MNI EUROPEAN MARKETS ANALYSIS: Fed Set To Deliver 75bp Hike, While Markets Say The RBA Won't

MNI Fed Preview - July 2022: Gaining Optionality

EXECUTIVE SUMMARY:

• 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.
• But for now the FOMC is likely to be non-committal, apart from saying it anticipates ongoing hikes are appropriate.
• For the full publication please use the following link: FedPrevJuly2022.pdf

US TSYS: Tight Pre-FOMC Asia Trade

Tsys experienced a limited round of Asia-Pac trade, which is typical of pre-FOMC decision sessions, with a tech (Microsoft & Alphabet) earnings/guidance related bid in e-mini futures and an Australian CPI-related bid in ACGBs having little impact on the space. TYU2 deals -0-04 at 119-23+, sticking within a 0-06 range on sub-par volume of ~57K. Cash Tsys are flat to 0.5bp richer across the curve.

• Flow was headlined by block buys in TYU2 120.50 calls (+5.0K over 2 blocks) and FV 113.00 calls (+2.0K).
• Wednesday’s domestic docket Is headlined by the latest FOMC monetary policy decision, with consensus looking for a 75bp rate hike. Focus will be on Powell’s press conference and the Statement that accompanies the decision, assuming the 75bp hike is delivered. The key immediate question is re: the FOMC’s thinking on the magnitude of the next rate 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. But for now the FOMC is likely to be non-committal, apart from saying that it anticipates ongoing hikes are appropriate.
• Note that the likes of the EDZ2/Z3 and EDZ2/Z4 spreads operate a touch above their deepest levels of inversion ahead of the FOMC decision, but the pullbacks have been shallow thus far. Elsewhere, the 3-month/3-month 18 months forward yield spread sits around the 55bp mark, hovering just above its own cycle flats.
• Wednesday will also bring the release of prelim. durable goods data, as well as pending home sales and MBA mortgage apps.

JGBS: Long End Bid Dominates Tokyo Trade

JGB futures have recovered from lows during the Tokyo afternoon, last dealing +5. This comes after the contract found some poise alongside the wider core global FI space in the wake of the latest Australian CPI reading, although moves were limited.

• Cash JGBs have continued their early twist flattening, as the major benchmarks run 0.5bp cheaper to 5bp richer, with 20+-Year paper bid from the get go. A reminder that yesterday’s well-received 40-Year JGB auction has been a trigger for notable flattening of the wider JGB curve, with 40s now operating ~15bp shy of yesterday’s yield peak.
• The bid seems JGB centric, with swap spreads wider across the entire curve, while only 30- & 40-Year swap rates are (marginally) lower on the day.
• Both domestic and macro headline flow has been rather limited since the Tokyo open, leaving cross-market impetus at the fore.
• BlueBay Asset Management have noted that they maintain their notable short position in 10-Year JGBs, even in light of the recent rally/BoJ defence of its current YCC settings, with their CIO stating that “we have been looking for the Bank of Japan to signal a policy shift in September as inflation continues to rise with the yen trending weaker as policies diverge. This continues to be the case.”
• Looking ahead, 2-Year JGB supply headlines Thursday’s domestic docket.

AUSSIE BONDS: Richer Post-CPI As 75bp Hike Swept Off The Table

Aussie bonds are comfortably higher after Australia’s Q2 CPI print, catching a bid as the slight miss in headline inflation has spurred a downward revision of RBA rate hike bets for the Aug meeting. Cash ACGBs are a little off best levels, running 6.0-11.5bp richer across the curve, bull steepening, with 3s sitting 10.0bp richer after printing as much as 14bp cheaper earlier. YM is +11.0, operating comfortably through its overnight highs, while XM is +7.0, sitting just shy of its own overnight peak. Bills run 10 to 19 ticks richer through the reds, bull steepening.

• Australian Q2 headline CPI missed expectations slightly (+6.1% Y/Y vs. BBG median +6.3%), although trimmed mean CPI (the RBA’s preferred measure of underlying inflation for this slate of data) came in slightly above expectations (+4.9% Y/Y vs. BBG median +4.7%), with the ABS noting that the figure was at the “highest since the series commenced in 2003”.
• The data has seen Goldman Sachs and Deutsche reduce their calls for 75bp rate hikes in Aug to 50bp, with NAB, CBA, and ANZ re-affirming their previous calls for 50bp of tightening next month.
• STIR markets have unwound any pricing of a 75bp RBA hike in Aug, and currently price just under 50bp of tightening at that meeting (vs. ~56bp prior to the CPI print). A cumulative ~191bp is now priced in for the remaining five meetings of the year, pointing to an average of ~38bp of tightening at each meeting (on a simple average basis), with a cumulative ~20bp of tightening premium through the remainder of ’22 unwound post-CPI.
• Thursday will see the release of Jun retail sales and Q2 terms of trade, while Treasury Secretary Dr Chalmers is expected to deliver his economic update for July in parliament at some point in the day, having noted earlier on Wednesday that he would be addressing “confronting” news re: a lower national growth outlook and the impact of inflation on real wage growth.

AUSTRALIA: CPI Momentum Eases A Touch

Looking at the breakdown of the Australian Q2 CPI shows that 10 out of the 11 major sub-indices recorded rises in Q2. This was the same as Q1 and Q4 from last year. However, the number of sub-indices that recorded faster quarterly changes compared to Q1 was down to 4 out of 11. This compares with 7 out of 11 for the previous 2 quarters, see the first chart below.

Fig 1: Australian CPI Momentum

Source: MNI/Market News/Bloomberg

• Looking at momentum on a YoY basis, 10 out of 11 of the sub-indices were positive in YoY terms, a fresh high for this upturn in inflation.
• However, it's interesting to note the proportion of sub-indices recording YoY gains above 2.5% (the mid-point of the RBA's inflation target) fell back slightly to 7 out of 11 from 8 out of 11 in the previous quarter, see the second chart below.
• Of course, inflation pressures can still pick up further from here, particularly if we see underlying wage gains build further momentum. Actual inflation is also still very strong, given the RBA's preferred core measure is highest on record at just under 5% yoy, while the ABS noted goods inflation is at the strongest pace since the late 1980s.
• Still, the RBA may take some comfort from today's print around the need to get even more aggressive than it already has in terms of the pace of rate hikes (i.e. needing to move beyond the 50bps rate hike pace).

Fig 2: Proportion of Major Australian CPI Sub-Indices Running Above 2.5% YoY Pace

Source: MNI/Market News/Bloomberg

FOREX: AUD Takes Hit As CPI Data Inspires RBA Re-Pricing, Earnings Reports Buoy Risk

Risk sentiment improved on the back of decent earnings reports from two U.S. tech giants (Microsoft & Alphabet), which pushed e-mini futures higher. This sapped some strength from traditional safe havens such as the USD, JPY and CHF.

• Sales of Aussie dollar stole the limelight later in the session, as the market dialled back expectations of an outsized rate hike from the RBA in response to Australia's quarterly CPI data. Modest pricing of a 75bp rate rise in August was reduced to zero as headline annual inflation missed, even as the trimmed mean topped estimates. When this is being typed, the market prices a ~79% chance of a 50bp hike next month.
• AUD weakness spilled over into the kiwi dollar to an extent, as New Zealand's headline flow failed to provide much in the way of notable catalysts. AUD/NZD probed the water below NZ$1.1100 amid a drop in Australia/New Zealand 2-year swaps spread.
• While Australian inflation data influenced price action in Asia, risk relief remained evident in the European FX bloc. NOK led the Scandies higher, outperforming all of its major peers, while EUR was the second-best performer in G10 FX space despite familiar risks to the Eurozone's economic outlook.
• The key risk event today is the announcement of the FOMC's monetary policy decision, with firm consensus for a 75bp hike shifting focus to the statement and comments from Fed Chair Powell.
• Post-Asia data releases include U.S. durable goods orders, wholesale inventories & pending home sales.

FX OPTIONS: Expiries for Jul27 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E1.5bln), $1.0125(E650mln), $1.0197-10(E1.7bln), $1.0250-55(E1.2bln), $1.0270(E533mln), $1.0300(E1.1bln)
• EUR/JPY: Y142.40(E1.4bln)
• USD/CAD: C$1.2750($590mln), C$1.2850-55($850mln), C$1.2910-25($648mln)
• USD/CNY: Cny6.7000($1.2bln), Cny6.7500($617mln)

ASIA FX: Most USD/Asia Pairs Push Higher

Most USD/Asia pairs are higher today, defying softer USD sentiment against the majors. Weaker data has weighed on THB, while an earthquake in the Philippines has seen USD/PHP rebound. USD/KRW is higher as well with local equities weaker. CNH and SGD FX have outperformed.

• CNH: USD/CNH has crept higher today, but continues to find resistance above 6.7700 for now. Onshore equities have faltered somewhat, with a fresh lockdown in Wuhan and restrictions on the manufacturing hub Shenzhen weighing at the margin. The pair was last at 6.7660.
• KRW: USD/KRW has edged higher on weaker equities and a sharp drop in domestic consumer sentiment. The pair is back close to 1314, with recent selling interest above 1315 potentially tested during the offshore session.
• INR: Spot USD/INR remains well behaved and within recent ranges. We are higher today but still sub 79.90. Futures expiry takes place today, which disrupted markets back in June, as spot USD demand came to market. Implied vol remains fairly modest at just above 5%, although we were at similar levels this time last month.
• PHP: The Philippine peso has given away some of its post-SONA gains as a strong earthquake struck the archipelagic country this morning. We are last at 55.80, +0.86% above yesterday's closing levels. Local equities are also lower, down over 0.7% at this stage.
• THB: Baht weakness has deepened as initial rounds of local data crossed the wires, undershooting market expectations. Thailand's trade deficit was $1.529bn in June versus BBG median estimate of $1.316bn, according to data from the Customs Department. Manufacturing output shrank 0.08% Y/Y in June, defying expectations of a 0.50% expansion. USD/THB last traded at 36.835, +0.40% for the session.

EQUITIES: Mostly Lower In Asia; Chinese Developers Resume Slide

Most major Asia-Pac equity indices are lower at typing on the back of a negative lead from Wall St., with Japanese stocks narrowly bucking the broader trend of losses.

• The Hang Seng brings up the rear amongst peers, dealing 1.6% softer at typing, seeing the property sub-index (-2.6%) lead the way lower after an announced ~$361mn share placement by Chinese developer Country Garden Holdings (-14.0%) raised worry re: wider liquidity worries in the sector. Large-cap Alibaba Group (-3.8%) was among the Hang Seng’s worst performers, erasing the bulk of its 4.8% move higher on Tuesday, with the HSTECH (-1.7%) underperforming as well.
• The Nikkei 225 trades 0.1% higher at typing, with the broader TOPIX index sitting a shade above neutral levels. Semiconductor and pharmaceuticals lead gains in the index, offsetting weakness in energy and retailers (with large-cap Fast Retailing sitting 1.3% weaker at typing).
• The ASX200 has pared its pre-CPI decline of as much as 0.4% to sit a shade below neutral levels at writing, with the financials sub-index (+0.6%) hitting seven-week highs after reversing earlier losses, contributing to outperformance in the healthcare (+1.3%) and consumer staples (+0.6%) sub-indices. Tech-related equities struggled, with the S&P/ASX All Tech Index trading 0.7% lower, tracking some of the weakness in U.S. tech stocks on Tuesday.
• E-minis deal 0.3% to 1.4% firmer apiece, off best levels, but holding on to the bulk of its gains observed after Google and Microsoft’s earnings beat after the bell on Tuesday.

GOLD: Range Bound Ahead Of FOMC; Little Moved On Growth Worry

Gold sits virtually unchanged to print ~$1,717/oz at typing after sticking to a ~$4/oz range, with the precious metal seeming content to operate around the $1,720/oz handle in recent sessions.

• To recap, gold closed ~$2/oz lower on Tuesday amidst an uptick in the USD (DXY) and U.S. real yields, with its daily trading range narrowing for a third consecutive day, as proximity to the upcoming FOMC decision (with a 75bp hike fully priced in) again likely contributed to its muted moves.
• Gold was little-changed in the wake of the IMF’s downward revision to global GDP growth for ‘22 (from 3.6% to 3.2%), with the organisation also stating that it would be "increasingly challenging" for the U.S. to avoid a recession.
• OIS markets currently point to ~78bp of tightening for the Jul FOMC, with a cumulative ~139bp priced in through to the Fed’s Sept meeting, pointing to ~56% odds of a 75bp hike then. Focus later will be on the Statement and comments from Fed Chair Powell, particularly over cues to the size of the next hike.
• From a technical perspective, short-term gains in gold still appear to be corrective, following its bounce off $1,681.0/oz last Thursday. Previously outlined levels remain intact, with initial support situated at $1,697.7/oz (Jul 14 low), and resistance seen at $1,745.4/oz (Jul 13 high).

OIL: Little Changed In Asia; U.S. Crude Inventories Eyed

WTI is ~+$0.20 and Brent is virtually unchanged at typing, with both benchmarks operating a little above their respective Tuesday’s troughs.

• To recap, WTI and Brent closed between ~$1-2 lower on Tuesday, reversing earlier gains of as much as ~$2.20 apiece, with worry re: economic growth exacerbated after the IMF’s lowered its global growth outlook in ‘22 from 3.6% to 3.2% while stating that the risk of a recession in ‘23 was “particularly prominent”.
• Adding to the gloom, U.S. new home sales and Conf. Board consumer confidence hit two-year and seventeen-month lows respectively after missing expectations, offsetting the beat from the earlier Richmond Fed m’fing index print, with WTI and Brent falling to session lows after the data release.
• Both benchmarks currently trade a little below levels observed prior to the latest round of U.S. API inventory estimates on Tuesday, despite reports pointing to a significantly larger-than-expected drawdown in crude stockpiles, more than unwinding the build reported last week. Elsewhere, gasoline and distillate inventories declined, while there was a build in Cushing hub stocks.
• Looking ahead, the EIA’s Weekly Petroleum Status Report will cross at 1530 BST, with BBG median estimates calling for a build in crude inventories.