UK job growth slows

• The UK unemployment rate for the three months ending May 2022 held steady at 3.8%, the same level recorded a month earlier. The pace of job growth has slowed dramatically, however, to 31k for June and May respectively, down from more than 70k per month in April and March. Wage growth has been holding steady at 4.3% y/y in May when stripping out bonuses. Total earnings, including bonuses, still remains strong at 6.2% y/y though slower than the prior three-month period. While the wage growth and labour market looks strong on the surface, wage growth is still running well behind inflation of more than 9% as of May 2022. Data for prices in June will be released later today.
• Markets reacted sharply to reports that the ECB is seriously considering making use of a 50bps hike at its governing council meeting later this week. A 50bps hike would be an aggressive start for the ECB in its path of normalizing policy which has seemingly dithered about how far it will take rates later in the year. ECB leadership had been signaling for a 25bps hike in July followed by potentially 50bps at the September meeting. Market pricing for a 50bps hike shifted substantially upward though still appears roughly balanced between 25bps and 50bps.
• House construction in the US slowed in June to 1.56m, down from 1.59m a month earlier and its lowest level since September 2021. The rise in US mortgage costs, as the Fed hikes rates, is contributing to a broad slowdown in the US housing market, helping to dampen sentiment among homebuilding firms.
• Banks in China kept their prime lending rates unchanged with the five-year rate, which underpins mortgage costs, steady at 4.45% and the one-year loan prime rate at 3.7%. The stability in rates follows on from the PBOC which has kept its own policy rates unchanged since the start of the year

Today’s Economic Data and Events

• 10:00 UK CPI y/y June: forecast 9.3%
• 10:00 GE PPI y/y June: forecast 33.7%
• 12:00 SA CPI y/y June: forecast 7.3%
• 16:30 CA CPI y/y June: forecast 8.4%
• 18:00 US Existing home sales June: forecast 5.36m
• 18:00 EC Consumer confidence July: forecast -24.9

Fixed Income

• European markets led benchmark bonds lower overnight on anticipation that the ECB could make use of a 50bps hike at its meeting tomorrow, rather than the 25bps as signalled earlier. Yields on the 2yr Schatz rose by 12bps to 0.621% while the 10yr bund yield added 6bps to 1.273%. Yields were higher across the eurozone and peripheral bonds will be in focus as the market looks to the nature of the ECB’s proposed anti-fragmentation tool. Italian 10yr yields added 4bps to 3.313%. Markets are split down the middle in terms of pricing a 25bps to 50bps hike from the ECB, suggesting that the impact of a larger hike may be better absorbed.
• US Treasury yields got dragged higher as well despite no material catalyst from data. Yields on the 2yr UST added 6bps to 3.2269% while the 10yr was up by more than 3bps to 3.019%.
• Emerging market bonds generally were weaker overnight with yields on South African 10yr bonds up 3bps to 11.505% along with higher yields across much of CEEMEA. Turkey 10yr local bond yields fell 12bps to 17.93%, however, while Indian 10yr yields were essentially unchanged at 7.435%.

FX

• Currency markets had a relentless day of dollar selling overnight with the greenback now down three days in a row. EURUSD soared on the potential of a larger hike from the ECB, ending the day up 0.8% at 1.0227 and holding onto those levels in early trade this morning. A 50bps hike is by no means guaranteed and there is a risk that the anti-fragmentation tool disappoints markets but at least for now, the Euro looks to be able to avoid a retest of parity.
• GBPUSD also moved higher, adding 0.3% to 1.1995. Andrew Bailey, governor of the Bank of England, said the bank would look at a 50bps hike in the August meeting at speech in the City of London. We expect the BoE will move by 50bps in August and September to push back against the high inflation rates the UK is currently enduring.
• The Bank of Japan meets tomorrow like the ECB with no change in policy expected. USDJPY was relatively stable on the close overnight, holding at 138.19.
• Commodity currencies were stronger across the board with USDCAD down by 0.8% at 1.2870 while AUDUSD added 1.3% to 0.6897 and NZDUSD gained 1% to 0.6225.

Equities

• Benchmark equity markets turned sharply higher overnight with the Dow Jones index up more than 2.4% while the S&P rose by nearly 2.8% and the NASDAQ rallied more than 3%. In Europe, the EuroStoxx 50 index gained 2% while the FTSE rose by 1%.
• Asian markets have opened strongly today with the Nikkei up by 2.4% while the Hang Seng has added 1.8% and the ASX index has gained 1.7%.
• Regional markets closed in the green overnight with the DFM up by 0.5% and the ADX gaining a similar amount. The Tadawul in Saudi Arabia rose by 1.8%.

Commodities

• Oil prices pushed higher overnight in somewhat lacklustre trading. Brent futures added 1% to USD 107.35/b while WTI gained almost 1.6% to settle at USD 104.22/b. Data from the API reported a build in US crude inventories of 2m bbl last week while official numbers from the EIA will be released later today.

Click here to Download Full article