Outlook: We get PPI today alongside jobless claims, but both pale in comparison to yesterday’s worse-than-expected CPI. It puts the Fed in a bind. If it’s data-dependent, the next hike should be 100 bp. If it wants message consistency, it needs to stay at 75 bp. The airwaves are jammed with opinion on which it will be and why. One idea is that if it does 100 bp this time, it will be a bridge too far and the Fed will have to retreat faster, sooner next year. For the market to knee-jerk jump to the 100 bp conclusion is normal but still foolish, and to say the Bank of Canada led the way is simply not true–its decision came hours after the CPI release, and besides, the US tends not to copy Canada (no offense). See the CME FedWatch tool. The probability of a 100 bp hike has jumped to 82.1%--from zero on July 7. Several Fed funds watchers note that front-loading hikes this year removes the need for more next year. For June 2023, 31% see the rate rising only another 75 bp from 2.5-2.75% at year-end, or 100 bp up from today. A lesser percentage (27.6%) see rates up another 100 bp by mid-year. This embeds the idea that the Fed will over-tighten because it’s always behind the curve and will have to slow down dramatically next year. We enjoy scenario-building as much as the next guy, but honestly, we should listen to what the Fed claims is its priority list: first, kill inflation, even at the expense of the labor market. Second, maintain credibility and respect, even if at the expense of getting the forecasts wrong sometimes but sticking to its broad policy forward guidance unless absolutely forced to deviate. In a funny way, all the criticism of the Fed for getting it wrong is a tribute to the confidence even the critics do have in the Fed. How dare the Fed be mere mortals and misjudge data? One semi-surprise is the rise in services prices even as goods prices contract a bit. See the chart from BDSwiss. Goods prices slowing down is partly a function of supply chain blockages getting resolved (and remember China is still exporting heavily to the US). The next chart, from Deutsche Bank via The Daily Shot, shows supply-sensitive vs. demand sensitive prices, and the same primary inflation source–demand, not supply. Well, presumably hiking rates through the roof is going to moderate demand as unemployment rises. If it rises. This reliance on the Phillips curve–remember, Yellen warned against it–is going to be a big, fat worry and someday soon. If the labor market remains tight, it’s not clear demand is going to fade, even if a wage-price spiral is avoided. All this is fun, if you are an economist with no skin in the game. We see developments down the road, like price-gouging scandals, but more importantly, data on how the US is changing structurally post-pandemic and we see the outlines only vaguely. As noted before, demographics are still a bit of a mystery–over 10,000 Baby Boomers retiring every day while women are not returning to the labor force. If the labor shortage persists, and it can, the sectors that will have to raise wages include government, education, transportation and warehousing, and manufacturing. Bottom line, we are not sure the trade-off to be watching is demand for goods, which waxes and wanes sometimes quite independently of prices. Just because Amazon’s “prime day” offers deals doesn’t mean we feel an urgent demand for those goods. It seems obvious that if we respect the real yield differential rule as a key determinant (if not the only one) of currency fates, the CPI report buoyed up the dollar some more, especially against the stuck-in-the-mud yen and the soon-to-be-recessionary euro. (Sterling awaits a political outcome and new tax regime). The dollar is king and the euro is toast. Everyone says so. Ah, therein lies the problem. When everybody and his brother is talking about the dollar as the top currency, it’s time to doubt it. First of all, most of these dollar-cheerleaders know very little about currencies. They see a 1-2 linkage and quit. Secondly, upsetting surprises lurk everywhere, including the chain of economic and price developments arising from a strong dollar in the first place, like commodity prices that favor emerging markets. Sometimes we see results and sometimes not. China said it’s reconsidering Australian coal but the AUD fell anyway. And just try to put the price of oil and the CAD on the same chart–the correlation is often not even there, let alone strong. And yet falling oil prices affect US CPI and then monetary policy that bleeds over to Canada. It’s a matrix of multiple, sometimes conflicting signals, not a simple 1-2...

Outlook: We get PPI today alongside jobless claims, but both pale in comparison to yesterday’s worse-than-expected CPI. It puts the Fed in a bind. If it’s data-dependent, the next hike should be 100 bp. If it wants message consistency, it needs to stay at 75 bp. The airwaves are jammed with opinion on which it will be and why. One idea is that if it does 100 bp this time, it will be a bridge too far and the Fed will have to retreat faster, sooner next year. For the market to knee-jerk jump to the 100 bp conclusion is normal but still foolish, and to say the Bank of Canada led the way is simply not true–its decision came hours after the CPI release, and besides, the US tends not to copy Canada (no offense). See the CME FedWatch tool. The probability of a 100 bp hike has jumped to 82.1%--from zero on July 7. Several Fed funds watchers note that front-loading hikes this year removes the need for more next year. For June 2023, 31% see the rate rising only another 75 bp from 2.5-2.75% at year-end, or 100 bp up from today. A lesser percentage (27.6%) see rates up another 100 bp by mid-year. This embeds the idea that the Fed will over-tighten because it’s always behind the curve and will have to slow down dramatically next year. We enjoy scenario-building as much as the next guy, but honestly, we should listen to what the Fed claims is its priority list: first, kill inflation, even at the expense of the labor market. Second, maintain credibility and respect, even if at the expense of getting the forecasts wrong sometimes but sticking to its broad policy forward guidance unless absolutely forced to deviate. In a funny way, all the criticism of the Fed for getting it wrong is a tribute to the confidence even the critics do have in the Fed. How dare the Fed be mere mortals and misjudge data? One semi-surprise is the rise in services prices even as goods prices contract a bit. See the chart from BDSwiss. Goods prices slowing down is partly a function of supply chain blockages getting resolved (and remember China is still exporting heavily to the US). The next chart, from Deutsche Bank via The Daily Shot, shows supply-sensitive vs. demand sensitive prices, and the same primary inflation source–demand, not supply. Well, presumably hiking rates through the roof is going to moderate demand as unemployment rises. If it rises. This reliance on the Phillips curve–remember, Yellen warned against it–is going to be a big, fat worry and someday soon. If the labor market remains tight, it’s not clear demand is going to fade, even if a wage-price spiral is avoided. All this is fun, if you are an economist with no skin in the game. We see developments down the road, like price-gouging scandals, but more importantly, data on how the US is changing structurally post-pandemic and we see the outlines only vaguely. As noted before, demographics are still a bit of a mystery–over 10,000 Baby Boomers retiring every day while women are not returning to the labor force. If the labor shortage persists, and it can, the sectors that will have to raise wages include government, education, transportation and warehousing, and manufacturing. Bottom line, we are not sure the trade-off to be watching is demand for goods, which waxes and wanes sometimes quite independently of prices. Just because Amazon’s “prime day” offers deals doesn’t mean we feel an urgent demand for those goods. It seems obvious that if we respect the real yield differential rule as a key determinant (if not the only one) of currency fates, the CPI report buoyed up the dollar some more, especially against the stuck-in-the-mud yen and the soon-to-be-recessionary euro. (Sterling awaits a political outcome and new tax regime). The dollar is king and the euro is toast. Everyone says so. Ah, therein lies the problem. When everybody and his brother is talking about the dollar as the top currency, it’s time to doubt it. First of all, most of these dollar-cheerleaders know very little about currencies. They see a 1-2 linkage and quit. Secondly, upsetting surprises lurk everywhere, including the chain of economic and price developments arising from a strong dollar in the first place, like commodity prices that favor emerging markets. Sometimes we see results and sometimes not. China said it’s reconsidering Australian coal but the AUD fell anyway. And just try to put the price of oil and the CAD on the same chart–the correlation is often not even there, let alone strong. And yet falling oil prices affect US CPI and then monetary policy that bleeds over to Canada. It’s a matrix of multiple, sometimes conflicting signals, not a simple 1-2...

The US Dollar extended its run of gains against most currencies on Wednesday, this on the back of a hot US CPI read, which only adds more pressure on the Fed to be needing to do more with rate hikes.

The post-US CPI volatility triggered good two-way price moves around EUR/USD on Wednesday. The energy crisis in Europe continued weighing on the euro and capped the attempted recovery. Aggressive Fed rate hike bets, recession fears underpinned the USD and favour bearish traders. The EUR/USD pair witnessed good two-way price moves on Wednesday and was influenced by the intraday US dollar volatility that followed the release of the US consumer inflation figures. The US Labor Department reported that the headline US CPI rose 1.3% in June and the yearly rate accelerated from 8.6% in May to 9.1% - the highest level since November 1981. The readings were above expectations and sealed the case for another large interest rate hike by the Federal Reserve. Adding to this, Atlanta Fed President Raphael Bostic said that everything is in play to combat persistently rising inflation pressures. The markets were quick to react and started pricing in the possibility of a historic 100 bps Fed rate hike move later this month. This, in turn, lifted the USD to a fresh 20-year high and dragged the pair briefly below the parity mark for the first time since December 2002. The initial market reaction, however, fizzled out rather quickly. A typical "buy the rumour, sell the news" kind of trade triggered a sharp USD pullback and prompted some short-covering around the EUR/USD pair. Spot prices rallied around 125 pips from the daily low, though struggled to find acceptance above the 1.0100 round figure. Fears that a halt to gas flows from Russia could trigger an economic crisis in the Eurozone and curtail the European Central Bank’s ability to raise rates acted as a headwind for the shared currency. Apart from this, growing fears about a possible global recession continued lending support to the safe-haven greenback. This, in turn, kept a lid on any meaningful upside for the major and attracted fresh selling at higher levels. The overnight retracement slide extended through the Asian session on Thursday amid a fresh bout of USD buying interest. Market participants now look forward to the US economic docket - featuring the release of the Producer Price Index and the usual Weekly Initial Jobless Claims. This, along with the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the EUR/USD pair. The fundamental backdrop, however, remains tilted firmly in favour of bearish traders and suggests that any attempted recovery move might still be seen as a selling opportunity. Technical outlook From a technical perspective, the EUR/USD pair, so far, has struggled to register any meaningful recovery and the range-bound price action might still be categorized as a consolidation phase. Furthermore, the recent downfall over the past two-and-half weeks or so has been along a downward sloping channel. This further adds credence to the near-term negative outlook and supports prospects for an extension of the recent downward trajectory. Sustained weakness below the 1.000 psychological mark would reaffirm the bearish outlook and make the EUR/USD pair vulnerable. Spot prices could then accelerate the fall towards the 0.9915-0.9910 region en-route the next relevant support near the 0.9850-0.9845 zone. On the flip side, the 1.0100 round-figure mark, followed by the overnight swing high, around the 1.0120-1.0125 region might now act as immediate strong resistance. Any subsequent move up is more likely to confront stiff resistance near the 1.0275-1.0280 region ahead of the 1.0300 mark. Sustained strength beyond should lift the EUR/USD pair towards the 1.0350 support breakpoint, now turned resistance.

Europe European markets have seen another choppy and negative session after today’s US CPI report for June came in at sizzling hot 9.1%. The bigger than expected jump in inflation has raised the volume on the ever-growing drumbeat of recession, which is starting to make itself heard on a more audible basis. As has been the case globally, the surge was driven by higher food and energy prices, with US gasoline prices up almost 60% year on year. Today’s sell-off has been across the board with all sectors getting hit, with the best performers coming from commercial real estate as British Land and Land Securities claw back some of their losses from yesterday. The losses have been broad based, with IAG down after posting some decent gains yesterday, while the miners are also lower on weaker copper prices and rising global recession risks The Platinum Jubilee didn’t provide the pubs sector the boost that was originally envisaged if today’s Q4 numbers from JD Wetherspoon are any guide, with the shares slipping to their lowest levels since March 2020, after like for like sales fell by -0.4% over the same period as 2019. Despite getting permission to stay open longer over the bank holiday period, the pub chain said that it expects to post a full year loss of £30m. This was a sharp departure from an update in May when CEO Tim Martin said he expected to see a break-even outcome for profits in the current financial year, and that 2023 would see a return to relative normality. Today’s downgrade is due to higher costs in the form of higher spending on wages and maintenance, with repair costs in FY22 expected to come in at £99m compared to £76.9m in 2019. Lower than expected sales were probably a result of more people choosing the cheaper option of staying at home, celebrating with friends or at street parties.     US US markets opened sharply lower after today’s bigger than expected increase in US CPI in June, raising concerns that the Federal Reserve might be tempted to pull the trigger on a 100bps rate hike at the end of this month. While the headline number is grabbing all the headlines it is notable that core prices fell back from 6% to 5.9%, which could serve to temper any weakness after Europe closes for the day. With earnings season set to start in earnest tomorrow with the release of JPMorgan Chase Q2 numbers, investors are becoming increasingly concerned that the rising cost of living and inflation will prompt further revisions to its loan loss provisions. In Q1 the bank set aside $1.5bn in respect of this due to rising inflation risks. Back then CPI had been trending at just below 8%, and there were few if any who were predicting CPI at over 9%. Could we see further provisions as well as the potential for slowdowns in lending, whether it be in home loans or business. After rising sharply yesterday, Delta Airlines shares have dropped sharply after falling short of profit expectations in Q2. Profits came in at $1.44c a share, missing expectations of $1.64c a share, while revenues also came in short at $12.31bn. The airline cited higher operating costs for the profit miss and said that these higher costs were likely to persist throughout the rest of the year. FX The US dollar briefly jumped higher this afternoon after US CPI hit yet another 40-year peak of 9.1%, increasing the odds that the Federal Reserve might lean towards a more aggressive rate move at the end of this month. Not only has today’s number made the prospect of a 75bps rate hike much more likely, but it has also brought the prospect of a 100bps move into play, although markets appear to be in two minds about this given core prices fell to 5.9% in June. 100bps is what we saw from the Bank of Canada today after they decided to throw the kitchen sink at inflation by hiking rate by more than expected, by 100bps, from 1.5% to 2.5%, and going on to say that there was more to come.  This surprise announcement sent the Canadian dollar higher, although its gains have remained tempered by the stronger US dollar. The euro briefly dipped below parity to 0.9998 in the wake of the US CPI report, however there was little in the way of follow-through, despite more aggressive pricing about the Feds intentions on rates later this month.   The UK economy enjoyed a decent rebound in May, growing by 0.5%, while the April number was revised higher to -0.2%. Index of services expanded by 0.4% helped by a large rise in GP appointments, which offset the scaling back of NHS test and trace which weighed on the April numbers....

Europe European markets have seen another choppy and negative session after today’s US CPI report for June came in at sizzling hot 9.1%. The bigger than expected jump in inflation has raised the volume on the ever-growing drumbeat of recession, which is starting to make itself heard on a more audible basis. As has been the case globally, the surge was driven by higher food and energy prices, with US gasoline prices up almost 60% year on year. Today’s sell-off has been across the board with all sectors getting hit, with the best performers coming from commercial real estate as British Land and Land Securities claw back some of their losses from yesterday. The losses have been broad based, with IAG down after posting some decent gains yesterday, while the miners are also lower on weaker copper prices and rising global recession risks The Platinum Jubilee didn’t provide the pubs sector the boost that was originally envisaged if today’s Q4 numbers from JD Wetherspoon are any guide, with the shares slipping to their lowest levels since March 2020, after like for like sales fell by -0.4% over the same period as 2019. Despite getting permission to stay open longer over the bank holiday period, the pub chain said that it expects to post a full year loss of £30m. This was a sharp departure from an update in May when CEO Tim Martin said he expected to see a break-even outcome for profits in the current financial year, and that 2023 would see a return to relative normality. Today’s downgrade is due to higher costs in the form of higher spending on wages and maintenance, with repair costs in FY22 expected to come in at £99m compared to £76.9m in 2019. Lower than expected sales were probably a result of more people choosing the cheaper option of staying at home, celebrating with friends or at street parties.     US US markets opened sharply lower after today’s bigger than expected increase in US CPI in June, raising concerns that the Federal Reserve might be tempted to pull the trigger on a 100bps rate hike at the end of this month. While the headline number is grabbing all the headlines it is notable that core prices fell back from 6% to 5.9%, which could serve to temper any weakness after Europe closes for the day. With earnings season set to start in earnest tomorrow with the release of JPMorgan Chase Q2 numbers, investors are becoming increasingly concerned that the rising cost of living and inflation will prompt further revisions to its loan loss provisions. In Q1 the bank set aside $1.5bn in respect of this due to rising inflation risks. Back then CPI had been trending at just below 8%, and there were few if any who were predicting CPI at over 9%. Could we see further provisions as well as the potential for slowdowns in lending, whether it be in home loans or business. After rising sharply yesterday, Delta Airlines shares have dropped sharply after falling short of profit expectations in Q2. Profits came in at $1.44c a share, missing expectations of $1.64c a share, while revenues also came in short at $12.31bn. The airline cited higher operating costs for the profit miss and said that these higher costs were likely to persist throughout the rest of the year. FX The US dollar briefly jumped higher this afternoon after US CPI hit yet another 40-year peak of 9.1%, increasing the odds that the Federal Reserve might lean towards a more aggressive rate move at the end of this month. Not only has today’s number made the prospect of a 75bps rate hike much more likely, but it has also brought the prospect of a 100bps move into play, although markets appear to be in two minds about this given core prices fell to 5.9% in June. 100bps is what we saw from the Bank of Canada today after they decided to throw the kitchen sink at inflation by hiking rate by more than expected, by 100bps, from 1.5% to 2.5%, and going on to say that there was more to come.  This surprise announcement sent the Canadian dollar higher, although its gains have remained tempered by the stronger US dollar. The euro briefly dipped below parity to 0.9998 in the wake of the US CPI report, however there was little in the way of follow-through, despite more aggressive pricing about the Feds intentions on rates later this month.   The UK economy enjoyed a decent rebound in May, growing by 0.5%, while the April number was revised higher to -0.2%. Index of services expanded by 0.4% helped by a large rise in GP appointments, which offset the scaling back of NHS test and trace which weighed on the April numbers....