Business research

The markets today: the day before the points

Ahead of tomorrow’s FOMC meeting, we have seen increased market volatility in equities, rates and forex.


Today’s Podcast

Overview The day before your arrival

  • Tech stocks lead late rebound in US stocks, but S&P still ends the day in the red
  • US PPI rise adds to inflationary woes
  • UST extends the sell-off, 10-year UST yields are now at 3.477%. 2-year-old gilts buck the trend
  • The USD remains in the ascendant. GBP and NOK the big underperformers
  • BoJ accelerates JGB purchases, increasing pressure on JPY
  • RBA Governor Lowe Australia must brace for higher rates
  • Oil prices retreat as talk of US corporate profits tax grows
  • Ahead: AU Consumer Confidence, May China Activity Readings, MLF Decision, EU IP, US Empire Survey, NAHB, May Retail Sales…and FOMC Rate Decision Early Tomorrow morning

And slamming on the roof I must have heard the sound of the rain
The day before you come -ABBA

Ahead of tomorrow’s FOMC meeting, we have seen increased market volatility in equities, rates and forex. A late rebound in tech stocks helped the NASDAQ close in positive territory, but that wasn’t enough to prevent the S&P from ending the day in the red. US Treasuries extend their sell-off as fed funds are expected to rise 0.75% early tomorrow morning, while 2-year gilts bucked the global rate uptrend. The USD remains in the ascendant with the GBP and NOK the major underperformers over the past 24 hours. Last night Governor Lowe warned Australians to prepare for higher rates as the AUD lost more altitude overnight, starting the new day at 0.6871.

The market is now fully pricing in a 0.75% fed funds rate hike, with seemingly well-documented news stories guiding the rise in initial yields over the past 24 hours. Late Monday, the WSJ’s Nick Timiraos and CNBC’s Steve Liesman reported that the Fed would consider raising the federal funds rate by 75 points this week, and Liesman believes they will. Timiraos’ report is interesting in that it comes just 9 hours after a news report said the Fed was likely to go 50 basis points this week. Timiraos writes: “A series of worrying inflation reports in recent days is likely to lead Federal Reserve officials to eye surprise markets with a larger than expected interest rate hike of 0.75 percentage points. at their meeting this week”. Meanwhile,” Liesman said. “I know Powell said the committee in May wasn’t actively considering it, but he also said they were looking at the economy, and I think the economy has changed to the point in my report, at this point , I’d be dialing in at 75 if I was a bettor at this point, not 50.”

A 100 basis point rate hike has also been mooted by some market participants to stifle rising US inflation with JPM chief economist Michael Feroli arguing that such a call was not trivial. The market is now pricing a 0.75% fed funds rate hike by tomorrow, moving another -74 bps by the end of July and 61 bps in September, taking the funds rate to 2.916% by the end of July. September 21. That said, bringing forward these rate hikes, the market now also expects a rate cut by the end of 2023 and rate cuts of 50 basis points in the first quarter of 2024.

UST 10-year yields rose 11 basis points to an 11-year high of 3.47%, while two-year yields hit 3.44%, a level last seen in 2007. PPI final demand rose 0.8% from April and 10.8% from a year earlier. Meanwhile, May’s NFIB index of small business activity and sentiment fell slightly to 93.1 from 93.2, very close to the consensus 93.0.

The movement in yields was not limited to the UST, with European core yields also up slightly, although 2-year gilts in particular bucked the trend, falling 1.5bps to 2.080%. The BoE is also meeting this week with the market pricing a 50% chance that the Bank will raise the cash rate by 50 basis points. The NAB sees the BoE sticking to a 25bps hike with indications increasingly leaning towards a pause, see our preview here. The German 10-year rate rose 12 basis points to 1.74% while, for a change, spreads peripheral to Germany were relatively stable. Schnabel, a member of the ECB’s GC, said “how we ultimately respond to fragmentation risks will depend firmly on the situation we face”, signaling that a new crisis tool is unlikely to be forthcoming. submitted until deemed necessary.

Sticking to the UK, overnight the April labor market report was mixed, with strong payrolls figures but an unexpected rise in the unemployment rate to 3.8%. Average non-bonus earnings rose 4.2% year-on-year, but fell 3.4% year-on-year when measured in real terms, the worst in two decades. The latter is in favor of the BoE’s view that the compression of real incomes will be “the remedy” to bring inflation down.

Moving to FX, the USD remained in the ascendant, stronger in index terms and gaining ground against most G10 pairs. The DXY Index is trading at a new 20-year high at 105.492 while in the G10, the NOK and GBP are the big underperformers, down 1.19% and 1.15% respectively. NOK the underperformance was not helped by lower oil prices (Brent -1.17%, WTI -1.85%), following comments by Bharat Ramamurti, Deputy Director of the National Economic Council. Speaking to Bloomberg Television, Ramamurti said: “There is a real problem here with the level of production by oil companies and the profits they are making.” Democratic Sen. Ron Wyden plans to propose up to 42% federal taxes on companies with a profit margin above 10%, according to people briefed on the proposal.

Cable’s drop below 1.20 isn’t just a delay in the rise in UK gilt yield, concerns over the government’s intentions to roll back parts of the Brexit deal are also a headwind for currency. The EU is expected to respond in more detail to the British bill on Wednesday.

The AUD extended its steady decline over the past few days and starts the new day at 0.6871, 20bps above its overnight low. Speaking on the ABC 7.30pm show last night, Governor Lowe sounded a slightly more hawkish warning. Australia must prepare for higher rates. The Governor pointed out that the RBA “will do what is necessary” to bring inflation back to its 2-3% target, noting that inflation could accelerate to 7% by the end of the year and that there is little likely to start slowing before the first quarter of 2023 . Repeating recent remarks, the Governor added that it would be “reasonable” to expect the cash rate to climb to 2.5% at some point. “How quickly we get to 2.5%, or even if we get to 2.5%, is going to be determined by events.”

Yesterday the BoJ stepped up its bond buying activity to keep yields low and even bought JGBs with longer maturities of 30 years as they showed signs of dislocation . The central bank bought 2.2 trillion yen ($16.3 billion) of bonds in the deal, a record amount of bond purchases in a single day, underpinning the pledge of the BoJ, for the time being, to maintain its aggressive policy. This policy continues to undermine the yen and USD/JPY has been hovering around the 135 mark.


  • We have a busy schedule today, starting with the monthly Australian consumer confidence reading, followed by activity readings from China in May as well as the unemployment rate, residential property sales and the MLF decision. . Later in the day, the euro zone releases industrial production and trade data for May, ahead of a group of US data including May retail sales, April business inventories plus the NAHB housing index. and the June Empire manufacturing survey (2.5 exp. vs. -11.6 prior). All of the above precedes the FOMC rate decision early tomorrow morning.
  • The market is expecting a slight rebound in Chinese activity readings after the drop recorded in April. Shanghai’s slow reopening in May and easing logistical bottlenecks are supporting improved activity readings, but this narrative is unlikely to be replicated by the consumer. Industrial production is estimated at -1.0% y/y vs. -2.9% in April and investment in fixed assets at +6.1% y/y vs. 6.8%. Retail sales are estimated at -7.1% over one year against -11% previously.
  • As for the announcement of the Medium-Term Lending Facility (1-year MLF) rate, Blomberg’s median survey suggests that the rate of 2.85% is likely to remain unchanged for a fifth consecutive month, although A minority is looking for a cut to 2.75%, which would strengthen the monetary policy support signal following the 15bp decline in the 5yr LPR.
  • The US retail sales report for May should help shed some color on some recent major retailer downgrades and the state of the consumer. Overall retail sales are expected to have risen a meager 0.2%, as price increases more than accounted for that increase. Meanwhile, the core reading (excluding auto and gas) is expected to decline to 0.4% from 1% previously.
  • We have many speakers from the ECB, including Holzmann, Nagel, De Cos, Panetta, Knot, Centeno and President Lagarde.
  • The FOMC meets early tomorrow morning and after Friday’s bullish US inflation surprise, the market quickly offered a 0.75% rate hike early tomorrow morning with essentially 100% probability. Amid a self-imposed silence ahead of the meeting, a series of seemingly well-researched news articles helped fuel the movement. Following the rate announcement, attention will quickly turn to the statement, the dot chart and Fed Chair Powell for any hint of the FOMC’s intentions over the next few months with another 0.75% rise. in July considered most likely followed by a high degree of certainty for another. Increase of 50 basis points in September.

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