Big Wednesday

It may not be monster surf breaks in Hawaii or Uluwatu in Bali, but today is shaping up to be a stormy day for markets, with plenty of chances to get dumped and held under the waves for a while. We have already had two central banks in Asia raise policy rates this morning, with the Bank of Korea and Reserve Bank of New Zealand hiking by 0.50%, with a hawkish tone in their statements. Rather surprisingly, the Korean won and New Zealand dollar are both sharply unchanged, suggesting that the news was already priced in.

This evening, it will be the Bank of Canada’s turn, and markets have a chunky 0.75% rate hike pencilled in. Even the Bank of England was beating the rate hike inflation-fighting drums last night. India’s June YoY inflation stayed stubbornly above 7.0% overnight at 7.01%. That will keep the pressure on the Reserve Bank of India to keep tightening, and on the Indian rupee. So, at a glance, the G-20 central banks are very much in inflation-fighting mode, unless you are China, Turkey and possibly Europe, who are in a world of stagflation pain now.

Markets brace for high inflation reports in Europe

Just how much pain the Eurozone may be in inflation/stagflation-wise may be highlighted by German inflation this afternoon. June Inflation YoY is expected to remain very high at 7.60%, only modestly retreating from May’s 7.90%. French and Spanish Inflation YoY for June will be equally grim, expected to be 6.50% and 10.20% respectively. If the gas stays off through Nord Stream 1 after the maintenance period finishes on the 21^st of July, those numbers are set to get worse, and not better. I suspect the outlook for the euro will get worse as well, and we will be looking wistfully back at EUR/USD at 1.0000 and wishing we’d sold more. It will be interesting to see if the ECB decides to take the Asian route through the pandemic and wear the inflation pain to keep the economic lights on.

The United Kingdom (unless you’re Scottish), releases a chuck of tier-1 data this afternoon as well, including GDP, the Trade Balance, Manufacturing, and Industrial Production for May. All of it has downside risks and won’t have improved in May and in many ways, the BOE is facing the same quandary as the ECB. Combined with an extended leadership contest to select a new prime minister to replace Boris Trump, pressure is likely to remain on sterling as well.

Before that, we get China’s balance of Trade shortly, expected to come in at USD 75.70 billion for June. Its market impact should be minimal though, as mainland markets fret over new potential covid-zero lockdowns, and ahead of a slew of tier-1 data releases on Friday, including GDP, retail sales and industrial production.

US inflation could cement 75bp move

All roads lead to the US Inflation data this evening, which comes after a surprisingly strong Non-Farm Payroll print last Friday. Overnight the US NFIB small business survey was quite weak, but it will be overruled by the inflation data, especially if headline inflation remains near 9.0% for June YoY, and the core remains near 6.0% YoY. That will lock and load 0.75% from the FOMC at the end of the month with potentially larger rate hikes to come, as well as shaking the confidence of the most ardent bottom-fisher in the US equity and bond market. Having said that, given the recent moves in the US dollar and US equities, if the data comes in softer than forecast, we could see a decent correction lower by the greenback, relieving some of the Euro’s pain. Equities will probably rally as the FOMO gnomes pile in, and the US yield curve will move lower.

Glancing around other asset classes, the big mover overnight was oil, which plummeted after the US API Crude Inventories by 4.762 million barrels, the second week of huge increases. Notably, gasoline inventories rose by 2.927 million barrels, and distillates by 2.262 million barrels. Offsetting that was another big fall by stocks in the US SPR, which seems to be making up the feedstock difference now. With the street on recession watch, saw Brent and WTI fall by around 7.0%, with Brent crude closing under USD 100.00 a barrel. I remain sceptical that oil prices will move materially lower from here, however. The forward futures remain heavily in backwardation on both Brent and WTI, indicating real-world supplies remain tighter than Elon Musk’s wallet. OPEC also forecast a supply/demand deficit from its member to persist through 2023 overnight as well. The price action still appears to be a disconnect between the speculative world, and the real world, although I don’t discount more downside losses in the short term.

Over in Disneyland, I mean crypto-land, bitcoin has slipped back below USD 20.000.00 of fiat currency US dollars to USD 19,500.00 this morning. A soft US inflation print tonight should save bitcoin’s bacon along with equities, temporarily at least. The line in the sand to flush our more margin stop-outs, 5-minute macros and some more HODL’ers is probably just below the June lows at around USD 18,500.00.

Also hanging out for a weak US inflation number tonight are gold bugs. Gold remains in Dire Straits, hovering near USD 1725.00 an ounce, strictly rhythm, it doesn’t want to cry or sing (old people will get this). Another bout of US dollar strength could well see USD 1675.00 fail, setting off another capitulation trade.

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