Inflation in focus

• The focus today will be on inflation, particularly in the US.  CPI is expected to have increased 0.5% m/m and 4.9% y/y in June, only slightly softer than the 5% inflation recorded in May. Core inflation is forecast to accelerate to 4.0% y/y from 3.8% in May.
• The US administration is reportedly considering a digital trade agreement with Indo-Pacific countries as a way of re-engaging with the region on the trade front, according to Bloomberg.  The agreement could include Canada, Chile, Japan, Malaysia, Australia, New Zealand and Singapore and would set out standards around the use of data, electronic customs arrangements and other ways to facilitate trade between the countries. The Trump administration had withdrawn from negotiations for the US to join the Trans-Pacific Partnership agreement in 2017.
• UAE broad money supply declined -0.3% m/m in May but was up 0.5% y/y.  Bank deposits fell -0.1% m/m but were also up 0.5% y/y while gross bank lending declined -0.7% m/m and -1.5% y/y in May. Lending to the private sector contracted -0.2% m/m and -2.8% y/y.
• Saudi Arabia has set an upper limit to domestic petrol prices, with the state covering any further price increases from June levels.  The move suggests the commitment to reducing subsidies may be waning as the budget benefits from higher oil prices.
• Covid-19 cases in the US surged 47% in the week to Sunday, the biggest weekly rise since April as the delta variant spreads.  Only around half of the US population has been vaccinated against the coronavirus. France and Greece will mandate Covid-19 vaccinations for certain segments of the population, including healthcare workers.  In the UK officials have cautioned that the current wave of infections may not peak until mid-August with hospital admissions and deaths expected to rise in the coming weeks. The UK is set to lift remaining restrictions on July 19^th.

Today’s Economic Data and Events

• 10:00 Germany CPI (June) forecast 0.4% m/m (2.3% y/y)
• 10:45 France CPI (June forecast 0.2% m/m (1.5% y/y)
• 16:30 US CPI (June) forecast 0.5% m/m (4.9% y/y)

Fixed Income

• An apparent turnaround in risk appetite helped to push USTs slightly lower overnight with the front end of the curve taking more of the move down. Yields on the 2yr UST added a bit more than 1bps to settle at 0.2267% while the 10yr closed only modestly higher at 1.3645% but had recovered from a drop to around the 1.32% level earlier in the day.
• New York Fed president John Williams noted that continued purchases of Treasuries and MBS by the Fed is helping to keep the cost of house financing low even as there is open debate about whether the buying of MBS is contributing to elevated house price growth.
• Emerging market bonds were generally weaker overnight with yields rising 3bps on 10yr Indian government bonds to 6.216% and a 2bps rise in South African 10yr yields to 9.258%. Yields on Turkish 10yrs, however, did move lower to around the 17% handle.
• Regionally the primary market is quiet ahead of holidays across much of the Middle East next week. PIF, Saudi Arabia’s sovereign wealth fund, indicated it was looking a potential green bond by Q4 this year.

FX

• A turnaround in risk sentiment in the second half of the day failed to dent the dollar’s gains overnight with the DXY index adding 0.14% to 92.218. in early trading today the dollar is being offered generally although the decline is modest against most peers.
• EURUSD stumbled at the start of the week, slipping by 0.13% to 1.1861 while GBPUSD witnessed a similar sized move to settle at 1.3883. Both are tentatively edging higher in early trade today. USDJPY rose by 0.2% to 110.37 and is nudging upward today.
• Moves in commodity currencies were more notable with both AUD and NZD falling against the dollar by 0.16% and 0.27% respectively. However, both have already recovered those losses with the AUD trading at around 0.749 and the NZD at 0.6999 in early trade today. USDCAD was marginally stronger overnight, at 1.2453.

Equities

• Global equity markets started the week on the front foot, and in the US all three major benchmark indices closed on Monday at record highs. The NASDAQ was the relative laggard with a 0.2% gain while both the Dow Jones and the S&P 500 added 0.4%. The prospect of strong earnings results is supporting the growth, which is being replicated in Asian markets this morning. The Hang Seng is up 1.7% at the time of writing and the Nikkei 0.8%.
• The STOXX 600 also hit a new record high yesterday, with the prospect of extended ECB support likely supporting shares, despite warnings from the central bank around banking sector dividend payouts.  The composite index gained 0.7%, with the DAX also up by that amount while the CAC gained 0.5%. The FTSE 100 was the European laggard yesterday, weighed down by hospitality firms amid concerns around the strength of demand for services once the remaining pandemic-related restrictions are lifted on July 19.
• Within the region the closed down -0.1% while the Tadaul gained the same amount. The ADX gained 0.4% and the EGX 30 0.8%.

Commodities

• Oil prices drifted lower overnight with Brent futures closing down 0.5% at 75.16/b and WTI down by 0.6% at USD 74.1/b. the uncertainty around the OPEC+ deal is for now failing to push back against anxiety that demand will be affected by the spread of the delta variant of Covid-19.
• Major oil producers in the Middle East have been raising their official selling prices for August in a clear sign to the market to prepare for the oil market to remain tight.
• Gold prices took a dent thanks to a shift in risk appetite with prices down 0.11% overnight to USD 1,806/troy oz. They are, however, higher in early trading today. Elsewhere industrial metals were largely lower, enduring the impact of a higher USD.

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