It was another record-breaking day for all three major US indices yesterday, with last week’s volatility seemingly a distant memory as investors chose to focus on the start of Q2 earnings season.
US banks JPMorgan Chase and Goldman Sachs get us underway today, with expectations tempered somewhat by recent comments from JPMorgan CEO Jamie Dimon, who warned in June that the bank's Q2 performance was unlikely to match that of Q1.
Trading revenue could be lower than the consensus estimates of $6.5bn, as lower yields and volatility impact turnover. Dimon also played down expectations over loan demand and income after a bumper Q1. The trend over loan demand was also notable in its Q1 numbers, which the bank said was likely to remain challenged, while deposits rose 24% year-on-year to $2.3tn. While having so much cash on its balance sheet is a nice problem to have, it also speaks to a difficult lending environment. It would appear that higher long-term rates are impacting on housing loan demand, a trend currently being reflected in the latest housing numbers, while small business lending was down 50% compared to the same quarter a year ago. This suggests that the bank's guidance could be a significant driver of where we head next after the gains of the last couple of days.
European markets had an altogether more subdued session, although we still managed to see marginal new record highs for the DAX and Stoxx 600, while the FTSE 100 lagged behind due to underperformance in travel and leisure stocks, despite the UK government confirming the ending of all Covid restrictions on 19 July.
After a similarly positive start on Monday, Asia markets picked up where they left off today with the latest China trade numbers for June showing a slowdown in imports, though exports unexpectedly rose from levels in May. For imports the slowdown wasn’t a surprise given that in May we saw a 51.1% rise from the year before, however we also have to acknowledge some of that rise was down to base effects from the weak numbers last year, when the Chinese economy was coming out of lockdown. The rest of the increase was driven by surging commodity prices, as reflation trade concerns drove up demand. Exports rose by 27.9% in May, slightly down from the 32.3% in April, in a sign that the global demand was still strong, albeit starting to slow.
Today’s June numbers were actually better-than-expected, with imports rising by 36.7%, while exports rose by 32.2%, part of the reason being the continued rise in commodity prices impacting both sides of the ledger. The main gains on the export side were mainly due to higher demand from the likes of South Korea and Japan, while US exports slowed to 17.8%.
Against this backdrop, markets in Europe look set to open broadly unchanged, with today’s focus on June CPI data from Germany, France and the US, while UK retail sales enjoyed their best quarter ever according to the British Retail Consortium. June saw a big jump in spending on clothing and footwear, as well as sales of TVs and food and drink sales with the start of Euro 2020. Spending on hotels and accommodation also rose as a result of the easing of restrictions in May. Later this morning Germany CPI is expected to be confirmed at 2.1%, while France CPI is expected to come in at 1.9%
With bond markets seemingly less concerned about inflationary pressures after last week's sharp fall in yields, and commodity prices starting to show signs of slowing, today’s latest CPI numbers from the US may well mark the high-water mark as far as the reflation trade is concerned. This of course assumes that bond markets are drawing the correct conclusions around recent events, and that we weren’t merely seeing a clear out of stale positions.
US 2-year yields are still higher now than they were a month ago, while 10-year yields are lower, suggesting that the Fed is right in thinking that the recent sharp moves higher in prices are transitory in nature. There were certainly a growing number of investors who feared that these upward price pressures might become more persistent, though these fears have subsided somewhat in the past few days. Over the last few months, we’ve seen US CPI jump sharply from 1.4% at the end of last year to 5% in May, significantly above expectations, with the threat that there could be more to come if PPI prices are any guide. Core prices have also surged to 3.8%, from a similarly low level.
A big component of the recent increases was a big rise in used car and truck prices, which have risen sharply, along with higher energy costs. In the aftermath of these increases, as well as a big rise in PPI prices, there has been much debate as to how much of these rises will drop out of the numbers and thus be transitory. If the recent May PPI numbers are any guide, this doesn’t look likely, which means we could get another increase today, given how much PPI tends to be a leading indicator for CPI. While Fed officials have admitted that inflation has been higher than initially anticipated, they still remain confident that these pressures will subside, and for now bond markets seem to agree.
As a reminder, May PPI jumped to 6.6%, its highest annual level in over 10 years. Expectations are for headline CPI to remain steady at 5%, with core CPI, which excludes food and energy, expected to rise to 4%, from 3.8%.
EUR/USD – still below last week’s high at 1.1895 with little in the way of direction. We still have support at the 1.1780 area, while a break through 1.1900 targets 1.1975 and the 200-day MA.
GBP/USD – currently has resistance at 1.3920 with a break targeting the 1.4000 area. Major support remains down at the 1.3670 level and March and April lows, as well as last week’s low at 1.3730.
EUR/GBP – the support at the 0.8530 area continues to hold, however the bias remains for a move towards the 0.8480 area, while below wider resistance at the 0.8640 level.
USD/JPY – last week’s break of the uptrend from the lows this year saw a big sell off after peaking at 111.70 earlier this month. The next support comes in at 109.20, and daily cloud support. The current rebound has resistance at the 110.70 area.
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