Fed:
Caught between a rock and a hard place. Growth momentum is clearly slowing judging by data on housing and recent PMI activity.
Core Pce came in weak at +0.1% for May, but unfortunately it still pegs the YoY rate at 2.5%, some 50 basis points above target.
The Fed Chairman has changed his tune from earlier in the year where he was willing to cut based on a forecast of 2% further down the road. He now wants firm evidence or “confidence” that inflation will return to 2% before easing policy any further.
Gaining confidence on inflation either needs to come from substantially weaker growth numbers or another 2 months of successive core Pce prints which come in at +0.1% or below. (Note if monthly prints remain at 0.1% for the next 6 months, core Pce will hit 2% by Jan 2025) The July 25th release of Q2 Gdp data for the US now become critical figures in deciphering the Fed’s next move.
Oil:
Supply risks keep spot pressure to the upside. Crude inventories draw 12m barrels in the US, mirroring a similar decline in July of 2023 last year. Geopolitical risks remain elevated, sending the futures curve further into backwardation. Note the 18m calendar spread is now trading at a -10, further inverting from -7 just a few trading sessions ago.
Short term price shocks in Oil will not alter Ecb policy as long as the back end of the curve continues to remain in line with previous forecasts.
Spec related buying will kick in only if spot trades above the 85.00 level, all else being equal
10y US rates have again begun to exhibit some positive correlation with spot Oil prices but this is temporary as growingly both moves up and down will be seen as exogenous and not relevant for near term central bank monetary policy.
Dollar:
Immediate selling pressure in Yen & Cnh has dissipated in the last 3 trading sessions with Eur also finding support under 1.07. Dxy remains capped overhead at 106.20 from the descending trend line.
Paradoxically, majors are being rewarded if the central bank exudes confidence in their individual inflation forecasts and is willing to take the risk and cut policy early in order to support growth.
Powell however remains pensive and his tone is being swayed too easily by incoming individual data points or the hawkish members on the board.
An uneasy outlook from the Fed coupled with US election uncertainty and technical exhaustion on the charts, for the time being, has weakened immediate bullish bias in the dollar.
Ecb Lagarde on the other hand shows a calm, confident demeanor at this week’s Sintra talks…..being able to perfectly communicate to markets a desire to return inflation back to 2% while maintaining a firm easing bias. The Euro currency was rewarded as a result for her efforts.
EurChf:
0.9731 trades in the pair, up from the 0.9550 level which was last seen after the most recent Snb meeting.
Safe haven flows during French turmoil had pushed the pair down, but immediate selling pressure has evaporated as France/Germany 10y spreads now tighter trading currently at 66 bps.
MoM cpi in Swiss printing at 0% for June keeps pressure on Snb to ease again and expand its balance sheet. Watch FX reserves from SNB tomorrow as a further push up above 720b in foreign reserves is now likely as SNB battles to bring inflation back towards 2%.
China:
2y rates trade at 1.6%, down 15 bps in the last 20 trading sessions as authorities continue to wrestle with real and present deflationary threat.
Annual Cpi remains just above zero with monthly price data unable to meaningfully shift the momentum in the central bank’s favor.
Authorities attempted a managed deval in Usd/Cnh ahead of key plenum talks but efforts now exhausted above 7.30 and all Chinese equity composites look weak despite previously announced SOE etf purchases.
Foreign inflows once again have turned negative awaiting further announcements.
Watch for evolution in quarterly US treasury trading by China and accumulation of Gold in light of recent macro data.
As always, I shall keep you posted here at Purity Macro.
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Disclaimer
The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.
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