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EU Summer Interim Economic Forecast; Germany WPI; updates from BMW, SEB, EQT, Aker Solutions, Barratt Developments, Ashmore, Experian, Severn Trent, Just Eat, BT, Electrocomponents
Opening Call:
Shares in Europe should rise early Thursday as investors prepare for the Fed to hike rates quicker to fight inflation. In Asia, stocks were mostly higher; the dollar, Treasurys yields and oil gained; and gold was a touch lower.
Equities:
European stocks should open slightly higher on Thursday, after U.S. futures pared early losses, as investors weigh whether the Federal Reserve may lift its target interest rate by a full percentage point later this month to combat surging inflation.
“At a minimum, a 75-bp hike is a given at the July 26-27 FOMC meeting,” said Piper Sandler. “But a 100-bp hike will likely be on the table.”
Read: Fed’s Mester: CPI Data Terrible, But Not Ready to Call for 100-Basis-Point Rate Increase
Stocks on Wall Street ended lower on Wednesday for a fourth straight day as the CPI data showed inflation at 41-year high. But after all was said and done, the selling wasn’t so bad and the major indexes were able to end above their lows for the day.
U.S. corporate earnings season kicks into gear on Thursday, and investors will be watching results for the second quarter, and most important, the outlook for the rest of the year.
“Based on these continued high prices in energy, the supply-chain bottlenecks and corporate earnings are something that investors are going to be hyper focused on,” said AXS Investments.
Further Reaction to U.S. Inflation:
When Jerome Powell said soon after the FOMC announcement of a 75-basis-point increase to the Fed Funds rate target in June that such a move shouldn’t be regarded as common in the future, no one imagined that it was because the next hike could be 100 basis points, said NAB.
Yet, in the wake of a second consecutive big upside surprise in U.S. inflation readings, Fed funds futures are pricing the July FOMC meeting at 91.5 basis points, up from 74.5 basis points pre-CPI.
NAB said while there are a number of indications that July’s CPI won’t make nearly as grim reading as the June’s–helped by falling fuel prices–investors have rightly viewed the numbers as signifying the need for the Fed to go still harder in its quest to suppress demand even if it’s the case that some of the supply-chain bottlenecks affecting inflation are starting to ease.
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Piper Sandler said inflation “is simply too high and too persistent,” to keep the Fed funds rate below long-term neutral.
It said a 100-basis point hike would become a base case in two ways: “Either via the market progressively pricing it in and the Fed not pushing back, or via some explicit communication, especially by FOMC leadership.”
The CME target rate probabilities tool moved a lot on Wednesday, showing the odds of a 100pb increase at 77%.
Forex:
The dollar pushed higher in Asia, with the ICE Dollar Index hovering around a 20-year high on concerns over aggressive Fed tightening following the U.S. CPI print.
MUFG Bank said data, hawkish Fed rhetoric and the Bank of Canada’s 100bp rate increase have fueled market expectations of more aggressive policy tightening by the Fed.
Bank of America said its bullish dollar outlook has focused on four underlying drivers: “Fed policy normalization, equity selloff, high oil prices and weak China.”
It said none of these factors “seem likely to reverse near-term at a time when idiosyncratic drivers of the other majors [EUR, JPY & CNH] remain uniformly negative.”
BofA said the “earliest turning point we can envisage is the fourth quarter of 2022 when the Fed potentially shifts from autopilot to being more data dependent and there is some sequential improvement in China growth. Until then the path of least resistance remains a stronger dollar.”
Read: Hong Kong Monetary Authority Sells U.S. Dollars to Defend Currency Peg
Bonds:
Two and ten-year Treasury yields gained early Thursday, leaving the curve inverted by the most in almost 22 years and signaling the potential for a looming economic downturn.
In terms of inflation, Frost Investment Advisors said: “We’re convinced that we’re in the peaking process here, led by housing and consumer goods. But the question is once inflation decelerates, where do we settle? We’re in the camp that sees some persistent pressures that will keep inflation above the Fed’s comfort zone, at 4% to 5%, by year-end.”
Read Barrons.com: A Key Part of the Yield Curve Might Invert. There’s Good and Bad News
Energy:
Oil futures edged higher in Asia, extending Wednesday’s modest gains.
Fears of recession and the potential for renewed Covid restrictions in China were blamed for a rout that saw WTI slump nearly 8% and Brent down more than 7% on Tuesday. Analysts said the drop left crude oversold and due for a bounce.
“Brent is in oversold territory at the moment, and the fundamentals do not justify the scale of the selloff we have seen in recent weeks. The oil market is still tight, as reflected in the prompt Brent spread. The outlook is for this tightness to persist,” said ING.
Phillip Securities Research said that after the recent slide, oil appears to be in oversold territory, based on its relative strength indicator, which is a measure of market sentiment.
Metals:
Gold prices were back in the red in Asia, weighed once again by a firmer dollar. Bullion on Wednesday managed to shake off losses from the hotter-than-expected U.S. inflation data to finish higher, buoyed by a pullback in the greenback.
OANDA said non-interest bearing gold may begin to see some safe-haven flows as global recession risks will cap how high rates can go by year-end.
Copper and iron ore prices were steady, underpinned by hopes for improving demand and despite sporadic Covid-19 outbreaks across China and its zero-Covid policy to contain the virus.
ANZ said China’s trade data released on Wednesday showed that demand was improving, with imports of copper and concentrate rising by more than 20% on year in June, suggesting the easing of restrictions has increased buyers’ confidence to restock.
Guotai Junan Futures said port inventories of iron ore were accumulating against a backdrop of stronger supply and softer demand.
TODAY’S TOP HEADLINES
Fed’s Mester: CPI Data Terrible, But Not Ready to Call for 100-Basis-Point Rate Increase
Federal Reserve Bank of Cleveland President Loretta Mester said inflation data released earlier Wednesday was terrible, but she wasn’t yet ready to commit to further accelerating central bank interest rate rises to deal with the problem.
The June consumer-price index “was uniformly bad, there was no good news in that report,” Ms. Mester said in a Bloomberg radio interview. “Until we get and see convincing evidence that inflation has turned the corner, is on a downward path and is sustainably on a downward path, we just have more work to do.”
Barkin Says Inflation Fight Must Occupy Fed’s Full Attention
A Federal Reserve official said Wednesday that the central bank needed to ensure it would bring down inflation even if that raised the prospect of a recession over the coming year.
“I acknowledge there is near-term recession risk, but I think the medium term is better if you have inflation under control,” said Richmond Fed President Tom Barkin in an interview Wednesday. “Our focus should be on controlling inflation. If we control inflation, we set ourselves up to have a much stronger economy.”
Hong Kong Monetary Authority Sells U.S. Dollars to Defend Currency Peg
The Hong Kong Monetary Authority, the city’s de facto central bank, sold U.S. dollars during New York hours on Wednesday to defend the city’s longstanding currency peg to the greenback.
Asia’s currencies, including Hong Kong’s, are coming under pressure as the U.S. Federal Reserve raises interest rates more aggressively than other central banks in order to contain decades-high inflation. And that is boosting the appeal of U.S. dollar-denominated fixed-income assets.
U.S. Economy Slows in Several Parts of the Country, Fed’s Beige Book Says
Several parts of the country showed signs of slowdown in recent weeks and price increases remained significant as the U.S. economy continued to modestly expand, the Federal Reserve said in a report.
Throughout the country, prices for food and energy rose, according to the beige book, which is a compilation of economic anecdotes collected through July 13. The latest publication released Wednesday comes as inflation hit 9.1% in June, a four-decade high.
Singapore Central Bank Tightens Monetary Policy in Unexpected Move
The Monetary Authority of Singapore has tightened monetary policy, in an unexpected move, to lean against price pressures becoming more persistent.
Singapore’s central bank will re-center the midpoint of the Singapore dollar nominal effective exchange rate policy band upward to its prevailing level, the MAS said in a statement Thursday. There will be no change to the slope and width of the band.
Bank of Canada Surprises With Full-Point Rate Rise to Combat Inflation
OTTAWA-The Bank of Canada raised its policy rate by a full percentage point and said that further rate increases are necessary, marking one of the more dramatic moves to date by a developed-world central bank to drive down inflation.
The Bank of Canada lifted its target for the overnight rate to 2.50% from 1.50%, the biggest onetime increase since 1998, when monetary officials tried to bolster the domestic currency amid financial crises in Asia and Russia. The last time the Bank of Canada’s policy rate was this high was in the fall of 2008, or before the onset of the global financial crisis….
Read More: EMEA Morning Briefing: Investors Weigh Fed’s Next Move After CPI Surge