Summary: A weak set of flash June PMI surveys out of Europe and the US yesterday took short yields sharply lower on fears that recession may arrive sooner than expected. With market pricing for peak central bank tightening getting pulled sharply forward yesterday, equities decided this was cause for celebration, preferring to consider the positive liquidity and valuation effects of falling yields rather than the bad news that prompted them to fall.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Yesterday we talked about the importance of a close above the 3,800 level in S&P 500 futures and while the close was 0.25 point below the close was strong enough coupled with lower interest rates to extend the momentum this morning. S&P 500 futures are trading around the 3,824 level with the 3,877 level being the next key gravitational point to watch. The key driver for equities today is the shape of the VIX forward curve and whether US interest rates will continue to weaken amid fears over recession.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
The indices climbed overnight with market sentiment towards Chinese equity markets continuing to improve, driving the CSI300 to a new high at 4383, last seen in early March. EV battery and makers, home appliance, alcohol and beverage led the charge higher. With still light positions ahead of quarter end in Chinese equities and the urge to catch up with the Chinese markets’ recent outperformance, investors are bringing up Chinese equity exposure to rebalance. As well, recent Chinese headlines may be driving an improvement in sentiment – see more below on the BRICs forum hosted by China yesterday.
EURUSD and USD pairs
The USD was pushed back lower from its rally attempt yesterday as risk assets celebrated the drop in global bond yields rather than fretting the fact that the cause of that drop was due to rising fears of an incoming recession. The US dollar can only thrive broadly as a safe haven trade, whether the driver for weak risk sentiment is the Fed’s ongoing tightening on financial conditions or whether the same is due to a worsening economic outlook. EURUSD is caught in limbo between 1.0600-50 resistance/upside pivot and the 1.0400-1.0350 downside pivot zone. Note that the cycle low near 1.0350 is only a few pips above the major low since 2003 of 1.0341 (from 2017).
USDJPY and JPY crosses
The JPY was offered about as much support as possible yesterday as the weak preliminary June PMI survey data from the Eurozone and the US sparked a powerful rally in sovereign bonds that took yields sharply lower all long the yield curve. The JPY did respond, particularly in EURJPY terms as the yield moves in Europe were the most severe, but nothing is yet breaking down there unless the pair begins to revisit the 140.00 area. USDJPY broke below the first pivotal 135.00 area, but there was no follow-through. If yields continue to edge lower, pressure is likely to mount on JPY crosses broadly and we’ll watch the 134.00-133.50 area in USDJPY for signs of a more pronounced breakdown.
Crude oil (OILUKAUG22 & OILUSAUG22)
Crude oil shows signs of stabilising following a near 15% top to bottom correction during the past ten days on increased concerns that aggressive rate hikes by central banks around the world will eventually hurt growth and with demand for key commodities from energy to industrial metals. Prices have dropped despite continued signs that the crude oil and and especially the fuel product market remains very tight, the latter being highlighted through near record refinery margins, which would have come down if demand was easing. In the short term we will see a battle between macroeconomic focused traders, selling oil as a hedge against recession, and the physical market where price supportive tightness remains.
Copper is heading for its biggest weekly loss in a year driven by global recession fears and China lockdown hurting growth and demand in the world’s biggest consumer of industrial metals. While the Bloomberg Industrial Metal index trades down 6% on the year, copper is currently 15% under water with around half of that loss realised this week when Fed chair Powell reiterated his commitment to bring down inflation, thereby raising the risk of a hard landing. In addition, Chile’s mining giant Codelco has reached an agreement with workers to end a strike that could have led to a price supportive reduction in supply. Below $3.86 the next key level of support can be found at $3.50/lb, the 50% retracement of the 2020 to 2022 rally.
US Treasuries (TLT, IEF)
US treasury yields dropped sharply yesterday on the weak initial June PMIs (details below) that are bringing forward recession fears and now have the market pulling forward peak Fed tightening to March of next year. The 10-year Treasury yield dropped through the important 3.15-20 area and fell all the way to the psychological 3.00% yield level before rising again. The move lower fully erased the rise in yields sparked by the release of the May CPI data on June 10. Cycle top in yields or is this a false dawn for treasuries?
What is going on?
Norway’s Norges Bank raised the deposit rate 50 basis points yesterday
... more than most expected, and guided for rates to rise more quickly and to a higher level than in the March forecast, which put rates at 2.5% by the end of 2023. Yesterday’s statement said that the bank would look to take rates to 3.0% “around 3.0% in the period to summer 2023”. Inflation forecasts were also raised markedly – to 2.5%. The CPI forecast was raised to 3.3% from 2.4% for 2023 and the 2024 forecast was raised to 3.0% from 2.5%. The EURNOK reaction was underwhelming as the pair remains capped at the key 10.50 area, with NOK perhaps failing to get more out of this hawkish adjustment due to the correction of oil prices linked to growing recession fears.
Global PMI plunge raises recession fears
Eurozone PMIs were at 16-month lows in June, falling below expectations. Manufacturing was at 52 from 54.6 in May, while more importantly services plunged to 52.8 in June from 56.1. The EURUSD slid below 1.0500 on the report but as noted yesterday, the lows at 1.0350 were not tested because of the focus on US slowdown concerns. Later, US PMIs disappointed as well, with manufacturing at 52.4 from 57 in May. Overall, the PMI releases have shifted focus some more on slowdown/recession from inflation, and more of that is likely to be seen in the coming weeks. What is worth noting is that services PMI also slowed substantially, so all the demand moving from goods to services also doesn’t have much room to run.
Powell’s message remains the same; but Bowman raises the hawkish bar
The second day of Fed Chair Powell's testimony had little new, reaffirming his commitment to reigning in inflation is 'unconditional'. Perhaps the only points to note were that Powell said the Fed would not raise its inflation target and the endpoint for the balance sheet is roughly USD 2.5tln-3.0tln smaller than it is now. More hawkish, however, was Fed's Bowman who is a voter. She said another 75bps rate hike will be appropriate in July – which seemingly is the consensus view now – but she also added that hikes of at least 50bps may be seen at the next few subsequent meetings.
Zalando cuts FY outlook
The fashion e-commerce retailer is cutting fiscal year revenue growth guidance to 0-3% against previously 12-19% expected as the company is facing severe headwinds from weaker consumer confidence. This is basically a repeat of the recent guidance cut from Asos in the UK.
US weekly initial jobless claims were out a 229k...
… vs. 231k last week and 232k the week before. This data series troughed back in late March at historic lows and has been rising since on a moving average basis. This high frequency data series is the most up-to-date indicator on the US labor market and bears watching as the last few weeks of claims data are the highest since January and a further rise would suggest that the US unemployment rate may be set to rise.
China’s markets reacting favorably to policy hints in the headlines
For example, President’s mentioning of “striving to achieve the full year social and economic targets” in the BRICS Business Forum yesterday and remarks in the Central Comprehensively Deepening Reforms Commission meeting that “supporting platform enterprises to service the real economy” are cited by analysts as reasons to cheer for “boosting growth” and “reducing regulation”. However, the “economic targets” are not specified and can be general rhetoric. Likewise, the bulk of the readout concerning the platform economy is about enhancing regulations not reducing them. But analysts still picked up that one single sentence and interpreted it in a positive light.
What are we watching next?
The Final Jun. University of Michigan sentiment and inflation expectations survey out today
The preliminary release of the June survey showed sentiment at all-time lows in the 44 year history of the survey at 50.2, fully 5.1 points below the worst levels during the global financial crisis. As part of the survey, the market will closely watch for any revision to the 5-10 year inflation expectations in this final version of the June survey after the initial reading of 3.3% raised eyebrows as it jumped well clear of 3.0% to the highest level since a one-off spike in 2008 (and before that since the mid-1990's). Inflation expectations are an important input into Fed considerations for setting the appropriate level of monetary policy.
Earnings WatchToday's focus is Carnival that is moving into its prime part of the traveling season and with weak consumer confidence in the US and Europe we are curious to get indications on future demand.
- Today: Carnival, China Gas, CarMax
Economic calendar highlights for today (times GMT)
- 0800 – Germany Jun. IFO Survey
- 1130 – Australia RBA’s Lowe speaks
- 1130 – US Fed’s Bullard (voter) speaks
- 1330 – UK Bank of England’s Pill to speak
- 1345 – UK Bank of England’s Haskel to speak
- 1400 – US Jun. Final University of Michigan Sentiment
- 1400 – US May New Home Sales
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