Friday, July 15, 2022

Daily Market Overview

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• Dollar strength was the one constant in a week where inflation angst traded for recession worries and vice versa. That subsided somewhat as markets headed into the weekend. The greenback consolidated after surging to multidecade highs in a range of crosses over the previous days. On a trade-weighted basis, DXY retreated slightly from 108.54 to 108.25. USD/JPY punched through recent cycle highs around 137/138 yesterday to close just shy of 139. The pair is changing hands at levels that are barely lower (138.69). “Third time’s a charm” only applied partially for EUR/USD. The currency cross yesterday indeed finally dipped below parity in a convincing manner (0.995) after three attempts but the psychological forces opposing gravity are strong. EUR/USD today even ekes out a small gain to 1.005. Perhaps things would have been a bit different if US retail sales surprised materially to the upside. Fed’s Waller referred to them as being key input whether to back a 100 bps hike at the July meeting or not. Instead, the amount of money spent by Joe Sixpack in June came in close to expectations. Headline sales showed a 1% m/m increase (0.9% expected) with 9 out of the 13 categories gaining. The control group – a proxy for private consumption in GDP calculations – rose by 0.8% m/m. Consumer confidence from the Michigan University due later today still has the potential to rock markets though. Other data today included the NY Manufacturing index, which unexpectedly rebounded from -1.2 to 11.1. Yet the outlook tumbled to a 21-year low. Prices paid continued to ease, reaching the lowest level since March 2021 and even October 2020 for the 6m ahead gauge, suggesting easing price pressures. New orders recovered slightly but the flow is expected to dry up in the near future.

US Treasuries strengthened today though left intraday highs behind during a speech by Fed’s Bullard and the slightly better-than-expected data. Bullard stepped up his end-of-year target from 3.5% to 3.75%/4.0%. He sticks to a 75 bps hike in July nonetheless, fearing hiking by 100 bps would create a false perception of panic. Yields pared declines still and are now up 1.9 bps at the front and less than 1 bp lower at the long end of the curve. German Bunds outperform slightly. Yield changes vary between -1 bps to -3.9 bps. Losses were bigger during early European dealings though. The 10y yield briefly lost 1.12% support (2012/2013 interim lows) before recovering as the session evolved. EMU swap yields decline 0.8 to 1.4 bps, the wings (+1.3/1.9 bps) underperforming. Peripheral spreads vs. Germany’s 10y are mixed. Italy again underperforms, adding 5 bps as political uncertainty lingers. Risky assets including equities bounce between 1.2-1.7% in Europe and the US. Brent oil (+2.4%) inches further north of $100 again.
News Headlines

• The Polish statistical office slightly downgraded its final inflation number for June from 15.6% Y/Y to 15.5% Y/Y. That’s still a significant rise from 13.9% Y/Y in May. Details showed that the biggest monthly contributions came from transport prices, dwelling, food and recreation and culture. While the headline Polish inflation number could stabilize somewhat over the next months thanks to the correction in energy prices and seasonal effects on food prices, the peak might still not be in sight with regulated prices set to rise again by the end of this year and early next. This suggests that the Polish national bank’s efforts to slow the tightening cycle (“only” 50 bps in July) might prove premature. The Polish zloty profits from the risk rebound today with EUR/PLN sliding from 4.82 to 4.77.

• The European Automobile Manufacturers’ Association reported that EU passenger car registrations continued their downward trend in June (-15.4%) as supply chain issues continue to limit vehicle output. Simultaneously, record high inflation rates impact the demand side of the equation. In terms of volumes (886 510), June was the lowest month on record since 1996. During H1 2022, new car registrations in the EU fell by 14% compared to one year earlier, totaling around 4.6 million units.

Graphs & Table

Italian 10y spread vs. Germany on the rise again as political uncertainty lingers.

EUR/CZK: Czech koruna profits from CNB’s Holub stating the obvious that rates may need to rise further.

EUR/USD: psychological forces stronger than gravity, for now

EuroStoxx50: saved by the bell, again.

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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