Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
EXECUTIVE SUMMARY:
- GERMANY EYES PASSING ON GAS COST TO CONSUMERS; UNIPER IN BAILOUT TALKS
- HOUSEHOLD SPENDING A FACTOR FOR RBA HIKES (MNI STATE OF PLAY)
- BANK OF ENGLAND: ECONOMIC OUTLOOK WORSE, STABILITY RISKS RISE
- KREMLIN: NO ORDERS PLANNED ON SWITCIHNG LNG SALES TO ROUBLES
Fig. 1: EUR Hits 20-Year Low Vs Dollar
Source: BBG, MNI
NEWS:
GERMANY / ENERGY (BBG): Germany is set to pass legislation to create a tool to allow part of the cost of surging gas prices to be passed on to consumers. According to a government official, the legislation will allow part of the costs to be evenly distributed among all customers. Cabinet is expected to sign off on the bill as soon as Tuesday.
GERMANY / ENERGY (BBG): German gas giant Uniper SE is in talks with the government over a potential bailout package of as much as 9 billion euros, ($9.4 billion) according to a person familiar with the situation. The government is looking at applying a set of measures, including loans, taking an equity stake and also passing part of the surge in costs onto customers, said two people familiar with the talks. The shares rose as much as 9.5%, after sinking almost a third on Monday in a move that took the company’s market value to about 4 billion euros.
RBA (MNI STATE OF PLAY): The Reserve Bank of Australia says that further interest rate hikes will be driven by "ongoing uncertainty" over household spending, and global momentum for inflation that is guiding tighter monetary policy by other central banks. The RBA, as expected, hiked official rates by 50 basis points to 1.35% on Tuesday, the third increase in as many months after the official cash rate reached a record low of 0.10%.
BOE (MNI): The Bank of England's Financial Stability Report saw deterioration in the domestic and global economic outlook, with downside stability risks rising. Stressed commodity markets, tightening financial conditions and the vulnerabilities of the property market with interest rates rising were all risks put in the spotlight in the report. Nevertheless, UK banks were deemed to be resilient to the increasing stresses. The BOE's Financial Policy Committee announced that it was raising the Counter-cyclical Capital Buffer (CCyB), the 'rainy day' capital buffer, from 1% to 2% in July 2023, taking it back to a normal level and forcing banks to enhance their capital provisions. The surge in commodity prices and accompanying supply shortages have resulted in a sharp rise in margin calls for commodity funds and these disruptions in commodities have knock-on effects in other financial markets and through into the real economy, the Bank noted.
RUSSIA/LNG: Wires reporting comments from the Kremlin stating that there are no presidential orders planned on switching Russian LNG sales to roubles. Earlier today, Reuters reported that a senior managed at Gazprom suggested a potential switch, in a similar scenario to payments made for gas supplies via pipelines. Japan and South Korea are two major importers of Russian LNG, with the suggestion of paying in roubles likely to raise red flags in Tokyo and Seoul.
BOJ: Japan's output gap is seen at -1.21 percentage points in the January-March period, narrowing from -1.47 pp in Q4, for the eighth consecutive quarterly negative gap, the Bank of Japan estimated on Tuesday.
DATA:
MNI: EZ FINAL JUNE SERVICES PMI 53.0 (FLSH 52.8); MAY 56.1
- MNI: GERMANY FINAL JUN SERVICES PMI 52.4 (FLSH 52.4); MAY 55.0
- MNI: FRANCE FLASH JUN SERVICES PMI 53.9 (FLSH 54.4); MAY 58.3
- MNI: ITALY JUN SERVICES PMI 51.6 (FCST 51.5); MAY 53.7
- MNI: SPAIN JUN SERVICES PMI 54.0 (FCST 53.5); MAY 56.5
French Manufacturing Strong in May as Auto Sector Rebounds
FRANCE MAY IP 0.0% M/M, -0.4% Y/Y; APR -0.6% Y/Y
FRANCE MAY MANUF. +0.8% M/M, +2.2% Y/Y; APR +0.5% Y/Y
- French IP saw a modest improvement in May, stabilising at 0.0% m/m growth following the downward revised -0.3% m/m contraction in April. The annualized reading saw a further contraction of -0.4% y/y, which is 0.7pp lower than anticipated as the industry continues to be hampered by global supply bottlenecks and shortages.
- The manufacturing print, on the other hand, saw a substantial upside surprise of 0.5pp at +2.2% y/y in May. The automotive industry accounted for the bulk of the uptick, rebounding with solid 15.3% m/m growth versus a softer +3.8% m/m in the month prior. Semi-conductior shortages were once again highlighted as continuing to add pressure to production capacities.
FIXED INCOME: Another aggressive move - higher today
Core fixed income has moved fairly aggressively higher this morning. Although we saw some downward revisions to European PMI data the move seems more of a retracement of yesterday's move ahead of the US getting back to the office. The German curve has bull steepened while the gilt curve has seen more of a parallel move.
- As well as the PMIs we have received the BOE's FSR this morning, which saw downside stability risks rising. Stressed commodity markets, tightening financial conditions and the vulnerabilities of the property market with interest rates rising were all risks put in the spotlight in the report. Nevertheless, UK banks were deemed to be resilient to the increasing stresses. The BOE's Financial Policy Committee announced that it was raising the Counter-cyclical Capital Buffer (CCyB) from 1% to 2% in July 2023, taking it back to a normal level and forcing banks to enhance their capital provisions.
- Upcoming we will see the final print of durable goods as well as US factory orders.
- In terms of speakers today we have the BOE's Tenreyro appearing on a panel on monetary and fiscal policy interactions but no scheduled Fed/ECB speakers.
- TY1 futures are up 0-7 today at 119-15+ with 10y UST yields up 1.4bp at 2.896% and 2y yields up 5.5bp at 2.890%.
- Bund futures are up 1.11 today at 150.22 with 10y Bund yields down -6.4bp at 1.266% and Schatz yields down -10.9bp at 0.498%.
- Gilt futures are up 0.68 today at 115.39 with 10y yields down -6.0bp at 2.134% and 2y yields down -5.8bp at 1.727%.
FOREX: EUR/USD Plummets to New Multi-Decade Low
- The EUR/USD primary downtrend resumes Tuesday, with the pair taking out the earlier YTD lows at 1.0350 to put prices at levels not seen since 2002. The acceleration lower in the pair coincides with the return of US markets after the July 4th holidays, with lower-than-expected French services and composite PMI data adding extra weight.
- This underpins a broader risk-off theme, evident in lower equity markets and lower Treasury yields headed into the NY crossover. The US 10y yield has reversed early upside to sit within range of the July lows printed on Friday at 2.7873%. A break below that level would mark the lowest 10y yield since late May and a ~75bps turnaround off the mid-June highs.
- The Reserve Bank of Australia raised rates by 50bps overnight to 1.35% - alongside expectations. The decision prompted little immediate market response, with the RBA signaling further tightening steps to come. Through the European open, however, broad greenback strength has worked against AUD/USD, putting the pair briefly below 0.68 and within view of the 2022 lows at 0.6764.
- Focus going forward turns to factory orders and the final durable goods data for May, while BoE's Tenreyro is also due to speak following the publication of the BoE's Financial Stability Report.
EQUITIES: Financials, Industrials And Materials Dragging Down Europe Stocks
- Asian markets closed mostly higher: Japan's NIKKEI closed up 269.66 pts or +1.03% at 26423.47 and the TOPIX ended 9.41 pts higher or +0.5% at 1879.12. China's SHANGHAI closed down 1.402 pts or -0.04% at 3404.025 and the HANG SENG ended 22.72 pts higher or +0.1% at 21853.07.
- European stocks are lower, with cyclicals faring poorly (defensives such as Utilities are outperforming): the German Dax down 122.32 pts or -0.96% at 12773.38, FTSE 100 down 71.43 pts or -0.99% at 7232.65, CAC 40 down 54.92 pts or -0.92% at 5954.65 and Euro Stoxx 50 down 29.89 pts or -0.87% at 3452.42.
- U.S. futures are falling ahead of the return from the long holiday weekend, with the Dow Jones mini down 161 pts or -0.52% at 30900, S&P 500 mini down 22 pts or -0.57% at 3805, NASDAQ mini down 85.25 pts or -0.73% at 11526.
COMMODITIES: Copper Drop Continues
- WTI Crude up $1.57 or +1.45% at $110
- Natural Gas down $0.03 or -0.52% at $5.7
- Gold spot down $7.34 or -0.41% at $1805.67
- Copper down $9.3 or -2.58% at $351.15
- Silver down $0.08 or -0.41% at $19.9053
- Platinum down $16.44 or -1.85% at $874.22
LOOK AHEAD:
| Date | GMT/Local | Impact | Flag | Country | Event |
| 05/07/2022 | 1230/0830 | * |  | CA | Building Permits |
| 05/07/2022 | 1400/1000 | ** |  | US | factory new orders |
| 05/07/2022 | 1530/1130 | * | | US | US Treasury Auction Result for 13 Week Bill |
| 05/07/2022 | 1530/1130 | * | | US | US Treasury Auction Result for 26 Week Bill |
| 05/07/2022 | 1630/1730 |  | UK | BOE Tenreyro Panels Qatar Centre Conference |
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.