Annual CPI in the US is forecast to rise to 8.8% in June. Markets are not sure about the size of the Fed's September rate hike. Core inflation is set to edge lower on falling crude oil prices.  The relentless US dollar rally extends further ahead of the highly-anticipated inflation data from the US. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, is already up more than 3% in July amid growing fears of the global economy tipping into recession. The US Bureau of Labor Statistics is expected to report that the Consumer Price Index (CPI) rose to a fresh multi-decade high of 8.8% on a yearly basis in June from 8.6% in May. The Core CPI, which excludes volatile food and energy prices, is forecast to decline to 5.8% from 6%. Crude oil prices fell sharply in June, suggesting that it wouldn’t be surprising to see a retreat in core inflation. After having posted gains for six straight months, the barrel of West Texas Intermediate (WTI) lost more than 8% in June. US annual CPI chart Market implications The US dollar remains the go-to safe-haven asset as the US Federal Reserve remains on track to continue to tighten its policy with the US economy remaining relatively healthy. The US central bank is widely expected to hike its policy rate by 75 basis points (bps) in July and several FOMC policymakers, including Chairman Jerome Powell, voiced their willingness to do so. Investors, however, are not certain about the size of the September rate increase. After the monthly jobs report showed that Nonfarm Payrolls in the US rose more than expected in June, the probability of one more 75 bps hike in July jumped to 30% from 15%, according to the CME Group’s FedWatch Tool. Hence, a hot inflation report could trigger a similar reaction and help the dollar preserve its strength against its rivals. On the other hand, an annual CPI print in line with the market consensus could cause a “buy the rumor, sell the fact” market action. White House Press Secretary Karine Jean-Pierre told reporters on Monday that she expects new CPI data to be “highly elevated.” Additionally, the Relative Strength Index (RSI) indicator on the daily DXY chart holds above 70, suggesting the index is overbought and that it could stage a technical correction before continuing its rally. The last time when the daily RSI climbed above 70 in late April, DXY lost more than 1% before resuming its uptrend. Unless CPI figures surpass analysts’ estimates, investors could take the opportunity to book their profits and cause the dollar to weaken. DXY daily chart An unexpected decline in annual CPI could cause market participants to reassess the Fed’s rate outlook and open the door for a USD selloff. Furthermore, a lower-than-expected print could also have a positive impact on market mood and cause the bearish pressure on the greenback to increase. With the Fed going into its blackout period on July 16, investors might refrain from betting on further dollar strength, and DXY could stay in a consolidation phase until the Fed’s policy announcements on July 27. 

The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 2.5% in July. Hard-landing risks unlikely to dissuade the RBNZ at this policy meeting. The kiwi could see a brief correction if the central bank sticks to its hawkish stance. The Reserve Bank of New Zealand (RBNZ) is on a hat-trick, as it is set to hike the key policy rate for the third meeting in a row this Wednesday. With increasing odds of a global recession, will the central bank hint at any slowdown in its pace of tightening? What would it mean for the NZD/USD pair? RBNZ forward guidance holds the key The RBNZ’s third consecutive 50 bps rate increase on Wednesday will lift the Official Cash Rate (OCR) from 2% to 2.5%. The central bank kicked off its tightening cycle in October 2021 and since then has resorted to super-sized rate hikes to fight raging inflation. The policy announcement will not be accompanied by any updated projections or be followed by Governor Adrian Orr’s press conference. A majority of the economists forecast the RBNZ raising rates by 50 basis points to 2.50% at its July 13 meeting while expecting the OCR to reach 3.50% or higher by the end of this year. In its May policy meeting, the RBNZ continued with its hawkish forward guidance by raising its forecast for the terminal rate to a 3.9% peak by mid-2023 from 3.35% previous. It also emphasized a “commitment to ensuring consumer price inflation returns to within the 1 to 3 percent target range.” Heading into the policy announcements, the South Pacific Island nation tolerates a 30-year high inflation rate of 6.9%, reported in the first quarter of 2022. The inflation expectations in the coming months are expected to remain higher, suggesting that the central bank will stay on its hawkish course to control inflation without risk of hard-landing. The RBNZ’s inflation target range is 1-3%. It’s worth noting that New Zealand's economy contracted marginally in Q1, with GDP falling by 0.2%, raising fears of a technical recession should the kiwi central bank’s aggressive rate hike stance deteriorate the economic activity further. The risks of hard-landing are unlikely to dissuade the RBNZ from delivering a super-sized rate hike this month, although it could alarm the bank if the economy is tipping into a recession. Fresh lockdowns in China due to covid flareups, surging energy costs and Fed’s aggressive tightening path are also already amplifying fears of a globalized recession. Therefore, the RBNZ could be compelled to slow down on its rate-hike track potentially from its August meeting.   Trading NZD/USD with RBNZ decision Wednesday’s RBNZ announcement could rescue NZD bulls from over two-year lows, should the bank stick to its hawkish guidance on the interest rates. In such a case, NZD/USD could rebound towards the 0.6200 level. A recovery in risk sentiment combined with a broad US dollar retreat is critical to aiding the pullback in the currency pair. The kiwi pair could resume its downtrend towards 0.6000 if the central bank raises concerns over the economic slowdown and turns rather cautious. This could be seen as a dovish rate hike and negative for NZD buyers. NZD/USD’s reaction to the RBNZ outcome could be brief, as the dynamics of the dollar and the market’s risk perception will play a pivot role.

The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 2.5% in July. Hard-landing risks unlikely to dissuade the RBNZ at this policy meeting. The kiwi could see a brief correction if the central bank sticks to its hawkish stance. The Reserve Bank of New Zealand (RBNZ) is on a hat-trick, as it is set to hike the key policy rate for the third meeting in a row this Wednesday. With increasing odds of a global recession, will the central bank hint at any slowdown in its pace of tightening? What would it mean for the NZD/USD pair? RBNZ forward guidance holds the key The RBNZ’s third consecutive 50 bps rate increase on Wednesday will lift the Official Cash Rate (OCR) from 2% to 2.5%. The central bank kicked off its tightening cycle in October 2021 and since then has resorted to super-sized rate hikes to fight raging inflation. The policy announcement will not be accompanied by any updated projections or be followed by Governor Adrian Orr’s press conference. A majority of the economists forecast the RBNZ raising rates by 50 basis points to 2.50% at its July 13 meeting while expecting the OCR to reach 3.50% or higher by the end of this year. In its May policy meeting, the RBNZ continued with its hawkish forward guidance by raising its forecast for the terminal rate to a 3.9% peak by mid-2023 from 3.35% previous. It also emphasized a “commitment to ensuring consumer price inflation returns to within the 1 to 3 percent target range.” Heading into the policy announcements, the South Pacific Island nation tolerates a 30-year high inflation rate of 6.9%, reported in the first quarter of 2022. The inflation expectations in the coming months are expected to remain higher, suggesting that the central bank will stay on its hawkish course to control inflation without risk of hard-landing. The RBNZ’s inflation target range is 1-3%. It’s worth noting that New Zealand's economy contracted marginally in Q1, with GDP falling by 0.2%, raising fears of a technical recession should the kiwi central bank’s aggressive rate hike stance deteriorate the economic activity further. The risks of hard-landing are unlikely to dissuade the RBNZ from delivering a super-sized rate hike this month, although it could alarm the bank if the economy is tipping into a recession. Fresh lockdowns in China due to covid flareups, surging energy costs and Fed’s aggressive tightening path are also already amplifying fears of a globalized recession. Therefore, the RBNZ could be compelled to slow down on its rate-hike track potentially from its August meeting.   Trading NZD/USD with RBNZ decision Wednesday’s RBNZ announcement could rescue NZD bulls from over two-year lows, should the bank stick to its hawkish guidance on the interest rates. In such a case, NZD/USD could rebound towards the 0.6200 level. A recovery in risk sentiment combined with a broad US dollar retreat is critical to aiding the pullback in the currency pair. The kiwi pair could resume its downtrend towards 0.6000 if the central bank raises concerns over the economic slowdown and turns rather cautious. This could be seen as a dovish rate hike and negative for NZD buyers. NZD/USD’s reaction to the RBNZ outcome could be brief, as the dynamics of the dollar and the market’s risk perception will play a pivot role.

The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 2.5% in July. Hard-landing risks unlikely to dissuade the RBNZ at this policy meeting. The kiwi could see a brief correction if the central bank sticks to its hawkish stance. The Reserve Bank of New Zealand (RBNZ) is on a hat-trick, as it is set to hike the key policy rate for the third meeting in a row this Wednesday. With increasing odds of a global recession, will the central bank hint at any slowdown in its pace of tightening? What would it mean for the NZD/USD pair? RBNZ forward guidance holds the key The RBNZ’s third consecutive 50 bps rate increase on Wednesday will lift the Official Cash Rate (OCR) from 2% to 2.5%. The central bank kicked off its tightening cycle in October 2021 and since then has resorted to super-sized rate hikes to fight raging inflation. The policy announcement will not be accompanied by any updated projections or be followed by Governor Adrian Orr’s press conference. A majority of the economists forecast the RBNZ raising rates by 50 basis points to 2.50% at its July 13 meeting while expecting the OCR to reach 3.50% or higher by the end of this year. In its May policy meeting, the RBNZ continued with its hawkish forward guidance by raising its forecast for the terminal rate to a 3.9% peak by mid-2023 from 3.35% previous. It also emphasized a “commitment to ensuring consumer price inflation returns to within the 1 to 3 percent target range.” Heading into the policy announcements, the South Pacific Island nation tolerates a 30-year high inflation rate of 6.9%, reported in the first quarter of 2022. The inflation expectations in the coming months are expected to remain higher, suggesting that the central bank will stay on its hawkish course to control inflation without risk of hard-landing. The RBNZ’s inflation target range is 1-3%. It’s worth noting that New Zealand's economy contracted marginally in Q1, with GDP falling by 0.2%, raising fears of a technical recession should the kiwi central bank’s aggressive rate hike stance deteriorate the economic activity further. The risks of hard-landing are unlikely to dissuade the RBNZ from delivering a super-sized rate hike this month, although it could alarm the bank if the economy is tipping into a recession. Fresh lockdowns in China due to covid flareups, surging energy costs and Fed’s aggressive tightening path are also already amplifying fears of a globalized recession. Therefore, the RBNZ could be compelled to slow down on its rate-hike track potentially from its August meeting.   Trading NZD/USD with RBNZ decision Wednesday’s RBNZ announcement could rescue NZD bulls from over two-year lows, should the bank stick to its hawkish guidance on the interest rates. In such a case, NZD/USD could rebound towards the 0.6200 level. A recovery in risk sentiment combined with a broad US dollar retreat is critical to aiding the pullback in the currency pair. The kiwi pair could resume its downtrend towards 0.6000 if the central bank raises concerns over the economic slowdown and turns rather cautious. This could be seen as a dovish rate hike and negative for NZD buyers. NZD/USD’s reaction to the RBNZ outcome could be brief, as the dynamics of the dollar and the market’s risk perception will play a pivot role.

AUD/USD Current Price: 0.6756 Australian NAB’s Business Confidence unexpectedly shank to 1 in June. A temporal pause in risk aversion weighed on the greenback ahead of US inflation data. AUD/USD has corrected oversold conditions and may recover further once above 0.6790. The AUD/USD pair heads into the Asian session, trading near a daily high of 0.6778, recovering from an early low of 0.6710. The greenback has been consistently rising on the back of markets’ concerns about economic progress. Slowing growth coupled with record inflation levels spooked investors away from high-yielding assets, while central banks’ decisions to tighten their monetary policies added to the mixture. Financial markets’ turmoil paused on Tuesday as the US government cooled down speculation of a recession in the country. However, fresh data to be out on Wednesday will give clearer clues than a White House memo. The country will publish the June Consumer Price Index, foreseen at 8.8% YoY, up from the previous 8.6%. Meanwhile, Australia published June NAB’s Business Confidence, which sunk to 1 from 8 in the previous month, missing an expected improvement to 8. NAB’s Business Confidence in the same period printed at 13, better than the 9 expected but below the previous 15. The country will publish July Westpac Consumer Confidence on Wednesday, previously at -4.5%. AUD/USD short-term technical outlook The AUD/USD pair is trading in the lower end of its latest range, still bearish but hinting at a possible bullish correction, without confirming it. Technical indicators in the daily chart are recovering from near oversold readings but are still well into negative territory. At the same time, moving averages maintain their bearish slopes far above the current level. In the near term, and according to the 4-hour chart, the chances of further recoveries cooled down. Technical indicators have bounced from near oversold levels but lost their upward strength and turned flat below their midlines. A bearish 20 SMA provides immediate resistance at around 0.6790, maintaining its bearish slope below the longer ones. Support levels 0.6710 0.6670 0.6625 Resistance levels: 0.6790 0.6840 0.6885 View Live Chart for the AUD/USD

EUR/USD dropped closer to the parity mark for the first time since December 2002. The energy crisis in Europe continued fueling recession fears and weighed on the euro. The relentless USD rally to a two-decade high exerted additional pressure on the pair. The EUR/USD pair struggled to capitalize on Friday's modest bounce and came under aggressive selling pressure on the first day of a new week. Investors remain concerned that the energy crisis in Europe could drag the region's economy faster and deeper into recession. The Eurozone is also facing the risk of broadening fragmentation amid the recent sharp rise in borrowing costs of more indebted countries because of the European Central Bank's tightening plan. This was seen as a key factor that weighed heavily on the shared currency. This, along with the emergence of aggressive US dollar buying dragged the major to its lowest level since December 2002, closer to the parity mark. In fact, the USD Index soared to a fresh two-decade high during the Asian session on Tuesday and continued drawing support from hawkish Fed expectations. The market seems convinced that the US central bank would stick to its faster policy tightening path to combat stubbornly high inflation. The bets were reaffirmed by the FOMC meeting minutes released last week, which indicated that another 50 or 75 bps rate hike is likely at the July meeting. Policymakers emphasized the need to fight inflation even if it results in an economic slowdown. Apart from this, the prevalent risk-off environment boosted the safe-haven buck and exerted additional downward pressure on the EUR/USD pair. The market sentiment remains fragile amid worries that a more aggressive move by major central banks to curb soaring inflation would pose challenges to global economic growth. Furthermore, the ongoing Russia-Ukraine war and a fresh COVID-19 outbreak in China have been fueling recession fears. This, in turn, forced investors to take refuge in traditional safe-haven assets and further benefitted the buck. Tuesday's economic docket features the release of the German ZEW Economic Sentiment Index, which might do little to provide any impetus to the EUR/USD pair. Nevertheless, the fundamental backdrop supports prospects for an extension of the well-established bearish trajectory. Technical outlook From a technical perspective, the RSI (14) on the daily chart is already flashing extremely oversold conditions. This makes it prudent to wait for some near-term consolidation or modest rebound before positioning for any further losses. Hence, any further decline below the 1.0000 psychological mark is more likely to find decent support near the lower end of a multi-month-old descending channel, currently around the 0.9980 region. Some follow-through selling would be seen as a fresh trigger for bearish traders and make the EUR/USD pair vulnerable. On the flip side, any attempted recovery could be seen as a selling opportunity near the 1.0070 region. This, in turn, should cap the EUR/USD pair near the 1.0100 round-figure mark. The latter should act as a pivotal point, which if cleared decisively could trigger a near-term short-covering bounce. Spot prices could then climb back to the next relevant hurdle near the 1.0180-1.0185 zone.

European equities are mostly lower at the start of the week, as key themes including nerves around earnings season and concerns that the Federal Reserve will be under more pressure to hike rates after last week’s stronger than expected payrolls report from the US, dominate sentiment. The “good news is bad news” theme remains strong for now. Markets are falling at the start of a new week, after concerns mount that China will go back into lockdown. While these concerns are preoccupying sentiment, there are some fundamentals that are worth looking out for as they could determine the longer-term direction of markets after this summer madness quietens down. Below we take a look at three themes that will drive market direction in the coming days and weeks: 1, EUR/USD parity As we start a new week, the risk off theme is driving EUR/USD below the 1.01 handle and the sell off in the euro is gathering pace. The lack of upward momentum suggests a break below parity is now inevitable. But what would it actually mean? A weaker euro is surely good for the large German exporters, including the automotive industry and the large manufacturing sector? However, it’s not as simple as this and there are many moving parts and unintended consequences when you see historical moves in the world’s most important currencies. As you can see in the chart below, the Dax and EUR/USD have typically had a strong correlation so far in 2022, however, the relentless pressure on the euro is causing a divergence with the Dax. As EUR/USD reaches two-decade lows, the Dax is starting to outperform the euro. We will be watching this closely to see if this is maintained. While a weak euro should be good news for German exporters, it has a dark side that could spell bad news for the future of the Eurozone. It increases the cost base for German companies, as energy, which is priced in dollars, becomes ever more expensive. The reliance of large Eurozone economies on energy imports is the Achilles heel of the European economy. Coupled with the restrictions of energy imports from Russia, and the threat from Russia that it will cut off natural gas supplies, Europe’s energy position already looks weak. The currency decline is exacerbating this problem, as Europe looks to secure energy from other suppliers, but needs to pay more because of the declining euro. Thus, the Dax’s divergence from EUR/USD may not persist, or it will be a reflection of more people selling the euro, rather than favouring the Dax. Thus, a weak euro is a threat to Europe’s largest economy. Graphical user interface, chart Description automatically generated. However, another impact of EUR/USD parity is what it means for central banks. Will it trigger a more aggressive stance from the ECB, or could it cause the Fed to hold back on large rate hikes per meeting due to the impact they have on the FX market? As we move into the second half of this year, we believe that central banks may be more attentive to currency moves, with an increasing chance that the ECB and BOE will have to adjust their current policy stances and start matching Fed rate hikes to prop up their currencies. This could limit dollar strength in the long term. Also, as the euro reaches a multi-decade low vs. the USD, we will be watching to see if the single curtrency will fall further, or if it will bounce back. We predict a 75% chance that there could be more weakness for the euro if EUR/USD breaks parity. 2, Economic data watch Key economic releases this week include US inflation data for June. The market expects another rise in the inflation rate to 8.7%, up from 8.6% in May. The market will trade off the monthly inflation figures, and these are likely to make grim reading from the Fed. The monthly rate of US inflation is expected to come in at 1%, driven by higher energy prices. The key drivers of inflation for June are expected to be energy prices, food costs, airline fares and shelter costs. Hence the rate of core inflation, without food and energy, is also expected to rise by 0.5% last month. While this is a slightly lower rate than the 0.6% rise in core inflation for May, it remains uncomfortably high for the Fed who embarked on a 75bp rate hike at its last meeting. We are unlikely to have reached peak inflation yet, which could keep markets nervous as we move through this week. It is worth noting that the June figures are unlikely to reflect the current slowdown in consumption that is expected after a record decline in consumer confidence in the US and rising US interest rates eating into consumer...

European equities are mostly lower at the start of the week, as key themes including nerves around earnings season and concerns that the Federal Reserve will be under more pressure to hike rates after last week’s stronger than expected payrolls report from the US, dominate sentiment. The “good news is bad news” theme remains strong for now. Markets are falling at the start of a new week, after concerns mount that China will go back into lockdown. While these concerns are preoccupying sentiment, there are some fundamentals that are worth looking out for as they could determine the longer-term direction of markets after this summer madness quietens down. Below we take a look at three themes that will drive market direction in the coming days and weeks: 1, EUR/USD parity As we start a new week, the risk off theme is driving EUR/USD below the 1.01 handle and the sell off in the euro is gathering pace. The lack of upward momentum suggests a break below parity is now inevitable. But what would it actually mean? A weaker euro is surely good for the large German exporters, including the automotive industry and the large manufacturing sector? However, it’s not as simple as this and there are many moving parts and unintended consequences when you see historical moves in the world’s most important currencies. As you can see in the chart below, the Dax and EUR/USD have typically had a strong correlation so far in 2022, however, the relentless pressure on the euro is causing a divergence with the Dax. As EUR/USD reaches two-decade lows, the Dax is starting to outperform the euro. We will be watching this closely to see if this is maintained. While a weak euro should be good news for German exporters, it has a dark side that could spell bad news for the future of the Eurozone. It increases the cost base for German companies, as energy, which is priced in dollars, becomes ever more expensive. The reliance of large Eurozone economies on energy imports is the Achilles heel of the European economy. Coupled with the restrictions of energy imports from Russia, and the threat from Russia that it will cut off natural gas supplies, Europe’s energy position already looks weak. The currency decline is exacerbating this problem, as Europe looks to secure energy from other suppliers, but needs to pay more because of the declining euro. Thus, the Dax’s divergence from EUR/USD may not persist, or it will be a reflection of more people selling the euro, rather than favouring the Dax. Thus, a weak euro is a threat to Europe’s largest economy. Graphical user interface, chart Description automatically generated. However, another impact of EUR/USD parity is what it means for central banks. Will it trigger a more aggressive stance from the ECB, or could it cause the Fed to hold back on large rate hikes per meeting due to the impact they have on the FX market? As we move into the second half of this year, we believe that central banks may be more attentive to currency moves, with an increasing chance that the ECB and BOE will have to adjust their current policy stances and start matching Fed rate hikes to prop up their currencies. This could limit dollar strength in the long term. Also, as the euro reaches a multi-decade low vs. the USD, we will be watching to see if the single curtrency will fall further, or if it will bounce back. We predict a 75% chance that there could be more weakness for the euro if EUR/USD breaks parity. 2, Economic data watch Key economic releases this week include US inflation data for June. The market expects another rise in the inflation rate to 8.7%, up from 8.6% in May. The market will trade off the monthly inflation figures, and these are likely to make grim reading from the Fed. The monthly rate of US inflation is expected to come in at 1%, driven by higher energy prices. The key drivers of inflation for June are expected to be energy prices, food costs, airline fares and shelter costs. Hence the rate of core inflation, without food and energy, is also expected to rise by 0.5% last month. While this is a slightly lower rate than the 0.6% rise in core inflation for May, it remains uncomfortably high for the Fed who embarked on a 75bp rate hike at its last meeting. We are unlikely to have reached peak inflation yet, which could keep markets nervous as we move through this week. It is worth noting that the June figures are unlikely to reflect the current slowdown in consumption that is expected after a record decline in consumer confidence in the US and rising US interest rates eating into consumer...

Markets US equities were a touch softer Friday, S&P down 0.1% to be 2% higher over the week. Bonds sold off after payrolls beat, US10yr yields up 9bps to 3.08%, 2yrs up 9bps to 3.1%, leaving the curve still inverted. Over the week, 10yr yields are up 20bps as recession concerns ease. While the MSCI World rose 1.7% last week, in another attempt at a growth-led bear market rally, Chinese benchmarks were down slightly below 1%.  Covid numbers are ticking higher again; on Sunday, Shanghai reported the first case of the highly-contagious BA.5 sub-variant. The latter is creating some negative chop at the open, with China beta getting slightly tarnished but no worse for the wear as investors could be increasingly desensitized to Omicron risk in China.  In the wake of solid Payroll data, US recession risks are getting nudged into the corner. Still, this week's focus pivots back to inflation, particularly the US CPI and the inherent hawkish Fed policy implications. Given the recent developments in the Ukraine war, markets are struggling to have high conviction on the Nord Stream 1 gas flow resumption; risk could start teetering on the edge of a dumpster again, And while we are putting the June inflation data to one side, it is still the marquee number in the market's eyes with the search for peak Fed hawkishness continuing. Because the government data doesn't capture the gasoline and freight shipping price slide, markets could look through a slightly hot CPI number; hence we think the focus should be on US activity numbers. Both the big ones come on Friday: the Empire Manufacturing Survey and Retail Sales. Central banks don't care about what people say but what people do. Hence, retail sales could be a market mover. More importantly, the Q2 earnings season will kick off next week, starting with the big banks. Do not forget that the forward guidance revision from retailers fueled recession concerns in the last quarter. Oil In the wake of solid economic data, US recession risks are getting nudged into the corner. So oil has rebounded as investors seemingly put more emphasis on supply issues over recession concerns in the US. However, with Covid numbers ticking higher again in China on Sunday, Shanghai itself reported the first case of the highly-contagious BA.5 sub-variant; the news could be a bit of a downbeat Monday morning rally capper.  Although the possible demand impact of a recession continues to weigh on sentiment, with desks de-risking the inevitable recession clunker and likely limiting a full-on recovery rally, the prevailing view, at least for now, is that the longer-term structural issues facing the oil market will support prices through any near-term uncertainty.

Markets US equities were a touch softer Friday, S&P down 0.1% to be 2% higher over the week. Bonds sold off after payrolls beat, US10yr yields up 9bps to 3.08%, 2yrs up 9bps to 3.1%, leaving the curve still inverted. Over the week, 10yr yields are up 20bps as recession concerns ease. While the MSCI World rose 1.7% last week, in another attempt at a growth-led bear market rally, Chinese benchmarks were down slightly below 1%.  Covid numbers are ticking higher again; on Sunday, Shanghai reported the first case of the highly-contagious BA.5 sub-variant. The latter is creating some negative chop at the open, with China beta getting slightly tarnished but no worse for the wear as investors could be increasingly desensitized to Omicron risk in China.  In the wake of solid Payroll data, US recession risks are getting nudged into the corner. Still, this week's focus pivots back to inflation, particularly the US CPI and the inherent hawkish Fed policy implications. Given the recent developments in the Ukraine war, markets are struggling to have high conviction on the Nord Stream 1 gas flow resumption; risk could start teetering on the edge of a dumpster again, And while we are putting the June inflation data to one side, it is still the marquee number in the market's eyes with the search for peak Fed hawkishness continuing. Because the government data doesn't capture the gasoline and freight shipping price slide, markets could look through a slightly hot CPI number; hence we think the focus should be on US activity numbers. Both the big ones come on Friday: the Empire Manufacturing Survey and Retail Sales. Central banks don't care about what people say but what people do. Hence, retail sales could be a market mover. More importantly, the Q2 earnings season will kick off next week, starting with the big banks. Do not forget that the forward guidance revision from retailers fueled recession concerns in the last quarter. Oil In the wake of solid economic data, US recession risks are getting nudged into the corner. So oil has rebounded as investors seemingly put more emphasis on supply issues over recession concerns in the US. However, with Covid numbers ticking higher again in China on Sunday, Shanghai itself reported the first case of the highly-contagious BA.5 sub-variant; the news could be a bit of a downbeat Monday morning rally capper.  Although the possible demand impact of a recession continues to weigh on sentiment, with desks de-risking the inevitable recession clunker and likely limiting a full-on recovery rally, the prevailing view, at least for now, is that the longer-term structural issues facing the oil market will support prices through any near-term uncertainty.

The day's best news for risk was Germany confirming that the government had received a positive signal from Canada regarding delivering a turbine needed to maintain the Nord Stream 1 gas pipeline to Germany. If it is confirmed it was received, I would expect a sharper correction in EU natural gas prices, the bleeding to temporarily stop on the Euro and a general recovery in European and global risk sentiment.  Friday's solid US non-farm payroll should keep the Fed on the path of a 75bp hike. But with aggressive Fed pricing already in the books, the strong print had less of a "good was bad" vibe. Last month, good was bad for a solid non-farm payrolls number, as good data gave a green light for aggressive hikes. I think that narrative has shifted.  A 75bp hike is almost entirely priced for July, and the market is moving closer to a 50/50 split between 50bp and 75bp in September July: 72.6bp September: 57bp (50/50 split between 50bp/75bp would be 62.5bp) November: 39.4bp December: 19.3bp Even though this week's CPI is the marquee data point with expectations for it to come in hot - the disinflationary forces of late, specifically lower commodity prices, will not be in the government data yet, which may complicate the market's reaction function to another hot print. But we think the market may look past the June data, given the recent pullback in crude and gasoline prices and the slowdown in freight data. Also, UMich inflation expectations still matter, but the Fed's weight on the data should be lower after last month's revision – especially given 5y5y breaks staying grounded. Just like the NFP number would have needed to be vastly different from the consensus to trigger a real market reaction, we think even more so for this week's CPI. Although an unexpected  downswing would be stellar for risk  I am putting the inflation data slightly to one side and am more interested in the US activity numbers. Both big ones come on Friday: the Empire Manufacturing Survey and Retail Sales. Ultimately central banks do not care about what people say but what people do. Hence, I think retail sales could be a market mover. More importantly, the Q2 earnings season will kick off next week, starting with the big banks. Do not forget that the forward guidance revision from retailers fueled recession concerns in the last quarter.

We got lots of trade and current account data this past week: German trade balance (Mon), the  Australia trade balance,  US trade balance (merchandise & services), Canadian merchandise trade (Thu), and Japan current account data (Fri).. Trade used to be the key for foreign exchange markets many many years ago, when financial flows were largely to finance trade. But now financial flows dominate the global economy and determine trade flows.  How does that work? Most people think of trade surpluses & deficits in the following way. The hard-working Germans who make excellent cars are the source of that country’s trade surplus (which we learned on Monday has disappeared, but never mind) while the spendthrift Americans, borrowing and spending money they don’t have, are the source of the perennial US trade deficit. This is the logic that says tariffs, market access agreements, and urging Americans to work harder and save more are the way to rectify these global imbalances.  That may have been the way the global economy worked many years ago, but not anymore. On the contrary, trade flows nowadays are the result of financial flows. Financial flows in turn are the result of political decisions to favor one group of people (normally the wealthy elite) over another group (the workers).  For example in a country like Germany, the workers don’t get paid enough to buy everything that they produce, a direct result of the Hartz Reforms of 2003/05 and the decision to focus on “competitiveness.”  The country therefore has to export its excess production. Furthermore, the profits of these companies go to people with a low propensity to consume (the wealthy), who save much of their income rather than spending it. But with domestic demand suppressed, there aren’t enough investment opportunities in Germany. They therefore have to put their savings abroad instead. That money flooding into other countries affects interest rates and the willingness of banks to lend in those countries and thereby distorts their economies.  That’s why although Germans may criticize the spendthrift ways of Spanish homebuilders and the Greek government, the bubbles that inflated and then popped, wreaking havoc on those countries, would never have been possible if excess German savings hadn’t pushed real interest rates in those countries down dramatically and made it so cheap to borrow.  In this global system, where one country’s surplus is another’s deficit, the US winds up as the “borrower of last resort” for countries with excessive savings. Its position as the major reserve currency forces it into the position of having a perennial current account deficit (the counterpart of its constant financial account surplus). What former French President Valery Giscard D'Estaing described as an “exorbitant privilege” is really an “extraordinary burden.” In other words, while the trade account used to be the dog that wagged the financial account tail, now the financial account is (generally speaking) the dog that wags the trade tail. For anyone who wants to understand this process, I strongly recommend reading Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace, by Prof. Michael Pettis and Matthew C. Klein. It will revolutionize how you think of trade and global economics.  In any case, what should we make of the German merchandise trade deficit in May, the first since 1991? Having said all of the above…sometimes the trade account is the dog and the financial accounts are the tail. Today may be one such time as the surge in energy prices combined with the slowdown in the global economy throws the German trade account into deficit.  This spells some danger for the euro. Germany has usually accounted for all if not more than all of the Eurozone’s trade surplus – it generally offsets the trade deficits of the other countries. (The chart only goes up to April and does not include May’s German trade deficit.)  Of course, that’s only the merchandise trade account. We have to know what’s happening with services and the various income accounts that make up the current account balance. Lo and behold, that’s a deficit too (this chart shows a 3-month moving average and so it hasn’t yet dipped into deficit, but the Eurozone current account was in deficit by EUR 5.4bn in April.) Looking at what’s happening recently with Germany’s trade in goods, the Eurozone current account deficit is bound to widen as higher energy prices push the trade account further into deficit. Now as we all know, the balance of payments has to balance. The money coming in always equals the money going out. If there’s a current account deficit (= Europeans spending more money abroad than they receive) then the country has to run a financial account surplus (= more money coming into European financial assets, such as stocks, bonds, land, etc.) than is...