MNI ASIA OPEN - No Let Up In Russia/EU Gas Turmoil

NEWS:

US (MNI): Manchin Tests Positive For COVID Ahead Of Crucial Week In Senate
Senator Joe Manchin (D-WV) has announced on twitter that he has tested positive for COVID-19 as the chamber prepares to enter a legislative push ahead of the August recess. Capitol Hill reporter Taylor Popielarz: "Unwelcome news for Senate Democrats as they try to get through a laundry list of legislative items between this week and next week, before leaving town for August recess. Manchin is specifically needed for a reconciliation package (prescription drugs and Obamacare) to pass."

ECB (BBG): The European Central Bank’s new tool to limit undue financial-market stress as interest rates are lifted won’t fit all scenarios, according to Governing Council member Martins Kazaks. The Transmission Protection Instrument, unveiled last week as the ECB raised borrowing costs for the first time since 2011, will be used in particular situations and adjusted to fit them as they arise, the Latvian central bank chief said in an interview in Frankfurt.

RUSSIA/UKRAINE (BBG): Wheat jumped after Russia’s weekend attack on the seaport of Odesa, even as Ukraine indicated it is pushing ahead with a deal to begin shipping millions of tons of grain that has been piling up since the invasion. Friday’s agreement involving Russia and Ukraine aims to facilitate exports from three of Ukraine’s Black Sea ports, including Odesa, and was hailed as a vital step toward alleviating a global food crisis. Ukrainian officials are still preparing to restart sea exports as soon as this week despite the attack. The assault serves as a stark reminder of the risks for shippers and insurers as Russia’s war rages on.

NORD STREAM (BBG): European natural gas prices surged as much as 11% after Gazprom PJSC said it will halt another turbine and reduce flows through the Nord Stream pipeline. The key pipeline will pump 33 million cubic meters a day, or just 20% of its capacity, from Wednesday as another turbine is halted for maintenance, Gazprom said in a statement. The move poses further risks to Europe’s gas supply ahead of winter. Nord Stream flows were already reduced to 40% of capacity since last month, after sanctions on Russia delayed the return of another turbine following repairs in Canada. President Vladimir Putin warned last week that flows could drop to 20% if the turbine issues aren’t resolved.

EU/FRANE (MNI): European Union energy ministers are set to agree a compromise on mandatory gas rationing at an emergency meeting in Brussels Tuesday, but with opposition from countries including Spain, Portugal and Greece, sources said unblocking agreement may require a Franco-German deal on financing for the REPowerEU programme for transitioning away from dependency on Russian gas.

US (BBG): Biden Team's Take On 'Technical Recession' - It's Not Real: President Biden's administration is downplaying data due this week that could show the US economy contracted for a second straight quarter -- a development that would match one standard definition of a recession. At stake is winning a political-messaging battle with Republicans over how effective Biden’s policies have been in spurring a post-pandemic recovery. Biden’s aides, including Treasury Secretary Janet Yellen, have fanned out in recent days in preparation for Thursday’s quarterly gross domestic product data, explaining that the formal definition of a recession is complex and runs deeper than simply two quarters of negative growth. “The technical definition is not two negative quarters,” Deese said. “Technically, the definition is the NBER’s definition.”

FOOD PRICES (BBG): Food inflation will get worse than previously expected this year before easing in 2023, according to forecasts by the US Department of Agriculture. The USDA raised its annual predictions for 2022 food inflation for the sixth straight month on Monday, and now sees an increase of 9% for 2022, at midpoint, up from a rise of 8% a month earlier. Among the main drivers are poultry, dairy products and cereals. In its first estimates for 2023, the agency predicts food prices will gain 3%. Many items are expected to return to inflation that is close to long-term trends.

BoE (MNI): The Bank of England is unlikely to provide a precise numerical estimate of the end point for quantitative tightening when it publishes its framework for running down its gilts holdings in August, but it will set a pace for combined sales and redemptions, with the counting set to start from the time active sales begin.

Partial Retracement Of Last Week’s Recession-Focused Rally

• Treasuries have more closely followed the risk-on moves implied in FX rather than falling equities, where tech companies appear to weigh on performance with Nasdaq seeing larger declines than SPX.
• Accelerated cheapening in the front-end, despite a brief pause for a solid 2Y auction stopping through 0.6bps with reasonable internals, has seen parallel shift higher in the yield curve (2YY +6.3bps, 10YY +6.6bps) from the early session bear steepening as both breakevens and real yields increase.
• That only sees a partial reversal of Friday’s rally, with yields still some 20bps below mid-last week levels before growth indicators started to roll heavily.
• Plenty of growth-related triggers tomorrow, with a heavy earnings week (50% of S&P market cap) beginning in earnest, the Richmond Fed manufacturing and Conf. Board consumer surveys plus the $46B 5Y auction.

G10 FX Mixed To Start The Week As Markets Await FOMC

G10 currencies have traded in mixed fashion on Monday, as global markets continue to ponder ongoing growth concerns and exercise caution ahead of Wednesday’s FOMC rate decision.

This sentiment is keeping the dollar off its highs as investors remain eager to see if the run of softer US data has in any way altered the Fed’s hawkish rate path. Additionally, market participants may have one eye on Thursday’s advance reading of second quarter GDP.

Overall, notorious safe havens have underperformed to start the week, with the Japanese Yen at the bottom of the G10 leaderboard. Conversely, AUD, GBP and CAD are the best performers, all rising the best part of 1% against the Yen and recovering the entirety of Friday’s retreat in the process.

An unchanged NZD is slightly contrary to broader moves, potentially explained by AUD/NZD creeping higher, in tandem with Australia/New Zealand 2-year swap rate gap.

The Euro was pulled in both directions as the initial IFO business sentiment survey indicated that business morale in Germany fell more than expected in July to its lowest in more than two years.

Initial weakness, however, was short-lived and EURUSD gradually reversed higher towards 1.0250, where a sizeable volume of option expiries for the NY cut kept price action muted around this level. After expiries, aided by a negative Gazprom headline relating to the NordStream 1 Gas pipeline, EURUSD fell roughly 40 pips to 1.0210, trading close to unchanged from Friday’s close.

An initial month-end model from Citi points to a net need to sell USD this month, with a signal strength in-line with the historical norm.

Some second tier US data highlights the docket on Tuesday in the form of consumer confidence and the Richmond manufacturing index. Focus remains firmly on Wednesday’s Federal Reserve decision and press conference.

US DATA: Another Soft Manufacturing Survey

• A small miss for the Dallas Fed mfg survey for July (from -17.6 to -22.6, cons -18.5) although there was some improvement in the six-month ahead measure from -26 to -17.7
• A notable slowing in price components, with input prices from raw materials sliding to the lowest since Nov'20 (-19pts to 38.4, series av 28) and finished goods prices extending to the lowest since Feb'21 (-4.5pts to 29.3, series av 8.8).
• One eye-catching comment from manufacturers of transportation equipment: "The economy is in shambles. There’s no way out that isn’t bad."
• Two weak readings from Dallas and Philly mfg surveys offset the Empire bounce, leaving a simple average of the three implying further downside risk to ISM compared to the 52.3 in the PMI survey (although remember that the output sub-component of the PMI hit 49.9) with the caveat that they were far more pessimistic during the pandemic - see chart.

EU DATA: July BNB Survey Adds to Slew of Declining Confidence Indicators

BELGIUM JUL BNB BUSINESS SENTIMENT -2.8; JUN -1.8

• Belgian business confidence weakened for the third consecutive month in July, adding to a slew of falling confidence indicators across the Eurozone. This was the lowest reading since February 2021.
• Trade saw the steepest decline, falling just shy of 6 points to -16.5 in July as business leaders prepare for waning demand in coming months.
• Only the manufacturing industry saw sentiment improve, however, this was largely linked to strong inventory levels and current situation indicators. Demand and employment outlooks continued to darken.

Source: BNB