MNI ASIA OPEN - EU/Russia Gas Curbs At The Fore

NEWS:

FED (MNI): CPI Shortens Odds Of 75-BP Hike In Sept-Ex Fed Staffers
Some former Federal Reserve economists are nudging up their estimates for where interest rates will peak this cycle to above 4% after inflation picked up speed in June, despite a more recent retreat in commodity prices and mounting recession risks, ex-staff told MNI. See the MNI Fed Preview here: https://marketnews.com/mni-fed-preview-july-2022

US (MNI): Mortgage Rates Have Likely Peaked. U.S. mortgage rates look like they have already peaked and home prices are not likely to fall on a national basis, boosting the chances the broader economy will dodge recession, Freddie Mac deputy chief economist Len Kiefer told MNI.

EU/RUSSIA (BBG): European Union countries reached a political agreement to cut their gas use by 15% through next winter as the prospect of a full cut-off from Russian supplies grows increasingly likely. The plan makes the 15% target mandatory under an emergency situation -- such as a severe disruption to flows from Russia -- albeit with certain opt-outs for particularly vulnerable nations or those integral to the bloc’s network as a whole.

RUSSIA (BBG): Kremlin to Keep Up Its Gas Squeeze on Europe, Insiders Say
The Kremlin is likely to keep vital gas flows to Europe at minimal levels as long as the standoff over Ukraine continues, ratcheting up the pressure on the European Union over its tough stance on Russia’s invasion, according to people familiar with the leadership’s thinking. If the squeeze drags into the winter, it could leave the continent, traditionally Russia’s largest export market, desperately short of the fuel.

EU ENERGY (BBG): European Energy Prices Soar as Russian Curbs Risk Economic Pain
European energy prices surged as Russia tightened its grip on gas supplies, deepening a crunch that’s threatening to plunge the continent’s largest economies into recession. Electricity prices in Germany and France, Europe’s biggest power markets, surged to a record on Tuesday, as natural gas jumped as much as 21.5% and coal futures for next year hit an all-time high. That’s leaving Europe without vital fuel to keep the lights on at a time when countries race to secure energy ahead of winter.

ECB (MNI): Warning Over Balance Sheet Effect Of War, Rates. The European Central Bank's Banking Supervisory Board has asked "significant" financial institutions to carry out an analysis of how a complete cut-off of Russian energy supplies would affect their balance sheets, a prospect Board member Elizabeth McCaul described as "realistic" in an interview.

IMF (BBG): IMF Cuts World GDP Outlook a Third Time as Inflation, Rates Jump
The International Monetary Fund cut its global growth outlook for this year and next, warning that the world economy may soon be on the cusp of an outright recession. Global economic expansion will likely slow to 3.2% this year, less than the 3.6% forecast by the fund in April and the 4.4% seen in January, the IMF said in an update to its World Economic Outlook released Tuesday. The series of interest-rate increases that central banks have unleashed to contain inflation “is expected to bite” in 2023, with global output growth set to slow to 2.9%, it said.

CANADA (BBG): Shopify to Cut 10% of Staff, With Most Workers Gone by Day’s End
Canadian e-commerce firm Shopify Inc. will cut about 10% of its workforce Tuesday, as Chief Executive Officer Tobi Lutke acknowledged the company’s decision to expand rapidly coming out of the Covid-19 pandemic didn’t pay off. The move will eliminate about 1,000 jobs out of 10,000 or so total employees at Shopify. “We bet that the channel mix -- the share of dollars that travel through e-commerce rather than physical retail -- would permanently leap ahead by five or even 10 years” because of the pandemic, Lutke wrote. “It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point.”

US (BBG): Biden Says He's "Feeling Great", Doctor Says He Can Exercise
President Joe Biden said he was “feeling great” after his doctor said his Covid-19 symptoms had resolved enough for him to resume exercise. Biden continues to work from the White House residence as he recovers. Tuesday is the fifth full day since he tested positive, opening a window for him to return to events once he tests negative.

US (MNI): US Senate Votes To Advance CHIPS-Plus Semiconductor Bill
The Senate has voted 64-32 to clear the filibuster and move the broad semiconductor, science, and China competitiveness bill to a full vote. The bill is now expected to be passed by the Senate either later today, or tomorrow, before being passed to the House where, although expected to pass, may face a slightly sterner challenge. According to Nancy Ognanovich at Bloomberg, Senate Majority Leader Chuck Schumer (D-NY) predicts that CHIPS will be ready to be sent to President Biden's desk by the end of the week.

OIL (FT): Borrell: JCPOA Compromises Have Been Exhausted
"After 15 months of intense, constructive negotiations in Vienna and countless interactions with the JCPOA participants and the US, I have concluded that the space for additional significant compromises has been exhausted" - EU's Josep Borrell

BANKS (BBG): Credit Suisse Plans to Announce Exit of CEO Gottstein, WSJ Says
Credit Suisse Group AG plans to announce the departure of Chief Executive Officer Thomas Gottstein, the Wall Street Journal reported, part of efforts to turn around the struggling company. While the timing of Gottstein’s departure couldn’t be determined, an announcement may come as soon as Wednesday, when the Swiss bank is scheduled to release its quarterly financial results, the Journal said, citing people familiar with the bank. Zurich-based Credit Suisse told investors last month to expect a third straight quarterly loss. The company’s board held early stage talks about replacing Gottstein as far back as May, Bloomberg News reported at the time.

US/RUSSIA (BBG): Space Station Buzzing as End Nears on US-Russian Cooperation
The International Space Station has been buzzing with US astronauts and Russian cosmonauts in recent days. But that scene may already belong to a waning era of cooperation, after the top Russian space official said his country is pulling out of the program.

US DATA: New Home Sales Slide With Existing, But Solid Price Growth

• New home sales slid -8.1% M/M in June (cons -5.4%) after a downward revised +6.3% (initially +10.7%), hitting a two-year low in the process and only just above the pandemic low.
• It adds to last week’s surprising -5.4% slide in existing sales in the continued reaction to the surge in mortgage rates, but separate measures of house prices continued to growth strongly.
• They are only for May but the FHFA and S&P CoreLogic 20-city measures increased 1.4% M/M and 1.3% M/M respectively, only slightly softer than lofty expectations.
• The strength in house prices should continue to filter through to imputed rents in CPI, a category that is clearly already running extremely hot and has been a large driver behind the last two months of upside CPI surprises.

New home sales (white) and 30Y Freddie Mac mortgage rate (green)Source: Bloomberg

US DATA: Mixed Regional Fed Surveys Whilst Consumer Labour Market Optimism Dips

• The Richmond Fed manufacturing survey continued a series of mixed July results for regional Fed surveys, surprisingly rising from an upward revised -9 to 0 (cons -14) whilst noting marked improvement in two of its three components.
• It follows a beat for Empire and misses for both the Philly and Dallas surveys, with the broader takeaway ahead of next week’s ISM mfg likely still the relatively small decline in the flash PMI from 52.7 to 52.3 (albeit masking a larger slide in output).
• Going again the upside surprise for businesses was a larger than expected decline in Conf. Board consumer confidence from 98.4 to 95.7 (cons 97.0) for the third month running. It was led lower by the assessment of the present situation, “a sign growth has slowed at the start of Q3”. Expectations remained well below 80, “suggesting recession risks persist” with familiar concerns about inflation and especially gas and food prices.
• The gap between CB present situation and U.Mich current conditions indices narrowed very slightly from a record spread in June, implying some minor softening in a previously very strong labour market.

Conf. Board and U.Mich present/current measures of consumer confidence (yellow/white) and U.Mich-Conf.Board spread (green) vs UST 2s10s (pink)Source: Bloomberg

Treasuries Square Up Ahead Of FOMC

• Treasuries have reversed course today ever since TYU2 cleared support at 120-11 (Jul 22 high) and stopped just short of the bull trigger at 120-16+ (Jul 6 high), touching an intraday high of 120-15+ in the process but now up just 4+ ticks at 119-25+, all on below average volumes ahead of tomorrow's FOMC. The initial rally was led by growth fears with a follow-on from yesterday's after close weak Walmart earnings plus also spillovers from weaker growth implications of EU gas curbs.
• The sell-off in the second half of the session extended through the latest second tier data, possibly putting more weight on the beat for the Richmond Fed manufacturing index despite misses for Conf. Board consumer confidence and new home sales, before slowing somewhat after the 5Y auction stopped through. More likely was the fact the clearance of prior levels seen after Friday's significant US PMI miss was a step too far.
• In cash space, the twist flattening around 7s, with 2YY +3bps and 10YY -1.5bps, drives inversion in 2s10s to -25.5bps (-4bps) just off earlier new post-2000 lows. The 3M to 10Y spread saw a modestly larger bounce off intraday lows of 16.5bps but at 24bps is still at pre-pandemic flats.
• Finally, there has ultimately been little change in breakevens on the day, leaving the 5Y at 2.59%, off early July lows of circa 2.50% but still down 40bps since the June FOMC.
• Earnings releases from Microsoft and Visa due after close today before preliminary durable goods and then obviously the FOMC decision tomorrow.

UST 2Y (white), 10Y (yellow), 2s10s (green) and 3M to 10Y (pink)Source: Bloomberg

Gas Uncertainties Prompt Renewed Euro Weakness

• EU energy ministers agreed Tuesday on a voluntary reduction in gas consumption of 15% ahead of the 2022-23 winter, as well as a mechanism to trigger a Union Alert if there is a risk to supply, in which case reductions would become mandatory.
• The decision comes amid ongoing concerns over Russia’s potential gas supply cuts to EU countries, adding to the growing recessionary fears throughout the continent.
• Euro weakness was broad based, falling roughly one percent against the greenback as well as the JPY, GBP and CHF. EURUSD downward momentum picked up speed below the Monday lows at 1.0179 and the single currency moved steadily lower throughout Tuesday.
• Approaching the APAC crossover and tomorrow’s FOMC decision, EURUSD is hovering just North of the 1.01 mark at a one-week low. The breach of initial support at 1.0120 will be monitored with the focus turning to the next support points at 1.0064/0.9952 Low Jul 18 / 14 and the bear trigger.
• EURCHF’s break below 0.9807 and the 0.98 handle sparked a wave of selling as the pair continues to make fresh cycle lows and print at the lowest levels since the removal of the floor in January 2015.
• Mostly a product of the weaker Euro, the USD index has risen 0.7% and combined with the weaker price action across major equity indices, the likes of AUD, NZD and CAD have fallen between 0.4-0.6%.
• Focus on July FOMC: With firm consensus for a 75bp Fed hike, focus at the July meeting will be on Powell and the Statement. The key immediate question is the FOMC’s thinking on the magnitude of the next hike.
• A reduction in the size of hikes is likely starting in September, especially given weakening economic data and the ongoing moderation in inflation expectations. However, for now the FOMC is likely to be non-committal, apart from saying it anticipates ongoing hikes are appropriate.