Markets looking to Powell testimony

Fed chair Jerome Powell will provide a testimony to the House Financial Services Committee where he will likely stress that more work is required to push back against inflation even as it has slowed substantially in the US. We would expect questions to revolve around why the Fed chose to keep policy unchanged at its June FOMC meeting even though members signalled more hikes ahead. Chair Powell may also face questioning on whether the Fed will need to quickly cut rates if economic conditions start to worsen, particularly in the labour market.

Bank of France governor Francois Villeroy de Galhau said the ECB had “done most of the path” on hiking rates. He said rates were nearing their peak and any further hikes would “depend on the inflation data observed.” Markets are pricing in a little less than two more 25bps hikes from the ECB by the end of the year.

Egypt and Turkey have both announced hikes to their minimum wages yesterday as the governments look to mitigate the effect of elevated inflation on more vulnerable consumers. Egypt’s National Council of Wages announced that the minimum wage for private sector workers would rise from EGP 2,700 a month to EGP 3,000 – the second hike in six months. Meanwhile, Turkey has also hiked for a second time this year as it announced a 34% hike from July 1, taking the monthly minimum wage to a net TRY 11,402 a month. The central banks of both countries are due to announce their latest rate-setting decisions on Thursday.

Today’s Economic Data and Events

• 10:00 UK CPI y/y May: forecast 8.4%
• 11:00 TU real sector confidence June

Fixed Income

• US Treasuries pulled higher overnight even with little material catalyst. Yields on the 2yr UST fell about 3bps to 4.6847% while the 10yr yield dropped 4bps to 3.7207%. European bonds rallied substantially with bund yields down about 11bps at 2.4% and gilt yields dropping almost 16bps to 4.327% ahead of tomorrow’s Bank of England meeting.
• Emerging market bonds generally closed more mixed with South African 10yr yields up about 8bps to 11.919% while Turkey 10yr yields fell 19bps to 16.6%.

FX

• Major currency pairs showed little clear direction overnight with the broad dollar index closing about flat. EURUSD settled near unchanged at 1.0918 while GBPUSD fell by 0.2% to 1.2765. USDJPY by contrast moved in favour of the yen, dropping 0.4% to 141.47.
• Commodity currencies showed more volatility with AUDUSD the largest mover, falling by 1% to 0.6785 even as minutes from the recent RBA meeting leant hawkish. NZDUSD followed is Tasman peer lower, down 0.5% at 0.6168 while USDCAD closed higher by 0.2% at 1.3235.

Equities

• With little in the way of key data ahead of Jerome Powell’s testimony tonight and the BoE tomorrow, equity markets ran out of steam yesterday, starting off in Asia where the Hang Seng closed down 1.5% and the Shanghai Composite 0.5%. The Nikkei managed to close up 0.1% but the Topix lost 0.3%.
• In Europe, the composite STOXX 600 ended the day 0.6% lower as the CAC dropped 0.3% and the DAX 0.6%. In the UK, the FTSE 100 lost 0.3%.
• In the US, the Dow Jones was the biggest loser as it ended down 0.7%. The NASDAQ dropped 0.2% and the S&P 500 0.5%.
• Locally, the DFM ended the day 0.3% lower while the ADX managed to add 0.1%. Saudi Arabia’s Tadawul also gained 0.1% while Turkey’s Borsa Istanbul started positively but in the end closed down 0.3%.

Commodities

• Oil prices dropped overnight as markets keep their eye on disappointing data and policy coming out of China. Brent futures fell 0.3% to USD 75.90/b and WTI dropped by 1.8% to USD 70.50/b.