Summary: The major US equity indices closed at new all-time highs yesterday, while the Asian session was buoyed by a strong session in China, as the CSI-300 Index has now pulled more sharply away from an important support level that was recently tested. Today, the market awaits the latest US May PCE inflation print out of the US as an important test of the narrative around inflation and the reaction to the FOMC meeting last week.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – yesterday’s session was a broad-based rally across all segments of the equity market with the strongest momentum most notably in growth pockets such as e-commerce and semiconductor stocks. The pause in US interest rates and the increased likelihood of an US infrastructure bill were also adding to sentiment. The VIX Index closed below 16 and for a while looked like it would make a new closing low for the pandemic cycle but failed. Overall, US equities are bid and back in rally mode with Nasdaq 100 futures trading around the 14,350 in early European trading hours.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Price action in cryptocurrencies showed a more determined effort to rally above the important 30k support in Bitcoin, which trades near 34.5k this morning, but still needing to break above the 40-42k zone to suggest a new bull move is in the making. Ethereum, meanwhile, continues to languish a bit as it plays cat and mouse with the pivotal 2,000 level, trading just below there this morning.
EURUSD and GBPUSD – it’s decision time for the US dollar with today’s PCE inflation data out of the US, as the US dollar has spent all week fading after the strong surge in the wake of last week’s FOMC meeting. Either the market decides that the Fed’s guidance is not sufficiently hawkish now for this latest rally to hold, or decides that the narrative of the Fed moving more clearly into a tightening cycle is now operative and could see the USD test higher still. 1.2000 is the next key resistance for 1.2000, and the next major is 1.1775 and then the range low of 1.1704 to the downside. For GBPUSD, the BoE did not wax hawkish as the market hoped and sterling retreated, if modestly, away from the key 1.4000 resistance area there. Support is quite far away to the downside starting at 1.3787.
JPY pairs – JPY pairs should prove quite sensitive to any dramatic surprise in today’s US May PCE inflation release if it sparks significant moves in US long treasury yields, which have crept back higher in the wake of a very choppy reaction to the FOMC meeting last week. If yields drop, the JPY may find a second wind in the crosses, with EURJPY an interesting one to watch in addition to USDJPY for potential downside on a drop in yields. If yields lift all along the curve, on the other hand, the JPY could be in for fresh lows for the cycle, coming full circle from the rally post-FOMC meeting last week.
HG Copper (COPPERUSSEP21) trades higher on Biden’s $579B bipartisan infrastructure deal (see below) which among other things will fund a 500,000 national EV charging network and other copper intensive projects. The lukewarm reaction so far boils down to the risk the deal may not get enough support from lawmakers given the political splits in the US. Overall, the market also maintains a close eye on China where the scaling back of stimulus efforts and sale of state reserves has left the market somewhat nervous about a bigger setback.
Natural gas (NATGASUSJUL21) has surged to the highest in more than two years at $3.42/therm as extreme heat in U.S. West has increased demand from utilities, thereby exacerbating already tight supplies. Inventories are currently 6% below normal for this time of year with rising domestic and LNG export demand at time where shale producers, just like those drilling for oil, have curbed output in response to investor calls for financial discipline. Front month prices this high in June was last seen in 2014 when it traded at $4.55.
The bond market is ready for the summer lull. Any surprise in today’s PCE data might be considered transitory (IEF). Yesterday’s 7-year US Treasury auction was surprisingly solid following this week’s weak 2- and 5-year auctions. The bond market buys into the transitory nature of inflation and the dot plot, which shows a rate hike only in 2023. That is why if today’s personal consumption expenditures data do not surprise by much, we expect the bond market to stay still and steady, and trade rangebound until the next big event: Jackson Hole.
What is going on?
US President Biden endorses $579B bipartisan traditional infrastructure deal that was agreed by a group of 10 senators, an interesting political signal even if it will take time for any deal to work its way into law and pass both houses of Congress. In a somewhat odd twist, Biden said he would veto the deal, however, if separate social and climate spending priorities were not passed by Democrats in Congress.
The Bank of England meeting did not provide the expected hawkish tilt. The meeting yesterday seemed very much a “wait and see” meeting, as no firmer message on an eventual asset purchase taper was delivered, and inflation was seen as transitory even if the bank suggested that inflation might spike above 3% in the near term. A dissenting vote from outgoing Chief Economist Haldane, who voted to reduce the asset purchase target, was no surprise. December 2022 BoE rate expectations backed off three basis points.
Mexico’s central bank surprised with a 25-basis point hike, taking the policy rate to 4.25% and sending USDMXN back just below 20.00 after its recent significant rally to well above 20.50 in the wake of the surprisingly hawkish FOMC meeting. The Bank of Mexico’s board said the hike was necessary to avoid any excessive rise in inflation expectations and in light of inflation data coming from the US.
Commodities have seen a strong rotation this past month into energy, both crude oil and natural gas, and out of metals and agriculture. Rising fuel demand, lackluster response from US shale has left OPEC+ in control ahead of its July 1 meeting where they will agree production levels for August and beyond. Food commodities trade lower on improved crop weather and the potential for lower biofuel demand with focus on the annual U.S. acreage report next Wednesday. Metals meanwhile trades lower with industrials troubled by the prospect for Chinese intervention while investment metals, led by gold has struggled amid a stronger dollar and lower inflation expectations.
Record result from Nike and FedEx spooking investors with rising costs. Nike shares were up 14% in extended trading on record quarterly result with revenue at $12.3bn vs est. $11bn and EPS at $0.93 vs est. $0.50. Gross margin also beat expectations as leaner inventories and less promotion. The only real disappointment was the lower-than-expected revenue in the Greater China segment. FedEx shares were down 4% in extended trading despite a good result with revenue beating expectations and management saying they expect pricing power throughout 2023. The market got spooked by the guidance of 20% increase in capital expenditures for the new fiscal year to meet demand and rising wage costs on deliveries.
What are we watching next?
US May PCE Inflation and University of Michigan inflation expectations data today and market reaction. The PCE inflation data series is a bit “late” relative to the official CPI data release which showed new multi-decade highs in core inflation for May, but it is the data series that the Fed uses to guide its policy decisions and markets will be sensitive to all inflation data releases in coming months as the narrative around whether the US inflation spike is “transitory” will be put to the test. The consensus expectation for today’s Core PCE data is +0.6% month-on-month (versus +0.7% in April) and a new cycle high for the year-on-year release of +3.4%, the highest reading since 1992. The University of Michigan inflation expectations data is also worth watching after the initial June survey showed longer term inflation expectations actually dropping from an eight-year high of 3.0% in May to 2.8%.
Earnings this week. Today’s earnings focus is on the second largest US car dealer CarMax which has invested heavily in online transactions of used cars. Given the recent price increases on used cars and changing consumer behaviour buying cars online, it is going to be an interesting earnings release, and especially for the potential insights to pricing formation of cars in the US.
Economic Calendar Highlights for today (times GMT)
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