US data likely to fix FOMC focus on inflation

• The US non-farm payroll report for June released over the weekend saw a further 372,000 net gain in jobs. This was down slightly from the downwardly revised 384,000 gain in May but better than consensus had expected and seeming to discount conjecture that the US is already in a recession. The headline unemployment rate remained stable at 3.6%. Meanwhile, CPI inflation is expected to have risen to 8.8% y/y in June in data set to be released tomorrow. In this environment, with a still strong labour market and inflation that continues to gather pace, the FOMC will remain committed to the more aggressive tightening stance at the upcoming July meeting, as laid out in the recent minutes from the June meeting.
• More aggressive tightening by the FOMC than its developed market peers so far this year continues to play out in currency markets. The Euro has been especially in the news as it has all but hit parity with the dollar amidst the policy rate differential and deteriorating outlook in Europe, where the gas supply from Russia is under threat and the risk of a new debt crisis mounts.
• UAE President Sheikh Mohammed has announced more support for households through the distribution of AED 1.5bn in housing benefits to Abu Dhabi citizens in a plan which is expected to benefit over 1,100 households. This follows the AED 28bn social support package for lower-income Emirati households pledged earlier in July.

Today’s Economic Data and Events

• 13:00 Germany ZEW survey expectations, July. Forecast: -40.5
• 13:00 Germany ZEW current situation, July. Forecast: -34.5
• 16:00 India industrial production, May, % y/y. Forecast: 20.7%

Fixed Income

• US Treasuries rallied at the start of the week amid a general risk-off move. Yields on the 2yr UST dropped by about 3bps to 3.0718% and are extending moves lower in early trade today while the 10yr UST yields fell almost 9bps to 2.9928% and has lost an additional 3bps in trading today. Esther George, the president of the Kansas City Fed warned that hiking rates “too fast raises the prospect of oversteering” while the still strong non-farm payrolls report out at the end of last week helps to build a case for another 75bps at the FOMC meeting later this month.
• European bond markets closed stronger with gains across all major securities. The 2yr Schatz yield fell by 9bps to 0.41% while the 10yr bund yield fell 10bps to 1.239%. In the gilt market, the 2yr yield fell 5bps to 1.843% and the 10yr yield fell more than 5bps to 2.173%.
• Over the last several days, Fitch cut their rating on Turkey’s sovereign rating to ‘B’ with a negative outlook.

FX

• Risk-off sentiment helped to propel the US dollar higher overnight and push EURUSD essentially to parity. The single currency closed down 1.4% at 1.004 and has moved even lower in early trade today as ominous signs for the health of the Eurozone economy continue to rise. The Japanese yen extended its losses with USDJPY adding almost 1% to 137.44 while GBPUSD seemed to shrug off the political instability caused by the resignation of prime minister Boris Johnson last week but was caught up in the risk off move overnight, falling by 1.2% to 1.1892.
• Commodity currencies wrenched lower overnight as well with USDCAD adding almost 0.5% to 1.3007 and AUDUSD down by nearly 1.8% to 0.6734 and NZDUSD down by 1.3% to 0.6111.

Equities

• The week started off with a bout of negative sentiment with tech stocks slumping further and high-profile voices warning that there was as yet no bottom in sight for equity markets. In Asia, the Hang Seng lost -2.8% and the Shanghai Composite dropped -1.3%. In Japan the Nikkei by contrast closed up 1.1%, following the expansion of the ruling coalition’s majority following voting over the weekend.
• In Europe the FTSE 100 closed flat as markets wait to see who the eventual successor to PM Boris Johnson will be, but the CAC (-0.6%) and the DAX (-1.4%) both ended the day lower.
• In the US, all three major indices fell as the Dow Jones dropped -0.5%, the S&P 500 -1.2% and the NASDAQ -2.3%.

Commodities

• Oil prices closed mixed to start the week although the bias appears to be lower for now. Brent is down by about 1% in early trade today at USD 106.08/b while WTI has fallen by a bit more than 1% to USD 103/b. This week sees US President Joe Biden visit the GCC region with some effort to try and encourage higher oil production. Comments from Biden administration officials suggests the US still thinks there is room among Saudi Arabia and others to increase output to help ease energy inflation.

Click here to download charts and tables