Choose your trading platfom

Europe set for positive start as 100bps rate hike bets get pared back

US dollar bills in a jar

The various lockdowns that have been implemented across China have had a chilling effect on the Chinese economy over the last 3 months, with this morning’s Q2 GDP numbers laying out the impact.

Unsurprisingly the economy contracted by -2.6%, on a quarterly basis and by more than expected dragging the annualised rate down to 0.4%, from 4.8% in Q1.  

The extent of the contraction along with the fact that even now with the stop start nature of the current situation that it will be virtually impossible for China to meet its 5.5% GDP target for this year.

Retail sales in June did improve, coming in at 3.1%, following on from -11.1% and -6.7% in April and May, while industrial production rose 3.9%, up from 0.7% in May.

Having been locked down for most of April and May the Chinese consumer went out and did a little bit of catchup spending, but confidence still remains weak, with restrictions still remaining in place in certain parts of the country.

Consequently, markets in Asia look set to end the week on a mixed note, with Chinese markets on the back foot and the Nikkei edging higher.

European markets underwent sharp falls yesterday on a combination of rising political risk in the euro area as the Italian government teetered on the brink of collapse, and the EU Commission cutting its GDP forecasts for 2022, to 2.6%, while upgrading its average inflation prediction for the year to 7.6%.

A higher-than-expected US PPI number for June didn’t help the overall mood after the headline number rose sharply to 11.3%, following in the footsteps of Wednesday’s sharp rise in CPI. In doing so the PPI numbers broke a sequence of declines from the March peak.

Like the CPI report before it the sharp rise in the headline rate was not matched by the core number which also slipped back, however that didn’t stop the US dollar index from hitting a new 20 year high, with the euro pushing conclusively below parity and down towards 0.9950. US short term rates continued to rise, with the US 2-year yield, finishing above the US 5-year, 10 year and 30-year yield.

With the Federal Reserve July meeting less than two weeks away, and the unwelcome nature of the stronger than expected inflation numbers, markets had increasingly convinced themselves that instead of raising rates by 75bps that the Fed might be tempted to go further by 100bps. This view was reinforced by Atlanta Fed President Raphael Bostic when he said “everything is in play” for July 27th.  

The risk of this outcome was tempered by comments from Federal Reserve governor Christopher Waller, who said that he thought the market was getting ahead of itself by 100bps. This appeared to be a softening of his tone from his comments a few weeks ago when he said the Fed was “all in” on inflation. This was followed by comments from St. Louis Fed President James Bullard that he wasn’t in favour of a 100bps move at this time, which in turn helped pull US markets off their lows of the day, even though they still finished the day lower.

This shift of tone looks set to translate into a more positive tone for European markets this morning, as we look to open higher.  

These interventions by two of the Fed’s most hawkish members appear to reduce the likelihood that the Fed will do 100bps at this point, but one can never say never. These interventions do appear to have reduced the risk of such an outcome.  

It does mean however that 75bps is pretty much a done deal, as we look ahead to today’s US retail sales for June and another University of Michigan confidence number for July, which is already at a record low of 50.

The US consumer has been surprisingly resilient so far this year, despite the declines being seen in various consumer confidence measures.

We’ve only seen one negative month this year for retail sales, and that was in May when we got a surprise decline of -0.3%.

This came across as a little bit of a surprise, however one has to ask why it should have been.  We only have to look at the rising cost of living from energy and food prices, as shown by this week’s CPI readings to see the impact on consumer wallets of higher prices.

It therefore shouldn’t be surprising that consumer spending slowed sharply in May, and it does seem optimistic to think that we’ll see a rise in retail sales of 0.9% in today’s June numbers, even with the current resilience of the US labour market. We could see a downside surprise.   

EUR/USD – slid below parity finding support at 0.9950 before rebounding. Momentum remains for further losses towards 0.9660 with resistance now at 1.0080. We need to see a move back above 1.0340/50 to stabilise and delay the prospect of further weakness.

GBP/USD – continues to drift lower pulling off 1.1760 as the move towards 1.1500 continues to unfold. We need to see a move back above the 1.2040/50 area and the 50-day SMA to stabilise and delay a move towards 1.1500.

EUR/GBP – rebounded from the 0.8400 level, pulling back to the 0.8500 before drifting back. The risk remains for further losses towards 0.8380, while below resistance, which comes in at the 0.8520/30 area.  

USD/JPY – continues to get drawn towards the 140.00 area, and then on towards 145.00. Support comes in at the 135.80 level, as well as the more solid support at the 134.80 area. 

Disclaimer: CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.