Currency and Stock Markets. Daily Insights

[stoch]

Markets are worried about a recession and the trend will only gain momentum


The toxic mix of hawkish central banks ready to tighten monetary policy "no matter what" and a series of weak macroeconomic data on the US and European economies has become a catalyst for sell-off in risk assets, rally of bond prices and dollar strength. A growing number of market participants believe that central banks are rushing to raise rates (aka "policy error"), which could, if not cause, then at least exacerbate the course of a possible recession. Looking at the two main asset classes - stocks and bonds, we see a flow from risk assets to safe havens (long-term bonds) - bond prices rise (yields decrease accordingly), and stock prices decline. For instance, the yields of 10-year US and German bonds returned to the level corresponding to the beginning of June:

In the risk assets market, considering the key S&P 500 benchmark, the rebound after the correction to the low since December 2020 did not last long, bearish sentiment again prevailed this week. The sellers may target the 3550-3570 zone, which will correspond to the test of the main bearish trend line:

Given these trends, the demand for the dollar, as a defensive asset, is set to remain high and it is very likely that we will see new highs in the dollar index in the near future:

Consumer spending in the US for the first four months was revised down, and after release of the May report, which indicated a significant slowdown in growth, it became clear that the flywheel of the US economy is starting to slow down. The Fed's policy of raising rates, along with a slowdown in consumer spending, is likely to lead to the fact that economic growth forecasts will become less optimistic, while the risks of a recession will increase.

The report, published on Thursday, contained important positive news for the Fed - the preferred inflation measure for the regulator - the core consumer spending index - eased from 4.9% to 4.7% (4.8% forecast). A decrease in the indicator means that the imbalance between supply and demand has somewhat eased, which means that inflation pressure in the economy is less than expected. The rest was less positive - the nominal monthly growth of expenditures amounted to 0.2% (forecast 0.4%), and in real terms it even decreased by 0.4% (forecast -0.3%). At the same time, the April figure was revised down - from 0.7% to just 0.3%. Along with deterioration of consumption data for the first quarter, the market is coming to the realization that the American consumer was not as resistant to inflation as it seemed.

The details show that the indicator of consumption of durable goods behaved the weakest. It sank by 3.5%, while the consumption of non-consumer goods decreased by 0.6%. Service consumption rose by 0.3%, but this was not enough to compensate for the weak behavior of other components.

The component-by-component dynamics of US consumer spending is as follows:

The decline in core inflation is a very good sign, but at 4.7% it is still twice as high as the 2% target. The Fed has signaled that it is ready to sacrifice strong demand to regain control of inflation, so the prospect of high pace of rate hikes is not yet in doubt. After Powell's speech in Sintra, where the head of the Fed announced the good shape of the US economy and the need to reduce inflation, this prospect only became clearer. Other than a strong labor market, there really isn't much to brag about: consumer confidence is at multi-year lows, the housing boom is waning, and fuel prices are likely to remain high. It follows that in the second quarter, the picture of consumption in the US may not be so rosy, and therefore fears of a recession in the fourth quarter of 2022 are likely to only gain momentum.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Recession risks keep dollar bid, set to curb risk appetite further



Major currency pairs struggle to choose direction on Monday, European indices move back into modest positive territory, US futures slip with S&P 500 futures trying to defend the 3800 level in order to prevent development of bearish momentum.

Last week we saw a significant rally in key sovereign debt markets (US, EU), with long-term bond yields falling to their lowest level since early June. The market now considers the 325-350 bp range to be the most likely outcome of the series of Fed rate hikes by the end of this year against 350-375 bp a week ago. In other words, market expectations for cumulative Fed rate hikes this year have been cut by 25 bps:

Growing risks of slowdown and even recession of the global economy is likely to continue to constrain the hunt for yield this week, based on this, a significant pullback of the dollar, which again rushed to multi-year highs, appears to be unlikely. An argument in favor of a slight correction in the dollar may be extreme positioning according to the CFTC data: the speculative long position on the dollar is now at a two-year high, which suggests a potential long squeeze.

Two significant reports this week are the minutes of the Fed meeting and the report on the US labor market for June, which is traditionally released on Friday of the first week of each month. FOMC "minutes" may raise expectations that the Fed will raise the rate by 75 bp for the second time in July if the content of the report indicates a strengthening of consensus that such a move is warranted.

Given the deteriorating growth forecasts for the US economy, the Fed's commitment "by all means" to reduce inflation, the US labor market report is likely to provoke a classic reaction in the event of a surprise: job growth below the forecast (270K) will strengthen expectations that the Fed will tighten policy aggressively in a slowdown and trigger risk-off, while higher-than-consensus job growth will support risk assets as fears that the economy will not bear the burden of policy normalization will likely subside. Only a very weak labor market report, such as contraction in the number of jobs, could lead to expectations of lower rate hikes, which will appeal to risk assets and could lead to a rebound.

As for the European economy, the inflation report caused a minimal market reaction, as asset prices already factor in a fairly aggressive ECB rate hikes (140 bp for this year) and market participants' focus on data that will help to clarify recession risks. As for the Eurozone, the main factor of this risk is the reduction in energy trade with the Russian Federation, fears of an escalation in this direction significantly affect the markets. The risk of a bearish breakout and movement of EURUSD towards the previous local minimum (1.0380) is, in my opinion, higher than the risk of a correction to 1.05, given potential negative development of the sanctions war.

Another significant event this week will be the RBA meeting on Tuesday, which will take place before the opening of European markets. The main question is whether there will be a 50 bp rate hike or the RBA will decide to go with modest 25 bp. The first outcome is not fully priced in by the money market, so 50 bp move will likely trigger upside in AUDUSD. Nevertheless, given negative sentiment of investors regarding currencies correlated with the phase of a business cycle of the global economy, AUDUSD recovery will probably be short-lived, with 0.70 level seen as the key resistance where a downside may resume:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Surging USD indicates investors’ search for a safe heaven is a key market driver


Global economic growth optimism is fading rapidly, with major central banks vying to announce a "material" deterioration in real output forecasts and rising risks of stagflation. On Tuesday, the Bank of England made a worrying revelation with its Financial Stability Report, which said that economic outlook for the UK and globally had deteriorated markedly and that UK banks would need to double their counter-cyclical capital buffer to 2%. The requirement to increase the margin of safety for the banking sector means that the Central Bank expects an increase in credit risks in the economy.

In a similar statement to the British Central Bank about the economic outlook, ECB centrist De Guindos made a statement on Monday. In the coming months, according to the official, the EU economy is likely to face shocks that will reduce growth and push inflation upward. The balance of risks for inflation in the Eurozone is shifted towards further acceleration.

Powell said in his last speech last week that the US economy is in good shape. The continuing contrast of statements suggests that the margin of safety of the US economy before policy normalization may be higher than that of the developed world peers, so the consensus on where to best ride out the coming storm is rapidly leaning in favor of the cash dollar. On Tuesday, the index of the US currency grew by more than one percent, primarily due to the strong weakening of the Euro and GBP:

EURUSD broke through the previous low of this year 1.0380 within two hours and went below 1.03. The nature of the movement suggests that the market took into account an important piece of information. GBPUSD fell below the key support level of 1.20, given the technical picture (bounce after the first break in June, consolidation, and then a retest), a breakdown of 1.19 is next in line.

Bank Nomura, in its latest report, announced the risk of the euro falling to parity against the dollar. In August, according to the bank's analysts, EURUSD may drop to 0.95.

Inflation reports for Asia's three key economies - South Korea, Thailand and the Philippines - showed that inflation accelerated faster than expected in all three countries, thus reinforcing fears of an impending period of stagflation in the world.

Yields on long-term bonds in the US, Germany and the UK again turned into decline, indicating increased anxiety in the market:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Fears of energy crisis may drive Euro to parity against USD


Despite sharp strengthening of the dollar on Tuesday and growing pessimism on European equity markets, the S&P 500 managed to neutralize selling pressure closing in green, Nasdaq rose 1.68%, the Dow Industrial Index fell 0.42%. The strength of the US currency extended into Wednesday, DXY aims to probe 107 level. The collapse of EURUSD to 1.0250 saw little headwinds and the pair looks set to continue to explore fresh lows, a probe below 1.02 looks very likely. Investors await release of the US services PMI in June and the Minutes of the June Fed meeting to assess the possibility that the Fed will soften the rhetoric and choose a less hawkish pace of policy normalization in response to increased risks of a global economic recession.

The term structure of US bond rates indicates rising expectations that a short period of rate increases will be followed by a cycle of rate cuts. Inversion of the yield curve deepened as both 10Y/2Y and 5Y/2Y bond yield spreads dipped below 0:

Such behavior of the yield curve often precedes negative returns of Asian and European currencies, such as the pound sterling and the euro, and increase in the demand for the dollar, the Japanese yen and the Swiss franc.

In the commodities market, the price of copper, a metal widely used in manufacturing and construction, is an indicator of concerns about a future slowdown in the economy. Its price has fallen by 28% since the beginning of June, reflecting fears that demand for it will decline rapidly in the second half of 2022:

The key question for investors is the magnitude of economic slowdown (aka demand destruction) that the Fed expects in its forecasts for which current plans of policy tightening will remain unchanged. It should be noted that despite the surge of risk aversion in financial markets, money markets investors only slightly revised their expectations for policy tightening towards a slower pace: by only 6 bp for the Fed and by 12 bp for the Bank of England and the ECB. Underlying this difference are likely the risks of a larger economic blow to the EU due to a torn trade ties with Russia and the fact that the US economy approached the tightening cycle in a more "overheated" condition than opponents.

Today, the Fed minutes are due, given significant strengthening of the dollar, the “sell on the facts” scenario is likely to materialize. EURUSD and GBPUSD are likely to experience a short bounce up. Also, market attention will be riveted to the ISM report in the service sector, which accounts for 70% of the US economy. The focus is on the hiring component, which should help to clarify expectations for Friday NFP report.

The European currency continues to price in rapid growth of anxiety that the economy may face an energy crisis. German authorities are taking measures to stabilize the situation, including calls to ration gas consumption and preparing a plan to take a stake in the country's largest utility provider, Uniper. Earlier it was reported that the load on the NordStream 1 pipeline was significantly reduced, investors fear that the situation could worsen. The seriousness of the situation is also evidenced by the fact that the EU is going to hold a meeting of energy ministers of the countries included in the bloc on July 26. EURUSD will most likely continue to decline up to 1.00, while the dollar index may rise to 109-110. The reversal of the pair will have to be preceded by news about the restoration of gas supplies from Russia, which will reduce the risks of an energy crisis in the bloc.




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US labor market reports can extend relief rally in risk-assets as investors are desperate for positive growth signals



The dollar remains close to fresh highs on Thursday, the minor retracement was also reflected in revived modest demand for risk, the key Asian and European markets gain more than 1%. Demand for safe assets came pressure, investors dump long-term bonds of matured economies. Yield on 10-year Treasuries is once again targeting the 3% mark.

Commodity markets saw surplus of buyers as well, key proxies for market fears of a future recession – oil and copper prices are up 1% and 3.5% today, respectively.

The rally of risk assets today was basically sponsored by the minutes of the FOMC meeting released yesterday. There were lots of mentions about the need to lower inflation and little about possible costs of an aggressive policy, which prompted investors to revise the odds of a recession to the downside and began to roll back the emotional reaction of recent days. The minutes showed that the Fed is ready to hike interest rate above the neutral level if inflation proves to be persistent and that the commitment to the idea of suppressing inflation outweighs fears that this could significantly harm the economy.

Another important source of information about the state of the US economy was the PMI in the services sector from ISM released yesterday. The headline figure was better than expected thanks to rebound in business activity sub-index, but other components of the report pointed to a decrease in hiring compared to the previous month, a slowdown in the growth of new orders and some slowdown in inflation:

Given these data, there is a growing risk of disappointment with tomorrow's NFP report, in particular, the payrolls figure could again miss estimates. As the Fed signaled it won’t be easily spooked with deterioration in the key macro data, worse than expected jobs growth will likely result in a new round of risk-off in the market, as this may rekindle worries about a policy mistake, i.e., policy tightening into economic slowdown.

The strong dollar forces US trading partners to keep up with the hawkish Fed in order to contain further devaluation of their currencies, which is fraught with inflationary pressure coming from expensive imports. The European currency is moving towards parity against the dollar and it is likely that the ECB will soon have to hint at a more aggressive pace of rate hikes, as the risks of higher inflation figures in the coming months may begin to outweigh the risks of lack of monetary stimulus due to monetary tightening. However, EURUSD move towards 1.00 is likely to resume soon and the best candidates to trigger sales are this Friday's labor market report and next week's US inflation report.

Today, the release of the ADP report is dye, to which the market is often very sensitive. Job growth is expected to be around 200K, an upside surprise will likely extend current rebound in risk-assets, while weaker-than-expected print may increase bearish sentiment in equities.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Strong NFP report will likely fuel EURUSD drop to parity


The dollar continued to strengthen on Monday after release of US labor market report on Friday, which did not confirm market pessimism about the US economy, reinforcing the view that the US is now an "island of stability" for large capital. The key measures of the US labor market remained in June at the level, which give the Fed grounds to confidently hike interest rate by 0.75% in July. Ahead is the release of the June CPI, which should point to a new high in inflation in the current business cycle (forecast 8.8% YoY), leaving no doubt that the Fed will continue to tighten policy at a galloping pace.

The US economy created 372K jobs in June, well above the consensus estimate of 265K. The number of jobs in the private sector increased by 381K against the forecast of 233K. The revised estimate for the previous two months was lower by 74K, however, the upside surprise in June Payrolls overshadowed that weak spot of the report. Along with upcoming June CPI release, the labor market report should lay the groundwork for a 75 bp Fed rate hike second time in a row.

The total number of jobs in the US thus rose to a level that is only 524K below the pre-pandemic level. By sector, tourism and leisure lag behind the most in terms of job growth, with 1.3 million jobs below February 2020 levels. However, the problem is not the low demand for labor, but the shortage of labor supply. The second weakest sector in terms of hiring is the civil service sector, however, along with the growth of government tax collections, the situation in 2023 will change for the better. The level of employment in other sectors is close to historical highs.

As for the rest of the report, the unemployment rate remained at 3.6%, wages rose by 0.3% m/m and 5.1% y/y, which was in line with consensus. Somewhat disappointing was the labor force participation rate, which dropped from 62.3% to 62.2%. Given quite low unemployment rate, LFPR recovery is necessary to ease the imbalance between strong demand and weak supply in the labor market, but so far this has not happened. There was hope that the decline in the stock market would hit wealth, primarily pension savings, and force some of the workers to start looking for work, but the market correction did not produce the desired effect, and this means that companies continued to experience difficulty in hiring and are likely to be forced to raise wages further, which speaks in favor of unfavorable inflation outlook.

Some other employment reports, such as the JOLTS report or the NFIB Small Business Survey, have shown that there are nearly two jobs for every unemployed American, and that 50% of small businesses have jobs that cannot be filled yet:

The NFP report turned out to be one of the few positive macro reports that came against other weak indicators of activity. Despite market pessimism, US companies' demand for labor remains strong. Against this background, the Fed is likely to raise rates by 75 bp in July, the odds of such an outcome according to rate futures is already 93% against 86.2% last week:

Further pace of Fed rate hikes is likely to slow down to 50 bp in September and November and up to 25 bp in December.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Greenback may stay in the uptrend for a while as key drivers are set to remain intact



The bullish momentum in the dollar remains intact at the start of the week with EURUSD testing the round 1.00 level followed by a technical rebound to 1.006. Given ongoing risks of an energy crisis in the EU (restart of the NordStream 1 pipeline after maintenance), as well as fresh round of escalation of the economic confrontation with the Russian Federation (seventh package of sanctions), the probability of falling below 1.00 remains high. The FX options market suggests that the next major support zone could be around 0.98.

The overbought in the dollar is swelling and along with this extremely long bias in positioning, the odds and size of a potential bearish correction are increasing as well. However, for a long squeeze in the dollar, we may need to see weakening or the appearance of counter-signals in the key drivers of the recent rally of the US currency – slowdown in global growth momentum and aggressive policy of the Fed. However, in the near future, such a development of the situation is not to be expected - the Fed, based on incoming data, is increasingly inclined to raise the rate by 75 bp for the second time in a row while macro reports outside the US are full of negative surprises. Take the dismal report from ZEW today, which showed that German economic sentiment plummeted from -28 to -53.8 (forecast -38.3 points):

In addition, a potential positive surprise in the US CPI report on Wednesday (e.g., annual inflation above 9%) could trigger speculation that there may not be a slowdown in the pace of Fed tightening at the September meeting.

Reporting season in the US started this week, and short sellers in USD hope that positive surprises in the reports will draw investors into equities which should add to dollar supply and trigger some sell-off. However, given the current state of the global economy, the chances of actually seeing strong earnings figures seem low. Despite overstretched rally, the dollar is more likely to remain in an uptrend than a correction in the short term. From a technical standpoint, the dollar index (DXY) may find meaningful resistance at 110 level:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Minor upside surprise in US CPI is likely priced as fuel prices continued to rise in June

Today is a special day for financial markets as the US Bureau of Labor Statistics releases CPI for June. It's no secret that the Fed tied monetary policy to developments in inflation, so its acceleration will mean that the Fed's lead in the policy tightening race will only increase, and vice versa, an inflation print below consensus should promote expectations that the gap in the pace of policy normalization between the Fed and other central banks will narrow somewhat. In fact, this will be the driver of price changes in almost all asset classes.
Headline inflation is expected to hit a new high of this business cycle (8.8%) and core inflation to slow from 6% to 5.7%. The expected acceleration in headline inflation is due to the jump in US fuel prices in June from $1.17 to $1.3 per liter:

Given this circumstance, a small positive inflation surprise will unlikely trigger sizeable shift in tightening expectations; much more unexpected will be inflation below the forecast of 8.8%, as well as a stronger slowdown in core inflation which is less volatile and characterizes key consumer trends.
If headline inflation accelerates above 9.0%, a bearish breakout of the EURUSD level of 1.00 can be expected while inflation reading in line with the forecast will likely lead to a false breakout and there is a risk that “sell on the facts” scenario will happen in the US dollar, given the significant overbought dollar in the medium term (RSI on the daily timeframe above 74 points).
Currencies showing high sensitivity to expectations of global business cycle - the Norwegian Krone, the Australian dollar, the New Zealand dollar, are rising today, the Japanese yen is consolidating near highs against the dollar (level 137). Futures for US indices show a slight increase, European stock indices are in the red.
Oil prices are trying to recover, but reports that China may be facing a fresh outbreak of covid vases (400 new cases in Shanghai) and risk of tightening of sanitary measures increase concerns about demand from the key consumer. OPEC said yesterday that demand for oil will exceed supply by 1 million barrels this year, but events in China have likely overshadowed that message. There is a risk of further decline in prices, as the threat of a new lockdown in China's major industrial and financial center grows.
Leading survey-based indicators of investor and business sentiment deteriorated in June. Shortly after the publication of investor confidence in Germany on Tuesday, which fell to the lowest level since the debt crisis in the EU in 2011 (-53 points), in the US, the index of small business optimism came out, the fall of which also markedly exceeded expectations as inflation climbed to the first the place of uncertainty factors among US small firm owners:

The risk of a new wave of risk aversion is rising, and a policy tightening by central banks will only reduce risk appetite in equity markets and increase demand for safety plays. The RBNZ raised the rate by 50 bp, the Bank of Canada is expected to raise the rate by 75 bp today. If US inflation jumps above 9.0%, risk assets are likely to come under serious pressure, and the dollar will continue to rally.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Markets brace for 100 bp July rate hike and the room for dovish surprise grows



EURUSD volatility around the round 1.00 level remains elevated which creates ripple waves in other USD cross-pairs. After yesterday's "shocking" CPI release, markets shifted expectations of the upcoming July rate hike from 75bp to 100bp. Earlier, the Bank of Canada surprised markets with a front-loaded 100 bp rate hike, highlighting seriousness of the inflation threat and the need for decisive response. European currencies are set to remain in the shadow of a strong dollar for a while as the factor of interest rate differential, until the Fed's policy stance is clarified on July 27, should keep these currencies under pressure. EURUSD consolidation near the 1.00 level with very weak attempts to rebound indicates a growing risk of a bearish breakout with a target of 0.98-0.99.

At least one Fed official signaled that a 100 bp rate hike at the upcoming meeting is on the table. Speaking yesterday, Atlanta Fed chief Rafael Bostic said that “everything is at play”. Bank Nomura made a 100 bp outcome as a baseline scenario for the upcoming FOMC meeting.

However, there is a risk that the market reaction to the upside surprise in the CPI report was excessive and may be prone to correction. Looking at the details, one can see a strong heterogeneity of inflation by components: prices in two categories, gasoline and utility gas, rose significantly more than others:

In other categories, monthly price growth in most cases did not exceed 1%.

The fact that gasoline prices jumped in June was known long before the release of the inflation report, so the surprise on the upside, in truth, does not look so unexpected. Due to the high dispersion in component price increases and the fact that the prices of goods known for their high volatility were the main contributors to the "shocking" June figure, a decline in inflation in subsequent months could be quite rapid. There is already information that gasoline price inflation began to slow down in July, so from this point of view, too sharp Fed tightening, and even more so a 100 bp step may be unreasonable and do more harm to the economy than good. It is also important to keep in mind that inflation generated by fuel prices growth is not the kind of inflation that can be effectively regulated by raising interest rate (via demand destruction), moreover, the pass-through effect of gasoline inflation into other categories, judging by the numbers, is not so strong.

Considering that futures on the Fed rate price in the 100 bp outcome at the upcoming meeting with an 84% chance, the decision to raise the rate by 75 bp may be regarded as dovish surprise and eventually lead to an overdue downward correction of USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Dollar can extend pullback as markets price out 100 bp rate hike in July


Last week was marked by highly volatile expectations regarding the FOMC July decision: after release of the CPI for June, which showed inflation accelerating to 9.1%, the chances of a 100 bp rate hike soared to 84%, but already on Friday, the retail sales report and inflation expectations from U. Michigan again made 75 bp a baseline scenario. The overbought dollar turned lower, while risk assets rebounded on optimism about the short-term inflation outlook.

Despite a new inflation record in June (in the current business cycle), US retail sales rose 1% in June, beating the 0.8% forecast. More surprisingly, growth in core retail sales, which is less volatile from month to month, almost doubled the forecast - 1% vs. 0.6% expected. The growth of import and export prices sharply slowed down, the dynamics was also better than expected.

The U. Michigan Sentiment Index moved up for the first time in several months, from 50 points in June to 51.1 points in July. The uptick is still minor, but what is more important is the fact of recovery as markets expected a fall to a new low. Inflation expectations of households for the next five years also brought some relief to market expectations, the figure fell from 3.1% to 2.8%. Easing gasoline prices in July have made a major contribution to the drop in household inflation expectations.

Retail sales data and a report from U. Michigan formed a counterbalance to the inflation report for June, indicating, firstly, that consumers could still bear the burden of inflation and continue to spend at quite a solid pace, and secondly, that the upside inflation trend could finally reach a tipping point in June. With the market starting to price in extreme Fed tightening scenarios (a 100bp rate hike in July), Friday's data triggered a significant correction in those expectations, leading to a sharp pullback in the USD index from 109 to 107.50 points and rebound in Asian and European equities. US futures were also up more than 1% on Monday.

Two Fed officials, Bullard and Waller, said last week that while all options for tightening policy in July, including extreme ones, are being considered, they would like to see clear signals in the data that more than a 75 bp is needed. It is clear that the data on retail sales and inflation expectations did not contain such signals. On Monday, the odds of a 100bp rate hike, according to interest rate futures, dropped from 84% to 35.6%. The "blackout period" of the Fed officials this week ahead of next week's meeting and the absence of key US economic reports this week make it unlikely that the market will make a 100bp rate hike as its base case. In this regard, consider extreme long positioning, the risks for the dollar appear to be skewed towards deeper pullback, the dollar index may test the previous consolidation area of 107-106.75:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.