Summary: Market sentiment remained positive yesterday, as European equities continued to regain ground and US equities likewise as treasury yields eased lower. Sentiment in Japan was on the defensive on the Japanese yen extending its powerful strengthening move overnight ahead of the macro data point of the week, the US June CPI report up today. Oil rallied sharply to two-month highs and gold poked above resistance.
The US equity market has bounced back from recent weakness with S&P 500 futures gaining 0.7% yesterday and extending the rally again this morning pushing closer to the recent highs for the cycle. Today’s key focus is the US June inflation report expected to show headline and core inflation rates are coming down to 3.1% y/y and 5% y/y respectively. If the market gets a positive surprise with inflation coming in lower than expected, then it could fuel the positive sentiment in equities even further. European equities have followed US equities sentiment bouncing back into the established range from mid-April with STOXX 50 futures trading around the 4,330 level.
The Hang Seng Index gained over 1%, rising for the third day in a row. China’s loan growth in June came in better than expected. President Xi called for opening the Chinese economy further to bolster trade and attract investment. In addition, the National Development and Reform Commission praised the 10 largest internet platform companies by market capitalization including Alibaba (up1.9%), Meituan (up 4.8%), and Tencent (+2%) for their investments in semiconductors, self-driving, new energy, and agriculture. The Hang Seng Tech Index gained 2.3%. The mainland A-share market, however, fluctuated between small gains and losses as the advance in auto-related stocks was offset by property and computing names.
USDJPY declined sharply to below 140.00 overnight in a fifth consecutive day of selling. Traders are said to be reducing their short Yen positions due to renewed speculation of a potential policy adjustment by the Bank of Japan and in anticipation of a moderation in US inflation, as indicated by the upcoming US CPI report later today. The magnitude of the USDJPY move has set the bar quite high for a sufficiently soft CPI surprise to drive the price action lower still. USDJPY direction likely sets the agenda for the USD direction more broadly today. Technically, the next area of interest is into 138.00 (just above double top in March-May) and then the 200-day moving average at 137.17. Also helping the USD lower, USDCNH weakened sharply overnight to as low as 7.186 at one point before finding support, as the yuan received support from stronger-than-expected credit data in China for the month of June.
Crude oil prices broke higher on Tuesday amid signs Russian supply is slowing, thereby supporting OPEC’s attempt to tighten the market to support prices. Ahead of tomorrow’s monthly oil market reports from the IEA and OPEC, the EIA in their latest outlook said the global market is expected to tighten in the second half with stockpiles drawing through 2024. Later today the EIA will release its weekly stock report with the API last night reporting a 3-million-barrel increase in crude stocks with fuel inventories also rising. Brent trades above resistance, now support in the $78.50-75 area with $80 the next psychological level to watch.
Gold closed above the 21-day moving average ($1928) on Tuesday for the first time since March, supported by a softer dollar and lower US bond yields ahead of today’s key CPI print which is expected to show a further deceleration in inflation, potentially bringing forward an end to the Fed’s aggressive rate hike cycle. Resistance at $1950.
Despite inflation numbers being released today, investors doubled down on 3-year US treasuries sold through an auction yesterday showing resilient investor sentiment. Yet, the yield curve bear flattened slightly by the end of the day. With unemployment rate stable and inflation elevated, more tightening might be suitable in the eye of the central bank, pushing yields higher.
Even though the unemployment rate beat expectations rising to 4%, wages excluding bonuses surprised also on the upside rising to 7.3% from 7.2% prior. Strong price pressures might force the BOE in August to hike by 50bps again instead of 25bps. The 2-year UK swap spread remains elevated indicating that there is more room for 2-year gilts to rise to 5.50%. For more information click here.
The RBNZ kept the Official Cash Rate, the bank’s chief policy rate at 5.50% as universally expected by observers. Having been early and quick to hike, this was the RBNZ’s first meeting to pause its tightening regime since late 2021 after 12 consecutive hikes. The RBNZ statement suggested confidence that its current policy is working. “Interest rates are constraining spending and inflation pressures as anticipated and required...The committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” The next test for this confidence will come in the form of the Q2 inflation report next Tuesday. NZD traded relatively flat after an initial weakening on the back of the overnight meeting, with NZD front-end yields falling some 10 basis points from the prior day. The market forward expectations are 50/50 that the RBNZ is done tightening through the end of this year.
The veto by the UK Competition and Markets Authority back in May is obstructing Microsoft’s deal to acquire gaming giant Activision, but now the UK regulator has opened for litigation which could pave the way for Microsoft in the case the US FTC court ruling on the 18 July goes in favour of the acquisition.
According to the China Association of Automobile Manufacturers, vehicle sales in June reached 2.6 million units, rising 4.8% Y/Y. For the first six months of the year, vehicle sales totaled 13.2 million units, increasing 9.8% Y/Y. In June, the sales of new energy vehicles (NEV) reached 806,000 units, marking a 35.2% Y/Y increase. The market share of NEV relative to the overall passenger vehicle market reached 30.7%. In the first half of this year, cumulative sales of NEV amounted to 3.747 million units, increasing 44.1% Y/Y and reaching a market share of 28.3%. Although the growth rate has slowed down compared to previous periods, it remains significantly higher than the overall growth rate of the passenger vehicle market.
The grain market trades higher ahead of the USDA’s monthly World Agriculture Supply/Demand Estimates Report. The report is expected to forecast lower yields for both corn and soybeans following what so far has been a challenging growing season due to drought. After a recent reduction in the US planted soybean acreage and increase in corn, a drop in yield should primarily support soybean prices. Wheat prices traded higher on Tuesday following a drone strike on Ukraine’s Odesa port returned attention to war risks to Black Sea supplies, and after a surprise drop in US spring wheat crop rating.
The US is set to report June CPI today, with the headline number expected to drop all the way to 3.1% YoY from 4.0% in May due to basing effects, as the worst of the spike in gasoline prices hit in June of last year. The critical core “ex Food and Energy” inflation is expected at +0.3% MoM and +5.0% YoY vs. 5.3% YoY in May and a peak rate last September of 6.6%. The Fed’s favoured PCE inflation data series has shown somewhat stickier core inflation than this CPI data series from the Bureau of Labor Statistics. This inflation report is an important input into the Fed’s July rate decision and on the market’s seeming confidence that disinflation is set to continue for now. The market is quite confident that the Fed will hike at the July 26 FOMC meeting, but has priced below-even odds that the tightening will continue thereafter. The long end of the US yield curve has also been a focus after the 10-year benchmark rate teased above 4.00% recently.
The Bank of Canada restarted its hiking cycle at its May meeting after a pause earlier this year to assess the impact of its tightening regime. The surprisingly slim majority of observers are looking for another 25-bp nudge higher to take the policy rate to 5.00% (why bother to restart only to immediately pause again). But data out of Canada has eased the pressure on the Bank of Canada to do more, after May CPI came in softer than expected at a 3.8% core rate and the latest earnings data was surprisingly weak, and a June Ivey PMI near contraction levels.
The Q2 earnings season starts this week with our key focus on US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season on Friday. Read our earnings preview here. Tomorrow, Delta Air Lines and PepsiCo are reporting earnings with analysts expecting strong margin expansion for Delta Air Lines as jet fuel indicators suggest that air travel demand remains robust. Analysts expect Q2 revenue growth of 7% y/y in PepsiCo with stable operating margins as the beverage and snacks business remains resilient against inflationary pressures.
This week’s earnings releases:
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy