MNI US OPEN - ECB Hikes Priced Out as Officials Strike Dovish Tone

NEWS

ECB (BBG): ECB’s Knot Says Hiking Beyond July Is ‘At Most a Possibility’

European Central Bank Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed. “For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty,” the Dutch central bank head told Bloomberg Television. “From July onward I think we have to carefully watch what the data tells us on the distribution of risks surrounding the baseline,” he said Tuesday in Gandhinagar, where he’s attending a meeting of Group of Twenty finance chiefs.

ECB (MNI): Visco Expects Inflation to Decline Faster than ECB Forecast

ECB governing council member and Bank of Italy Governor Visco has given an interview to Bloomberg TV and said that he believes inflation will return to 2% faster than the ECB's forecast of end-2025. He expects lower energy prices to result in a significant moderation in core inflation. A recession shouldn't be necessary to contain inflation. Visco believes that the ECB needs to find a balance so that it doesn't do too much or too little. He is also happy with the pace of ECB bond portfolio reduction. The next ECB meeting is on July 27 and the market has a 25bp hike almost fully priced in.

US/CHINA (BBG): US Plans Narrow China Tech Investment Limits, Likely by 2024

The Biden administration’s plans to restrict investments in China will be narrowly focused on cutting-edge technology, only new investments, and likely won’t go into effect until next year as the policy grinds through Washington’s bureaucracy. Officials are aiming to wrap up a proposal by the end of August for the long-delayed program to screen and possibly prohibit investment in China’s semiconductor, quantum-computing and artificial intelligence sectors, according to people familiar with the plans, who asked not to be identified because the details are still private.

US/CHINA (BBG): China’s Li Tells US’s Kerry That Nations Can Boost Climate Work

China’s Premier Li Qiang pledged the nation can strengthen climate action with Washington as he met John Kerry for the most high-profile talks scheduled during the US envoy’s visit to Beijing this week. The meeting, at the Great Hall of the People in Tiananmen Square, came on the second full day of Kerry’s visit. The US and China are seeking to reset relations marked by tensions over trade controls, Taiwan and human rights — while forging progress on combating global warming.

UK (The Times): Food Price Inflation Falls at Fastest Rate Since March

Grocery price inflation has fallen at the fastest rate since its peak in March but remains high, new figures show. Inflation fell to 14.9 per cent in the four weeks to July 9, down from 16.5 per cent over the previous month, according to data from the market researcher Kantar. It is the fourth month in a row that grocery inflation has fallen after hitting a high of 17.5 per cent in March.

GLOBAL (MNI): Inflation Should Keep Moderating as Supply Chain Tensions Resolve

Supply chain issues were one of the reasons why G20 inflation rose above rates not seen since the series began in 1997. But they have been easing for around a year now and signal further downward pressure on headline inflation from this source. The Federal Reserve Bank of New York's measure of global supply chain pressures fell further in May to -1.56, lowest since November 2008, but then ticked up to -1.2 in June. On a 3-month average basis it is unchanged at a very low level. It is indicating that global inflation pressures should continue to ease over the months ahead.

PBOC (MNI): LPR to Remain Unchanged, H2 RRR Cut Possible

MNI (Beijing) China’s reference lending rate will likely remain unchanged in July, however, the central bank could cut the reserve requirement ratio in H2 thanks to poor Q2 economic performance and increasing medium-term lending facility maturities, economists told MNI. The Loan Prime Rate (LPR) – based on the People’s Bank of China’s MLF rate and quotes submitted by 18 banks – will likely remain steady at 3.55% for the one-year maturity and 4.2% for the five-year plus tenor on Thursday, they said.

CHINA (BBG): China’s New Consumption Plan May Do Little to Boost Growth

China released a plan to boost household spending on everything from electric appliances to furniture as economic growth slows, though economists say it’s still light on the kinds of policies that would meaningfully boost the recovery. Local authorities are encouraged to help residents refurbish their homes, and people should get better access to credit to buy household products, according to the plan released jointly by 13 government departments. Officials are expected to outline more details at a briefing later Tuesday.

CHINA (MNI): China Pork Prices to Recover Towards Year-End: NDRC

MNI (Beijing) China could see a recovery in pork prices towards year end as demand increases as the weather cools and students return to school, Li Hui, a spokesperson for the National Development and Reform Commission (NDRC) said Tuesday. Speaking at a press conference, Li noted pork prices have remained at an excessively low level for several weeks due to strong supply and weak demand, a factor which led the NDRC to launch a second round of central pork reserve purchases recently.

RBA (MNI): Fears Grow Over Rapid Spending Drop - RBA Minutes

The Reserve Bank of Australia board noted at its July 4 meeting considerable uncertainty over household consumption resilience existed and the squeeze on household budgets could result in a sharper fall in spending than forecasted, according to the minutes published Tuesday. Should consumption fall faster, the demand for labour will also slow and unemployment rise beyond the rate needed to ensure inflation returns to the 2-3% target in a reasonable timeframe, the board added.

WHEAT (BBG): Wheat Steadies After Dropping as Russia Ended Black Sea Deal

Wheat futures steadied in Chicago, after dropping on Monday as Russia ended its grain export deal with Ukraine, prompting uncertainty over global food supplies and escalating tensions in the region. The pact, which allowed the safe passage of Ukrainian grain through the Black Sea, will cease to be effective as of Tuesday, Russia’s foreign ministry said in a statement. The corridor’s shutdown will hit key buyers like China, Spain and Egypt. Ukraine is one of the world’s top grain and vegetable oil exporters.

COMMODITIES (BBG): Iron Ore Rebounds on Hopes More Stimulus Coming After GDP Miss

Iron ore rose on hopes Beijing will step up stimulus efforts after second-quarter growth data missed expectations. The steel-making staple rose as much as 2.2%, more than canceling out its drop on Monday as gross domestic product figures disappointed and data showed China’s contraction in property investment was deepening.

FOREX: EUR Off Cycle Highs as Knot Strikes Softer Tone

• EUR/USD printed a new multi-month high at 1.1272 early Tuesday, with markets resuming the soft USD backdrop in early European hours. The price action soon reversed, however, on comments from ECB's Knot. Knot struck an uncharacteristically dovish tone, flagging that beyond a July rate hike, the path for policy is more uncertain, expressing confidence that the peak in core inflation has passed. The subsequent Bund rally aided EUR/USD's climb lower, to trade broadly flat headed into the NY crossover.
• JPY is firmer against most others in G10, however there's been little impetus from equities, which look somewhat directionless after a quiet morning. The e-mini S&P remains firmer on the week, however is off the best levels of the Monday session.
• NZD is the poorest performer across G10, helping keep NZD/SEK under pressure and extending the recent losing streak. The cross has fallen in 8 of the past 9 sessions, now sitting at the lowest levels since mid-May.
• US retail sales take focus going forward, with markets expecting sales to have risen 0.5% on the month. Industrial production updates are set to follow, with Canadian inflation also on the docket.

BONDS: EGB-Led Global Rally as ECB Hikes Priced Out

EGB yields have fallen sharply in early trade Tuesday, pulling down Treasury and Gilt yields with them.

• The catalyst for the EGB move was uncharacteristically dovish commentary by ECB hawk Knot who sounded unconvinced about the need for hikes past next week's near-certain 25bp raise (tightening beyond this month "would at most be a possibility but by no means a certainty").
• The comments knocked 5bp off the market- implied ECB terminal policy rate and saw the German curve bull steepen with Schatz yields down double-digits.
• Periphery EGB spreads tightened on prospects of a less hawkish ECB, with 10Y BTP/Germany hitting tights not seen since Jun 28 (163bp).
• The EGB moves triggered a rally in Treasuries, led by the curve belly, with 10Y yields hitting the lowest levels since June (a touch below 3.75%).
• Gilt gains were briefly pared by a weak long-dated auction, but subsequently recovered.
• US data is the focus for the rest of the session, with retail sales, industrial production, inventories, and homebuilder sentiment featuring.

Latest levels:

• Sep US 10Y futures (TY) up 8/32 at 112-31 (L: 112-19.5 / H: 113-2.5)
• Sep Bund futures (RX) up 82 ticks at 133.81 (L: 133.08 / H: 133.97)
• Sep Gilt futures (G) up 88 ticks at 95.63 (L: 95.2 / H: 95.67)
• Italy / German 10-Yr spread 3.7bps tighter at 163.7bps

EQUITIES: Eurostoxx Futures Continue to Ease Off Last Week's Highs

Eurostoxx 50 futures traded higher last week. The rally resulted in a move above the 50-day EMA at 4335.00 and price is through 4371.00, the Jul 6 high. Clearance of this latter level highlights a potentially stronger bull cycle and attention is on key resistance and the bull trigger at 4447.00, the Jul 3 high. Key support and the bear trigger has been defined at 4220.00, the Jul 7 low. Initial support is at the 50-day EMA. A bull theme in S&P E-minis remains intact. This week’s rally has resulted in a break of resistance at 4498.00, the Jun 30 high. The break confirms a resumption of the uptrend and maintains a bullish price sequence of higher highs and higher lows. The contract has also traded through 4500.00 and this opens 4576.62, a Fibonacci projection. First support lies at 4439.81, the 20-day EMA. Clearance of this level would highlight a S/T bearish threat.

• Japan's NIKKEI closed higher by 102.63 pts or +0.32% at 32493.89 and the TOPIX ended 13.18 pts higher or +0.59% at 2252.28.
• Elsewhere, in China the SHANGHAI closed lower by 11.81 pts or -0.37% at 3197.82 and the HANG SENG ended 398.06 pts lower or -2.05% at 19015.72.
• Across Europe, Germany's DAX trades higher by 19.9 pts or +0.12% at 16089.12, FTSE 100 higher by 17.35 pts or +0.23% at 7424.52, CAC 40 up 14.3 pts or +0.2% at 7305.96 and Euro Stoxx 50 up 6.9 pts or +0.16% at 4363.69.
• Dow Jones mini up 6 pts or +0.02% at 34769, S&P 500 mini down 0.5 pts or -0.01% at 4553.25, NASDAQ mini down 11.5 pts or -0.07% at 15828.5.

COMMODITIES: Gold Prints Fresh Multi-Week High, Approaching Next Resistance

The current bull cycle in WTI futures persists despite the pull lower in prices across the Friday session. The contract has recently breached $72.72, the Jun21 high and Wednesday's move higher resulted in a break of key resistance at $75.70, the Jun 5 high. This strengthens current bullish conditions and paves the way for a climb towards $78.03, a Fibonacci retracement point. Key short-term support has been defined at $66.96, the Jun 12 low. Initial support is at $72.31, the 20-day EMA. Gold is holding on to its latest gains. The yellow metal has breached resistance at the 50-day EMA. The average intersects at $1945.0 and the break signals scope for a continuation of the current corrective cycle. This opens $1968.00, the Jun 16 high. Key resistance has been defined at $1985.3, the May 24 high where a break would highlight a stronger reversal. Key support and the bear is at $1893.1, the Jun 29 low.

• WTI Crude up $0.25 or +0.34% at $74.42
• Natural Gas up $0.05 or +1.95% at $2.561
• Gold spot up $6.71 or +0.34% at $1961.74
• Copper down $1.6 or -0.42% at $382.75
• Silver up $0.09 or +0.36% at $24.932
• Platinum up $6.86 or +0.7% at $986.75