The US inflation report was ugly. Inflation in the US advanced to 9.1% in June, from 8.6% a month earlier, and there was nothing toppish about yesterday’s inflation report, apart from the fact that gasoline prices which soared 60% since last year was the main responsible for the further advance in inflation, and gasoline prices have been trending lower since a couple of weeks now.
Due today, the producer price index is expected to stabilize a touch below the 11% mark.
A CPI figure above the 9% psychological level boosts the idea that the Federal Reserve (Fed) won’t hesitate to continue its aggressive rate increases to abate inflation. Pricing on Fed funds futures now gives more than 80% chance for a 100bp hike at the next FOMC meeting, due by the end of this month. That results in a stronger dollar, higher yields and a further selloff in equities.
More importantly, there is little between now and the Fed decision to reverse the pricing.
Post-CPI
The US dollar index consolidates above the 108 mark, and the bulls have their eyes set at the 110 level.
The 10-year yield remains a touch below the 3% mark, but the 2-year yield continues pushing higher, pushing the 2-10-year portion of the yield curve to a deeper inverted territory.
Gold dived to $1707 per ounce yesterday, not because the market doesn’t buy the inflation rhetoric as claims Cathie Wood, but the rising US yields continue weighing on the precious metal, even when the risk sentiment is off.
And crude oil tipped a toe below the 200-DMA, near $93pb. The tighter monetary policies, the recession talks and prospects of slower demand should keep the bears in charge of the market.
Elsewhere
The Bank of Canada raised its rate by 100bo yesterday, sending the Canadian stocks lower, and the loonie just a little bit higher against the US dollar. But the US dollar remains so strong, that no currency defies its strength.
The data released in Europe was quite mixed. The British GDP grew 3.5%, as both the industrial and manufacturing production surprised to the upside in May. The better-than-expected economic data gave a small boost to Cable at yesterday’s session, but Cable remains under the growing pressure of a stronger US dollar, and will hardly fight back the 1.20 offers.
In the eurozone, the inflation figures were mixed. The German inflation stabilized at 7.6% as expected in June, that was slightly lower than the 7.9% printed a month earlier. The French inflation rose less than expected, advancing from 5.2% to 5.8%, instead of 6.5% expected by analysts. Spanish inflation confirmed a read above 10% in June.
But there was one good news: industrial production in Europe somehow rebounded in May, to 1.8%, versus 0.3% printed a month earlier. I doubt that it would help keeping the EURUSD above parity.
There is a solid support near the 1.00 level, and stops below that level. If the 1.00 support is broken, we could rapidly see the EURUSD slip lower on stops.
Earnings
JP Morgan and Morgan Stanley will go to the earnings confessional today, BlackRock, Citigroup and Wells Fargo are due to release their earnings tomorrow.
The higher interest rates may have increased the banks’ interest margins, but inflation certainly ate a part of that margin. Plus, lower trading volumes and slower loan activity due to the recession fears may have weighed on 2Q earnings.
