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What next for markets as US earnings gets underway?

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After a fairly volatile session, US markets did close lower yesterday, however they did manage to close well off their lows, despite a decline in US 10-year yields, and a surge in US 2-year yields, prompting the biggest inversion in this spread since 2000. 

With bond markets increasingly pricing economic slowdown equity markets are struggling to make sense of what comes next when it comes to valuations, with the first test coming later today with JPMorgan Chase Q2 earnings numbers.

The second puzzle to navigate is how many more rate hikes are coming down the pipe before we see central banks cutting rates again.

With US markets closing off their lows, and Asia edging higher, markets in Europe look set for a modestly positive open.

Days before the previous Federal Reserve rate meeting US CPI unexpectedly jumped by to 8.6%, prompting Fed during a blackout period to brief anonymously that they were considering a higher-than-expected 75bps rate hike, rather than the 50bps rate rise the markets had priced in as a done deal.

Yesterday’s even bigger jump to 9.1% in June has similarly shifted the odds from a 75bps rate rise later this month to 100bps, even as core prices modestly fell back from 6% to 5.9%.

Following yesterday’s hotter than expected number Atlanta Fed President Raphael Bostic expressed concern at the strength of the June number and said that “everything is in play” for July.

With other Fed members indicating their recent preferences for a 75bps move in the leadup to yesterday’s number it wouldn’t surprise if the thinking of these more hawkish members may well have shifted as a result of yesterday’s number. One of those, Fed governor Christopher Waller is already on the record as saying the Fed is “all in” for another big hike in comments made 3 weeks ago, so his comments later today will be closely monitored for any hints that he is thinking along the lines of a more than 75bps move.

With the Fed already facing criticism for being behind the curve in acting on inflation it seems likelier than ever that they will over tighten in the short term to re-establish those credentials than pay attention to the fact that of all the inflation readings, headline CPI is the only measure that is still rising, due to the big increases in food and energy prices that the Fed can’t do anything about.

The Bank of Canada’s actions yesterday in raising by 100bps may well have opened the door to the Fed also being more aggressive, even though, it is by no means a done deal.

Today’s June PPI readings could well continue the trend of weaker PPI readings since the March peaks of 11.5%. In the months since then, while the numbers have remained strong, they have been edging lower, like they have for core PCE.

Similarly core PPI has also been trending lower from 9.6% in March to 8.3% in May and is expected to fall again to 8.2%. Final demand PPI is expected to fall to 10.7%.

It’s also worth noting that since those inflation peaks in March, commodity prices have taken a sharp tumble from their June peaks, with the Thomson Reuters CRB down over 15%, along with agricultural commodities as well.

With US unemployment still down near multi year lows, weekly jobless claims appear to have settled at around a consistent 230/235k, since hitting 50-year lows of 167k back in April. For the whole of June, they’ve been around 232k and are expected to come in at 235k today.

Today’s numbers on PPI and jobless claims aren’t likely to change the Feds mind when it comes to aggressive tightening. It appears the die is cast for them to tighten until something breaks, with the bond markets increasingly pricing an upcoming recession.  

EUR/USD – support at parity has held so far, raising the prospect of a short squeeze back to 1.0200. We still have potential for a move towards 0.9660 but need to trade below 0.9980 to boost downward momentum. We need to see a move back above 1.0340/50 to stabilise and delay the prospect of further weakness.

GBP/USD – currently finding support just above 1.1800, raising the prospect of a short squeeze. 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 – slipped back to the 0.8400 level, before rebounding, with minor resistance currently at 0.8480. The risk remains for further losses towards 0.8380, while below resistance which comes in at the 0.8520/30 area.  

USD/JPY – a marginal new high at 137.86 yesterday before slipping back. The bias remains for a move towards 140.000, while above solid support at the 134.80 area. 


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