The news on Russia scaling back gas supplies through Nord Stream 1 to just 20% remained the dominating trading theme yesterday. Investors increasingly consider a (sharp) recession, especially in Europe, as unavoidable. The dark mood was compounded by yet again downwardly revised IMF growth forecasts (cfr. infra). Stocks in Europe and on WS shed 0.8% and 0.7-1.9% respectively. German yields fell 6.4 bps in the 2y to >9 bps further down the curve. The 10y lost the 1% level. US yields initially joined the downtrend before bottoming in early US dealings. The curve eventually bear flattened with changes between 1 and 3.9 bps even though eco data wasn’t very rosy. House prices rose less than expected. Combined with disappointing new home sales it underscored the cooling market. Consumer confidence (Conference Board) in July eased more than expected as well, to 95.7, down from 98.7. It’s the weakest reading since February last year. Moves on FX markets were classic risk-off. The yen, Swiss franc and dollar secured the top three. EUR/CHF hit an all-time closing low of 0.974. EUR/USD lost more than a percent to 1.012 and EUR/JPY forfeited more than a full big figure to 138.51. But even sterling won against the weak euro, even sterling. EUR/GBP slid to 0.8412. Meanwhile, the pound follows debates between UK PM candidates Truss and Sunak with the former suggesting to lower the taxes Sunak has raised in order to plug the gaping hole in public finances.
Markets in Asia trade mixed even as some US bellwether companies (Microsoft, Alphabet) produced bumper earnings. Nervousness going into the Fed meeting tonight is palpable. We, and markets, expect the US central bank to hike by 75 bps to bring the policy rate to 2.25/2.50%, i.e. the neutral level. But more importantly will be Powell’s message about the pace going forward. A slew of poor economic data (confidence indicators, housing) argues for slowing down. However, a still strong (but notoriously lagging) labour market and way too high inflation suggest otherwise. There is a large amount of data to be published going into the next meeting, including GDP numbers tomorrow and two more inflation prints. Powell may therefore refrain from guiding markets explicitly and stress the importance of being data-dependent. Keeping all options open and going meeting-by-meeting is probably the best one can do to not to rock the boat on markets. In any case we don’t think the Fed chair will already hint at the end of the cycle let alone rate cuts the way markets foresee for the end of this year and mid next year respectively. As such we believe US interest rates to be well supported, especially at the front end of the curve. This should also keep the dollar in favour of investors, especially against the likes of the euro which has a worse set of problems to deal with.
Inflation in the second quarter in Australia jumped 1.8% Q/Q to be 6.1% higher compared to the same period last year. The Q2 yearly rise was the fastest pace since 2001 and compared to 2.1% Q/Q and 5.1% Y/Y in Q1. The Reserve Bank of Australia aims to keep inflation within a 2-3% range. The Q2 rise in headline inflation was slightly slower than market expectations. Underlying inflation (trimmed mean) accelerated further by 1.5% Q/Q to 4.9% Y/Y (from 3.7%). Even as inflation is well above the RBA target and might rise even further later this year, markets are positioned of a 50 bps rate hike at the August 2 RBA meeting rather than a super-sized 75 bps step. The 2-y Australian government bond yield this morning dropped 11 bps to 2.60%. The Aussie dollar slipped from the 0.6960 area to the 0.6920 area immediately after the release, but the setback eased soon as the US dollar is losing some momentum overall.
The IMF further the cut the global growth forecast as increasingly gloomy developments are materializing. Several shocks have hit a world economy that was already weakened by the pandemic. High inflation worldwide is resulting in tighter financial conditions. China faced a worse-than-anticipated slowdown due to COVID- 19 outbreaks and lockdowns and further negative spillovers from the war in Ukraine are weighing on global activity. The IMF reduced 2022 growth in the baseline scenario to 3.2%, 0.4%pt lower compared to April. Global inflation has been revised up to reach 6.6% in advanced economies and 9.5% in emerging market and developing economies. The IMF only expects global output growth of 2.9% on 2023 as monetary policy is expected to slow activity. Risk to the outlook are overwhelming tilted to the downside.