mn. The company is issuing a fiscal year revenue outlook of €14.5-16bn vs est. €15.2bn.
Q2 revenue missed by 5% against estimates and the user metric MTU was lowered to 7-9mn from previously 5-15mn against estimates of 8.7mn. The crypto exchange is saying that retail investors are getting more inactive on cryptocurrencies due to the recent violent selloff.
China’s PPI came in at 4.2% y/y in July, notably lower from June’s 6.1%). The decline was mainly a result of lower energy and material prices. The declines of PPI in the mining and processing sectors were most drastic and those in downstream industries were more moderate. CPI rose to 2.7% y/y in July from 2.5% in June, less than what the consensus predicted. Food inflation jumped to 6.3% y/y while the rise in prices of non-food items moderated to 1.9%, core CPI, which excludes food and energy, rose 0.8% y/y in July, down from June’s 1.0%.
Despite extending the military drills near Taiwan beyond the originally schedule, in a less confrontational white paper released today, the Taiwan Affairs office and the Information Office of China’s State Council reiterated China’s commitment to “work with the greatest sincerity” and exert “utmost efforts to achieve peaceful reunification”. The paper further says that China “will only be forced to take drastic measures” if “separatist elements or external forces” ever cross China’s red lines.
The highly watched US inflation data is due to be released today, and the debate on inflation peaking vs. higher-for-longer will be revived. Meanwhile, the Fed has recently stayed away from providing forward guidance, which has now made all the data points ahead of the September 21 FOMC meeting a lot more important to predict the path of Fed rates from here. Bloomberg consensus expects inflation to slow down from 9.1% YoY in June to 8.8% YoY last month. The core print will gather greater attention to assess stickiness and breadth of price pressures. Will any surprise just be noise given that we have another print for August due ahead of the next FOMC meeting, os is this market looking for an excuse to be surprised as it has maintained a rather persistent view that US inflation data will soon roll over and see a Fed set to stop tightening after the December FOMC meeting?
Chicago President Charles Evans discusses the economy and monetary policy today. Evans is not a voter this year, but he votes in 2023. He said last week a 50bps rate hike is a reasonable assessment for the September meeting, but 75bps is a possibility too if inflation does not improve. He expects 25bps from there on until Q2 2023 and sees a policy rate between 3.75-4% in 2023, which is in line with Fed’s median view of 3.8% for 2023, but above the 3.1% that the market is currently pricing in.
Today’s US earnings in focus are marked in bold with the most important earnings release being Walt Disney and Coupang. Disney is expected to deliver revenue growth of 23% y/y with operating margins lower q/q as the company is still facing input cost headwinds. Coupang, which is the largest e-commerce platform in South Korea, is expected to deliver revenue growth of 13% y/y and another operating loss as e-commerce platforms are facing slowing demand and still significant input cost pressures.
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