FOMC week finally

Will FOMC opt for 75bp hike?

This month has dragged on and seems to be lasting forever. One reason could be that it is my last full month as a keyboard warrior, toiling as the voice of reason as I try to make sense of the nonsense in the financial markets. The second, and more likely, is that the US FOMC policy meetings falls at the end of the month, instead of its usual mid-month slot. But as the last week of July arrives, so does the FOMC policy meeting, with the results due out in the early hours of Thursday morning Singapore time. For what it’s worth, I am in Team Taylor, and going for 75 basis points, with 100 being a bridge too far.

Last Friday’s price action may have softened the ardour of the 100 basis point hikes on the committee as well. Equity markets finished sharply lower, ostensibly because of soft social media earnings, but given Wall Street’s schizophrenic nature of late, it was just as likely to be recession fears, booking some short-term profits, and cutting exposure ahead of the weekend and any potential risks that emerged over it. Currency markets had a noisy day but finished not far from unchanged across the DM and EM space, so I don’t think Friday’s equity sell-off was a structural move.

Friday’s S&P Global Manufacturing and Services PMIs for Europe and the US were disappointing to say the least, coming in softer across the board. Eurozone bond yields moved sharply lower as the market falls over itself to price in a recession there. Even Italian BTPs rallied. That seems to have flowed into the US bond market as well, with the US yield also moving sharply lower across the 5 to 30-year tenors, and even 2-years closed under 3.0%. The R-word remains on everyone’s lips. Even gold managed to string two consecutive positive days together, while oil markets were broadly unchanged.

Agricultural commodities fell on Friday after Russia and Ukraine signed a Turkey-brokered deal to allow Ukrainian grain exports to resume from Black Sea ports such as Odessa. Naturally, Russia decided to rain cruise missiles down on Odessa over the weekend, including one that hit a grain silo. That has seen wheat futures rise by 2.0% this morning and has led to some US dollar strength and extended the risk-off tone to equity markets. Various news outlets are also running a story about China’s increasingly strident warnings behind the scenes to US officials around Nancy Pelosi’s intended visit to Taiwan sometime in the next few weeks.

This week features a raft of heavyweight US second-quarter earnings from tech heavyweights, which could drive volatility on stock markets in addition to the FOMC. Alphabet and Microsoft announce tomorrow, Meta on Wednesday, perhaps the highest risk one looking at the ad-strewn content-light wasteland of my Facebook and Instagram feed. Apple announces after the bell on Thursday evening NYT. Falling across the FOMC, we could be in for some tasty volatility around the mid-week hump.

Alongside the FOMC, we have the German Ifo this afternoon, US Durable Goods Wednesday, German Inflation, US GDP and German, French, Italian, Spanish and Eurozone GDPs Thursday, and then Eurozone Inflation prints and US Personal Consumption and Expenditure data and the Chicago PMI on Friday. Slap in some China property and Taiwan risk, Eastern Europe risk, and the US President who has Covid, and good luck picking the bones out of this week. It’s the show with everything but Yul Brunner. I’ll be in Bali next week for four days, and mightily glad I am, watching the dust settle from the distance.

Closer to home, we see Singapore Core Inflation for June (4.20% exp. YoY), and Headline Inflation (6.20% exp YoY), released at 1300 SGT today. Having already made an unscheduled monetary tightening this month, higher-than-expected inflation data this afternoon will lock-and-load the Monetary Authority of Singapore to tighten again at their scheduled October meeting. I am in Singapore this week, and although COE’s have hit record high prices in July, I am still seeing a lot of brand new Mercedes and Range Rovers being driven around. I also paid just over seven dollars for a quite small, but pleasing, hipster latte in Singapore this morning. My feeling is that inflation will come in on the high side this afternoon, which may give local equities some headwinds this week while supporting the Singapore dollar.

On a similar note, Australia releases its Q2 CPI on Wednesday, and we can expect volatility over the number as the street uses it to reprice the trajectory of the Reserve Bank of Australia tightening cycle. The Australian dollar’s value is a function of international investors’ macro outlook for the world economy, risk-on/risk-off for those of us in the pilot fish part of the financial markets. A high CPI print could also be a headwind for Australian equities though, although they have been mostly content to follow Wall Street like a doting puppy of late.

It is a slow week for China data, with just Industrial Profits on Wednesday. However, we do see official PMIs released this weekend on Sunday, and the Caixin PMI next Monday. The focus is likely to remain on China’s Covid-19 trajectory and the China property market woes. Evergrande is approaching an end-of-month deadline around debt restructuring, and if no progress is made, this could start grabbing more headlines as the week advances.

The bear market rally in equities faces more than a few hurdles this week as outlined above. The currency markets technical picture look a bit clearer and the US dollar correction lower would appear to still have legs. There are rising and falling wedge breakouts everywhere. The dollar index is testing the base of its rising wedge, USD/JPY has broken lower out of its wedge, GBP/USD, AUD/USD and NZD/USD have all broken higher out of falling wedges. USD/JPY has the potential to be the most emotional, especially if the evolution of the week sees US yields move sharply lower again. Long USD/JPY is a very crowded trade, and a thinning of the herd is long overdue.

One could also argue that both bitcoin and gold are trying to form bases as well, but let’s not get too far ahead of ourselves, they remain the ugliest horses in the glue factory. However this week plays out, I suspect today will be the most sedate day of the week to come, enjoy the peace and quiet while you can.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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