FOMC minutes show focus squarely on inflation

• Minutes from the June FOMC meeting, where the Federal Reserve hiked rates by 75bps, laid bare the Fed’s fixation on combating inflation. For the FOMC, getting inflation to “2% [was] crucial to achieving maximum employment on a sustained basis” and that there was “a significant risk…that elevated inflation could become entrenched.” The FOMC also alluded to an “even more restrictive stance” being appropriate if inflation remains high. The minutes would suggest to us that the FOMC could indeed persist with another 75bps at the July meeting later this month though the downswing in some market prices, particularly commodity prices, opens up room for them to hike by 50bps.
• The ISM services index fell in June to 55.3, down from 55.9 a month earlier but came in better than expected. New orders slumped while employment also moved below 50, signifying a contraction in activity. While the report does indicate slower activity it still is holding comfortably above the balancing point of 50, dividing expansion and contraction. The slide in employment last month may be reflected in the release of the non-farm payrolls report later this week.
• Retail sales in the Eurozone improved in May, rising by 0.2% m/m compared with a contraction of 1.4% a month earlier. Non-food buying seemed to lead the purchasing, up by 1.2% m/m while food, drink and tobacco fell by 0.3% m/m. At a country level, German retail sales rose by 0.6% m/m while in France sales were flat.
• Huw Pill, the chief economist of the Bank of England, said the bank would hike rates at a faster pace to avoid inflation becoming entrenched in the UK economy. He said that “bold moves” can disrupt markets even as high inflation pushes the BoE to need to steadily tighten policy. We expect a 50bps hike at the bank’s next meeting as well as in September, even amid the current instability in financial markets.

Today’s Economic Data and Events

• 10:00 GE Industrial production May: forecast -1.8% y/y
• 16:30 US Trade balance May: forecast USD -84.7bn
• 16:30 US Initial jobless claims Jul 2: forecast 230k

Fixed Income

• The hawkish tone from the June FOMC minutes helped to push US Treasuries lower later in the session. Yields on the 2yr UST added 18bps to 3.0018% while the 10yr yield gained 12bps to 2.928%. The 2s10s spread closed inverted at a degree of 7bps overnight.
• European bond markets were more mixed with the front end of the German curve rallying. Yields on 2yr German bonds fell almost 5bps to 0.374% while the 10yr bund yield gained almost 3bps to 1.203%. In the UK. The 2yr gilt yield jumped almost 8bps to 1.735% while the 10yr yield added 4bps to 2.09%.

FX

• Currency markets continued to flock to the dollar overnight with the broad DXY index up 0.5% to 107.096. EURUSD provided much of the losses, falling to 1.0182, down 0.82% and opening up the way to Dollar/Euro parity seemingly as an inevitability at this stage. GBPUSD fell by about 0.2% to 1.1926 while USDJPY was slightly higher at 135.95.
• Commodity currencies were weaker against the dollar with USDCAD up by slightly less than 0.1% to 1.3042. AUDUSD dropped by 0.3% to 0.6779 while NZDUSD fell almost 0.4% to 0.6148.

Equities

• Major global equity indices in Europe and North America enjoyed some relief yesterday with gains across the board. In the US, the Dow Jones added 0.2% while both the S&P 500 and the NASDAQ gained 0.4%. In Europe, the CAC was the notable gainer as it ended the day 2.0% higher. The FTSE 100 shrugged off political turmoil to add 1.2% and the DAX added 1.6%.
• Locally, the Tadawul gained 0.6% but both the ADX (-0.2%) and the DFM (-1.9%) closed lower.

Commodities

• Oil prices extended their losing streak overnight, falling by 2% in the Brent market to USD 100.69/b while WTI was off by 1% to USD 98.53/b. Both contracts are now sub-USD 100/b as markets price in recession fears and a negative demand adjustment.
• Data from the API showed a build in US crude inventories of 3.8m bbl last week while gasoline and distillate stocks both dropped.

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