We standardise WoW price changes across different markets to allow for cross-market comparisons.
Markets turned more hawkish on the Norges, Riksbank, and RBNZ (Chart 1).However, we think there’s room for disappointment down under. In government bonds, recessions fears continued to see US, UK, and German curves bull flatten. It’s likely the move will continue in the US with a US 2s10s inversion to around -50bps very likely while a move to -200bps or lower is possible. In Europe, Henry prefers RV trades. In particular, he sees value in positioning for relative Spain 2s10s flattening vs UK 2s10s steepening.
In China GDP came out weaker than expected while the yield curve bull steepened, and the CSI 300 fell 4.1% WoW. It meant the index it moved closer to recent lows (Chart 3). The index has since found some support on PBoC Governor Yi’s comments that the central bank will step up monetary policy support to the economy. The comments also saw commodities rebound slightly after strong selling last week.
USD strength continued. In G10, USD/JPY moved to fresh highs (139.39) and political uncertainty helped GBP/USD cement itself below 1.20. Meanwhile, the prospect of a comparatively timid 25bps hike and potentially disappointing anti-fragmentation guidance, as well uncertainty around Nord Stream 1 (NS1; due to be turned back on 21 July), helped EUR/USD break below parity. In EMFX, USD/CNH remained in its recent 6.60-6.70 range, while growth-sensitive USD/BRL returned above 5.40. In the crypto space, Ethereum moved back above $1,300. We turned less bearish on Ethereum.
The Week Ahead
European event risk will take center stage this week. On the mainland, Italian PM Draghi will attempt to gain support in the Senate for his proposed package of household support measures (20 July). Failure to do so would significantly raise the risk of early elections – something the right wing may welcome. A day later (21 July) gas flows from NS1 should resume (if it does not, expect a big risk-off), and the ECB will deliver a 25bp hike and lay down more details around their new anti-fragmentation tool (high risk of disappointment on this front). Expect asset volatility will remain high, and Henry sees value in DAX and FTSE MIB straddle and put trades.
Turning to the UK, we’ll find out who the final two Conservative party leader candidates are (21 July). But it’s data that will be most important for markets with the May labour market (Tuesday) and June inflation reports (Wednesday) likely to take the headlines. The labour market numbers will be most important. Henry thinks that signs that labour market tightness is continuing, or building, will help decide between a 25bp or 50bp move from the BoE in August. Right now, he favours a 50bp hike. Meanwhile, inflation is likely to continue its rise, with the peak expected in Q4 – likely above current BoE forecasts.
Elsewhere, it is a quiet week in the US. Dominique is looking for S&P PMIs (22 July) to confirm that manufacturing is slowing faster than services and residential data (18, 19, 20 July) to show that the housing market is slowing, but not crashing. The FOMC speaker blackout period has also started for the 27 July FOMC meeting. She expects them to take the Fed Funds rate to 2.5% (+75bps). Meanwhile, 2Q inflation will be released for neighbouring Canada (20 July). It’s expected to accelerate to 8.4% YoY, much higher than the BoC’s new 7.6% projection. Such a number would help the market price a 75bp move, rather than the 50bp it’s debating with currently. There’ll also be two speeches in Australia (19 and 20 July). Markets will be waiting for any sign that the RBA are willing to join the 75bp trend. For a full breakdown of the week ahead, read Dominique and Henry’s Key Events and watch Dominique and Andrew’s Week Ahead.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.