Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
In the news: US business activity inches up in June; price pressures abating (Reuters), France Keeps Markets on Edge With Le Pen Fighting Left for Power (Bloomberg), Yen Is Under Pressure Even as Japan Steps Up Its Verbal Warnings (Bloomberg), EU and China set for talks on planned electric vehicle tariffs (CNBC), Apple and Meta have discussed AI partnership, WSJ reports (Investing), Existing home sales decline in May as home prices reach record high (Yahoo), Apple, Competitors Face Tougher AI Regulation in EU, Driving Decisive Calls (Barron’s)
Equities: Mixed start to the new week in the Asia session with Japanese equities up 0.5% and Hong Kong equities down 0.7%. Futures are pointing to a slightly higher open in European and US equities. This week has some interesting earnings releases from FedEx (Tue), Micron Technology (Wed), and Nike (Thu). On macro, the key event today is the IFO survey for June which is survey across 9,000 companies on the outlook for the German and Eurozone economy. The VIX Index remains subdued trading at levels just above 13 making downside protection trades cheap relative to history for those investors that are worried about a setback.
Macro: Flash US PMIs for June were hot across the board, showing the US economy expanded at the fastest pace in more than two years. The manufacturing component rose to 51.7 (prev. 51.3, exp. 51.0), and services to 55.1 (prev. 54.8, exp. 53.7), resulting in the composite moving higher to 54.6 from 54.5. European PMIs were a stark contrast and came in weaker than expected. Manufacturing dipped further into contraction at 45.6 in June vs. 47.3 in May, while Services eased to 52.6 from 53.2, bringing the Composite index close to the 50-mark at 50.8 from 52.2 in May. UK retail sales for May surprised to the upside, coming in at 1.2% YoY ex-auto fuel from -2.5% YoY previously and -0.7% expected. The report led to calls for firmer Q2 GDP growth in the UK as wages have supported consumption, but the outlook is weakening and that has led to the Bank of England hinting at the start of rate cuts at its June announcement. US economic data watch this week will be focusing on Friday with the release of PCE inflation data for May, the price gauge preferred by Fed officials, spending and income as well as University of Michigan consumer sentiment.
Macro events (times in GMT): German IFO Survey (Jun) exp 89.6 vs 89.3 prior (0800), CFTC’s Weekly COT report (delayed from Friday), US Crop Conditions (2000). ECB Speakers today: Nagel (1010), Villeroy (1230) & Schnabel (1530)
Earnings events: A busier week ahead on earnings with the key releases to watch being FedEx (Tue), Micron Technology (Wed), and Nike (Thu). FedEx is interesting from a macro perspective because the company in plugged into the global logistics network and thus is a good barometer for economic activity. Micron Technology will be interesting because its memory chips are used across many different consumer electronic devices. Nike has had some disappointing quarters so investors will be looking for glues that the Euro Championship in football and the Olympics later in July can help on demand.
For all macro, earnings, and dividend events check Saxo’s calendar
Fixed income: U.S. Treasury yields closed slightly lower on Friday, as S&P Global’s preliminary June PMIs for U.S. manufacturing and services beat estimates, despite weak European PMI data. The yield on the 10-year U.S. Treasury closed the week around 4.25%, while the 2-year U.S. Treasury closed at 4.73%. Bond futures are currently pricing in 47 basis points of rate cuts by year-end, with the first 25 basis point cut expected in November. This week’s PCE data will be in focus as economists expect it to decrease to an annualized rate of 2.6% from 2.8% last month. Although this is the lowest rate since March 2021, it still exceeds the Fed's 2% inflation target. At the same time, the unemployment rate remains at or below 4%. Additional gains in bonds may necessitate a more significant slowdown in inflation and economic growth to trigger faster and more substantial interest rate cuts than the Federal Reserve currently anticipates, making a broad bond rally unlikely at this point. This week U.S. Treasury auctions will also be in focus with the U.S. Treasury selling $69 billion in 2-year notes on Tuesday, $70 billion in 5-year notes on Wednesday, and $44 billion in 7-year notes on Thursday.
Commodities: A stronger dollar following better than expected US manufacturing and services data saw the commodities sector end the week on a sour note on speculation a synchronised global easing cycle could be further delayed. Gold and silver reversed sharply lower on Friday, and with incoming US economic data currently giving mixed signals, we expect the current consolidation period will continue until we get a clearer picture about the timing and depth of US rate cuts. Copper failed to hold onto mid-week gains amid ongoing concerns over demand in China. Crude oil trades lower following Friday’s strong data prints but remains on track for a monthly gain, amid signs of rising gasoline demand in the US and healthy demand for air travel and OPEC+ production restraints.
FX: The Bloomberg Dollar Index recorded its highest weekly close since November on Friday, driven by continued yen weakness and concerns over how next Sunday’s French election outcome may impact the euro following Friday’s weak PMI data. Additionally, a rate cut by the Swiss National Bank and a dovish stance from the Bank of England supported the dollar last week. However, the Japanese yen was the weakest performer among G10 currencies, with USDJPY nearing the significant 160 level, and despite increased verbal intervention from FX chief Kanda, the yen remained unaffected. Key yen pairs such as AUDJPY, GBPJPY, and MXNJPY surpassed important thresholds, with AUDJPY above 106, GBPJPY above 202, and MXNJPY breaking its 200-day moving average.Disclaimer
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