Global Market Quick Take: Europe – June 15, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): FOMC rate confusion

The FOMC delivered no rate hike, but instead a more hawkish rates outlook in its dot plot before Fed Chair Powell soften it again during the press conference connecting future rate hikes to incoming data. US equities were confused travelling a large distance in both directions yesterday, but S&P 500 futures are trading around the 4,418 level this morning unchanged from the level before the FOMC rate decision suggesting equities have responded neutrally to the event. The FOMC dot plot was not exactly the condition for an extended melt-up scenario in equities, but the pricing of the Fed Funds forward curve in the weeks to come will provide clues to what the market is thinking about the economy and potential rate cuts over the next year.

FX: Choppy dollar, JPY dives, focus turns to ECB

The USD was sold-off in the run up to the Fed announcement, and then spiked on the hawkish dot plot before giving up most of the gains later as Powell’s commentary guided for a data-dependent approach. NZD led the gains overnight but NZ Q1 GDP data reported this morning was somewhat softer than expectation at 2.2% YoY (2.3% prev and 2.6% exp). A technical recession was also confirmed as GDP fell 0.1% QoQ after a decline of 0.7% QoQ in Q4. NZDUSD fell from overnight highs of 0.6236 to break below the 0.62 handle. As US treasury yields pulled back higher after the choppy reception of the FOMC meeting, the JPY nosedived overnight, falling across the board, with AUDJPY, for example, soaring more than a percent and up well over 5% this month. EURUSD stayed above 1.08 overnight with ECB expected to hike rates today, but forward guidance will be key.

Crude oil: hawkish dot plot and inventory jump weighed

Crude oil prices received a double blow on Wednesday, after a big weekly jump in US crude and fuel stockpiles was followed up by an FOMC looking for additional rate hikes potentially steering the US economy into a recession. The EIA reported a 7.9m bbl rise in US crude oil stockpiles with the jump being exacerbated by inventories at the key storage hub of Cushing hitting its highest level since 2021. Gasoline and distillate stockpiles were also higher, both rising 2,1m bbl. Meanwhile, after Goldman Sachs, now JP Morgan has cut its 2023 brent forecast to $81/barrel from $90 earlier. Focus will be on China’s activity data today and any further easing measures that can help to lift the demand outlook.

Gold drops to a three-month low as the FOMC projects more rate hikes

Gold touched a three-month low in early European trading and is in danger of losing additional altitude after the Fed projected two more rate hikes before year end. Fed chair Powell referred to the July meeting as “live” for a rate-hike discussion and said the FOMC will make decisions “meeting by meeting”. So far, however, the market is questioning the hawkish talk by only pricing a July hike at 67% with the risk of an incoming recession potentially forcing a change in tone. The further delaying of a peak rate scenario has seen total holdings in ETFs decline continuously for the past 12 trading sessions. Below $1930 traders will be looking for support ahead of $1900. Resistance at $1957 and $1973.

The US yield curve bear flattens to lowest since SVB as FOMC hawkish bias remains intact (2YYM3, 10YM3, 30YM4)

With the help of the SEP, which saw higher GDP and inflation rate than expected in March, Powell was able to pause hiking rates without markets speculating on rate cuts this year. Yet, the bond market finds it hard to believe the FED can be more aggressive going forward. Interest rates expectations for December rose only by 12bps from 5.10%. Yields continue to be in an uptrend this morning. Ten-year yields broke above resistance at 3.75% and will find the next resistance at 3.9%. Two-year yields are testing resistance at 4.75%, if they break above this level they will find resistance at 4.85% next.

Yield open higher following a FOMC hawkish pause (IS0L:xetr, D5BC:xetr)

German 2-year Schatz opened above 3% this morning as the market is expecting the ECB to add on hawkishness. The 2-year German spread has tightened the most since mid-April as German yields rose fast. We expect yields in the Euro area to continue to rise, especially in the front end with 2-year German Schat testing resistance at 3.13%.

What is going on?

FOMC takeaway: Pause and hawkish dot plot offset by dovish Powell presser

The Fed left rates unchanged at 5-5.25% as expected, but crucially, ramped its 2023 rate dot forecast 50bps to 5.6% from 5.1%, suggesting that there will be two more rate hikes coming. The 2024 dot was raised to 4.6% from 4.3%, 2025 raised to 3.4% from 3.1% - overall reducing the scope for rate cuts that may be seen following this tightening cycle. In terms of economic projections, there was a material increase in its real GDP 2023 forecast to 1% from 0.4% in March, with Core PCE projection rising to 3.9% from 3.6% and the unemployment 2023 projection tumbling to 4.1% from 4.5%. A lack of evidence of credit contraction following the banking crisis was cited as a driver for upgrading the projected economic performance.

However, turning the page over to Powell’s presser suggested that the Fed’s approach will remain data-dependent, which may not leave much room to hike further as noted in this article yesterday. Powell stressed that the Dot Plot was not a plan, or a decision and Fed will continue to make decisions on a meeting-by-meeting basis. He saw the labor market in a better balance, albeit still tight, but bringing inflation to target will need below-trend growth and some softening of labor market conditions. Powell described July meeting as ‘live’ and data-dependent. Following the meeting, the market adjusted forward rate expectations marginally higher, with the December 2023 SOFR future pricing in about 12 basis points higher rates than prior to the meeting as the two-year US treasury benchmark trades a few basis points higher than the highs prior to the FOMC meeting.

US May PPI comes in below expectations

May PPI data was cooler than expected, declining by 0.3% MoM from the prior +0.2% and a deeper fall than the expected -0.1% print. The YoY print also cooled to 1.1% from 2.3% and came in below the 1.5% forecast. On the core, PPI came in at 2.8% YoY or +0.2% MoM, lower than 3.1% YoY, +0.2% MoM previous and the 2.9% YoY, +0.2% MoM expected. The report added to the argument that inflation is cooling but the decline remains mostly energy-driven. Focus today turns to the May retail sales print in the US and a lower-than-expected print could once again spark concerns of consumers pulling back on spending after the markets have been on a risk-on with banking sector and debt ceiling concerns having eased.

EU Commission increases the heat on Google

The EU said yesterday that it charges Google with abusing its dominate market position to favour its own products and services. Despite €8bn in fines over the years the company seem to have not changed its behaviour according to the EU and thus the EU Commission is now threatening that it may be forced to break up some of Google’s businesses in Europe. The market reacted quite muted to the news.

H&M misses estimates

The Swedish fast-fashion retailer reports this morning Q2 revenue at SEK 57.6bn vs est. SEK 58.3bn saying unfavourable weather was the main driver behind the miss. The fashion retailer says in its press release that June is off to a good start.

Lennar shares up 2% on order rise

The US homebuilder reported adjusted earnings and revenue that were much better than expected in Q2, but investors got excited over the Q3 outlook on new orders in the range 18-19,000 vs est. 15,700 suggesting US households have absorbed the rising interest rates and remain confident about the future despite looming dark clouds.

What are we watching next?

ECB: A 25-bps rate hike seems to be a “done deal”

The European Central Bank is widely expected to hike rates by 25bps on Thursday to take the deposit rate to 3.50%. Since the last meeting when the ECB slowed down the pace of rate hikes from 50bps increments to 25bps, headline Eurozone CPI has cooled to 6.1% from 7.0%, whilst the “super-core” measure fell to 5.3% from 5.6%. Furthermore, the ECB’s Consumer Expectations survey for April saw the 1yr ahead inflation expectation declines to 4.1% from 5.0% and 3yr view fall to 2.5% from 2.9%. That said, despite the disinflationary impulses, President Lagarde has reiterated that inflation “is too high and is set to remain so for too long”, adding that the ECB will “keep moving forward” as the bank is still behind the curve. However, the growth trajectory is also worrisome with Germany and Eurozone in a technical recession, and if the ECB decides to (like Bank of Canada) remove all forward guidance, it could weigh on the euro.

Urgency rising for Bank of Japan to signal willingness to make policy shift

The bottom is dropping out of the Japanese yen ahead of Friday’s Bank of Japan meeting, in part as a number of central banks have adjusted their policy expectations higher recently and yields at the long end of the US yield curve are perched near the highs since the March US banking turmoil pushed them lower. At his first meeting as Bank of Japan Governor back in April, Kazuo Ueda stated that the bank would take up to eighteen months to conduct a policy review (likely wanting to incorporate one more year of wage talks next March to see if inflation will prove sustained before moving with any notable tightening).  But with the most recent collapse in the Japanese yen, the market could yet force the BoJ’s hand and require that the bank make at least a few tweaks to indicate it won’t allow the JPY to absorb intensifying pressure. The market is pricing the BoJ to deliver perhaps a hike of the policy rate from –0.10% to 0.0% through its December meeting.

Technical update

• Nasdaq 100. No resistance until 15,265. RSI supports higher Nasdaq
• S&P 500. No strong resistance until 4,546
• DAX New all-time high. Target 16,600 possibly 16,766
• Dutch Gas on the move. Building uptrend.
• US 10-year Treasury yield. Uptrend intact. Likely to reach 4%
• Copper closed above resistance at 382. But RSI rejected at 60 i.e., risk of setback
• Gold testing support at 1,934. Break below no support until 1,870
• GBPUSD testing key resistance at 1.2667. Upside potential to 1.2845
• EURJPY higher. If breaking above 151.62 likely move to 155
• GBPJPY likely to reach 180 resistance
• USDJPY likely to test strong resistance at 142.25

Earnings to watch

Next earnings focus is Adobe reporting tonight after the US market close. Shares in Adobe are up 43% over the past month as the AI-hype has created massive tailwinds for the shares including a new product update integrating new AI capabilities in Adobe’s content creation software. Analysts expect Adobe to report 9% revenue growth and lift EBITDA to $2.35bn from $1.74bn a year ago. Read our Friday’s earnings preview for our take on Adobe earnings scheduled for Thursday this week.

• Thursday: Adobe, Kroger, Jabil, Halma

Economic calendar highlights for today (times GMT)

• 1215 – ECB Rate Decision
• 1215 – Canada May Housing Starts
• 1230 – US May Retail Sales
• 1230 – US Weekly Initial Jobless Claims
• 1230 – US Jun. Empire Manufacturing
• 1230 – US Jun. Philly Fed survey
• 1245 – ECB President Lagarde Press Conference
• 1315 – US May Industrial Production
• 1430 – EIA's Natural Gas Storage Change
• Bank of Japan meeting