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Stock markets are understandably choppy so far this week, as Europe posts small gains with Italy being the outlier up more than 1%. It's shaping up to be a critical week for Europe, with Brussels nervously waiting to see whether gas flows will resume following the completed maintenance of Nord Stream 1 on Thursday. That's the same day that the central bank will be weighing up a 25 or 50 basis point rate hike to combat soaring inflation in the bloc. There were already massive doubts about whether flows would resume, with many suggesting Russia could be prepared to ramp up the weaponisation of energy in response to Western sanctions. There's been plenty of occasions over the last year when Russia has claimed it hasn't politicised energy supplies with Europe, something many would speculate isn't the case and later this week, that could become extremely clear. In calling a force majeure dating back a month yesterday, Gazprom may have laid out how it plans to delay the resumption of flows which the European Commission expects to happen. Not that the company or the Kremlin would be hoping to fool anyone, it's simply a legal exercise but it could set the… Read More »Choppy trade ahead of ECB

Outlook: We see the outline of the emerging world economy in the form of tidbits. Russia declares force majeure on natural gas to oppress Europe. The announcement came overnight in the US time scale but failed to make the WSJ, NYT or even the FT. Bloomberg includes it but not as a headline. Reuters and the Guardian are the two that headline the story. The FT’s top headline is an unattributed claim that the ECB may consider a 50 bp hike on Thursday instead of the announced and expected 25 bp. “Some Baltic states” is as close as we get to the origin. Meanwhile, we still await the “anti-fragmentation” policy tool. Apple is cutting investment and hiring. Johnson and Johnson whines that profits are suffering from the too-strong dollar. (We used to consult to them on FX at Citi and like most big organizations, they can’t get out of their own way; funny, Japanese companies know how to hedge and you never hear that complaint from them.) The US Congress is considering a bill to fund domestic chip-making to get around foreign shortages–not exactly totally free capitalism. Look what happened to the waste and failure when we tried the same… Read More »Resurgence in risk appetite: Is it simple repositioning?

Tomorrow we get the release of the final June CPI figures for the Euro Area. Since we already had the preliminary numbers at the start of the month, it's much less likely to catch the market by surprise. But, there could be a lot more attention on the figure ahead of the ECB's meeting on Thursday. The consensus of expectations is that the data will confirm what has already been released: Inflation of 8.6% compared to 8.1% in May. That would be the highest rate since the beginning of the Euro. Core inflation is expected to show a mild deceleration to 3.7% compared to 3.8% in May. The question now is, what will the ECB do about it? The context matters Last week, the EC updated its economic forecasts for the year, which it does only every six months. Not surprisingly, the governing body cut its economic growth forecast, and raised its expectations for inflation. But what is significant is the magnitude and the duration. The EC is currently expecting inflation this year to average 6.1% and to still average above target at 2.7% next year. This seems to suggest that they don't see peak inflation yet, and that it… Read More »Euro area final CPI ahead of ECB’s interest rate decision on Thursday

Tomorrow we get the release of the final June CPI figures for the Euro Area. Since we already had the preliminary numbers at the start of the month, it's much less likely to catch the market by surprise. But, there could be a lot more attention on the figure ahead of the ECB's meeting on Thursday. The consensus of expectations is that the data will confirm what has already been released: Inflation of 8.6% compared to 8.1% in May. That would be the highest rate since the beginning of the Euro. Core inflation is expected to show a mild deceleration to 3.7% compared to 3.8% in May. The question now is, what will the ECB do about it? The context matters Last week, the EC updated its economic forecasts for the year, which it does only every six months. Not surprisingly, the governing body cut its economic growth forecast, and raised its expectations for inflation. But what is significant is the magnitude and the duration. The EC is currently expecting inflation this year to average 6.1% and to still average above target at 2.7% next year. This seems to suggest that they don't see peak inflation yet, and that it… Read More »Euro area final CPI ahead of ECB’s interest rate decision on Thursday

Outlook. We lower our GDP forecast for 2022 to 2.7% (from 3.7%) while keeping the 5.7% forecast for 2023.  The economy recovered in June in a post-lockdown rebound. However, China is facing renewed headwinds from rising property stress and weakening US and euro demand. Q2 GDP was weaker than we expected falling 2.6% q/q. Uncertainty over new possible covid restrictions takes a big toll on private consumption and small businesses and the arrival of the more contagious Omicron variant BA.5 is adding to the uncertainty. The main impetus to growth comes from stimulus, not least the part related to infrastructure.  China today Growth. PMIs rebounded further in June and the credit impulse is robust. Retail sales increased in June but is still weak. Confidence is very low. The property sector is still in a deep crisis and stress among developers has increased again lately. Inflation. PPI inflation declined further to 6.1% in June coming from 13.5% in October. CPI inflation is edging higher to 2.5% in June from 2.1% in May, but still below the 3% target. Monetary policy. PBoC has kept the RRR rate unchanged since April. China is reluctant to cut rates and prefers fiscal policy to underpin growth. M1 growth is still weak. CNY. The yuan is still stable against USD after weakening in… Read More »China: Strong headwinds from property, COVID-19 and global recession risks

Outlook. We lower our GDP forecast for 2022 to 2.7% (from 3.7%) while keeping the 5.7% forecast for 2023.  The economy recovered in June in a post-lockdown rebound. However, China is facing renewed headwinds from rising property stress and weakening US and euro demand. Q2 GDP was weaker than we expected falling 2.6% q/q. Uncertainty over new possible covid restrictions takes a big toll on private consumption and small businesses and the arrival of the more contagious Omicron variant BA.5 is adding to the uncertainty. The main impetus to growth comes from stimulus, not least the part related to infrastructure.  China today Growth. PMIs rebounded further in June and the credit impulse is robust. Retail sales increased in June but is still weak. Confidence is very low. The property sector is still in a deep crisis and stress among developers has increased again lately. Inflation. PPI inflation declined further to 6.1% in June coming from 13.5% in October. CPI inflation is edging higher to 2.5% in June from 2.1% in May, but still below the 3% target. Monetary policy. PBoC has kept the RRR rate unchanged since April. China is reluctant to cut rates and prefers fiscal policy to underpin growth. M1 growth is still weak. CNY. The yuan is still stable against USD after weakening in… Read More »China: Strong headwinds from property, COVID-19 and global recession risks

Market sentiment remains anxious, at one point today US stocks were up nearly 1%, following on from a brighter mood in Europe and Asia, however they closed the session down more than 0.96%. The driver of this shift in sentiment was Apple, who announced that it would slow hiring and spending growth in certain regions. This news comes ahead of Apple’s earnings that are scheduled for release next week. Overall, the key themes remain: the market appears to have settled at a 75bp hike for the Federal Reserve next week, CME Fedwatch is now suggesting that there is a 71% probability of a 75bp rate hike from the Fed next week, last week the balance was in favour of a 100bp rate hike. The ECB is expected to hike rates later this week, the PBOC has promised supportive monetary policy to help beleaguered home builders in China, which as a sector is larger than the entire US stock market, and US earnings season continues to ramp up.  Don’t expect the end of the bear market this summer  There are two themes that have guided our analysis so far this year: 1, fundamentals matter more than technicals at this stage of… Read More »ECB, UK inflation and a mixed bag of earnings increase market jitters once again

EUR/USD built on last week’s bounce from a two-decade low amid modest USD weakness. Reduced bets for a 100 bps Fed rate hike and sliding US bond yields undermined the buck. A positive risk tone also undermined the safe-haven greenback and remained supportive. The uptick lacked bullish conviction amid recession fears and ahead of the ECB on Thursday. The EUR/USD pair kicked off the new week on a positive note and built on its modest recovery move from the vicinity of mid-0.9900s, or the lowest level since December 2002 touched last week. The uptick was sponsored by some follow-through US dollar profit-taking slide, led by diminishing odds for a more aggressive policy tightening by the Federal Reserve. In fact, two of the most hawkish FOMC members – Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard – said last Thursday that they were not in favour of the bigger rate hike at the upcoming meeting in July. The remarks forced investors to scale back their expectations for a supersized 100 bps increase in the benchmark rate. This was evident from a further decline in the US Treasury bond yields, which continued undermining the greenback. On the economic data… Read More »EUR/USD Forecast: Upside potential seems limited ahead of ECB on Thursday

EUR/USD built on last week’s bounce from a two-decade low amid modest USD weakness. Reduced bets for a 100 bps Fed rate hike and sliding US bond yields undermined the buck. A positive risk tone also undermined the safe-haven greenback and remained supportive. The uptick lacked bullish conviction amid recession fears and ahead of the ECB on Thursday. The EUR/USD pair kicked off the new week on a positive note and built on its modest recovery move from the vicinity of mid-0.9900s, or the lowest level since December 2002 touched last week. The uptick was sponsored by some follow-through US dollar profit-taking slide, led by diminishing odds for a more aggressive policy tightening by the Federal Reserve. In fact, two of the most hawkish FOMC members – Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard – said last Thursday that they were not in favour of the bigger rate hike at the upcoming meeting in July. The remarks forced investors to scale back their expectations for a supersized 100 bps increase in the benchmark rate. This was evident from a further decline in the US Treasury bond yields, which continued undermining the greenback. On the economic data… Read More »EUR/USD Forecast: Upside potential seems limited ahead of ECB on Thursday

Although US retail sales figures are often the more important news, their slight overshooting relative to expectations has, in our view, less impact on markets than the import price index. According to preliminary estimates, US sales rose by 1% in June against expectations of 0.9% and a 0.1% contraction a month earlier. Not too much better than expected, given that volume is not price-adjusted, which was higher than expected earlier in the week. The good news for market participants is the cooling of import price increases. For the month, the index added 0.2% vs 0.7% expected and to 10.7% y/y versus 11.6% a month earlier, with 12.1% forecasted. This deceleration results from the correction in commodity prices and the strengthening of the dollar in previous weeks. But most importantly, this index indicates that the peak of the rate of price increases is over. More signs of a bullish trend reversal in prices might ease the Fed’s pressure on the key rate. Market participants are now trying to weigh the chances of a one percentage point hike in a week and a half. A softening of their expectations could trigger a corrective pullback in the dollar and an attempted equity market… Read More »With signs of US price pressure decline, will the Fed soften its approach?