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Wednesday, July 13, 2022

Daily Market Overview

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Markets

• Chinese trade data and comments by ECB Villeroy served as amuse-bouche for today’s main dish: June US CPI numbers. Chinese exports rebounded significantly in June as parts of the country (Shanghai) reopened. Exports rose by 17.9% Y/Y in USD terms with imports rising by 1% Y/Y. An acceleration in shipments of auto data processing machine parts drove growth with export growth of many other goods slowing (clothing and accessories, shoes, steel products, aluminum, rare earths,…). ECB’s Villeroy mentioned the decline of the single currency as an inflation risk. Mentioning this risk to us strengthens the central bank’s determination to start (in July) and rapidly accelerate (from September) its normalization cycle. EUR/USD slowly headed towards 1.01 after yesterday’s failed test of parity in the run-up to the US June inflation numbers. Inflation accelerated way more than forecast on a monthly basis (1.3% M/M – highest since 2005 – from 1% vs 1.1% expected) with the Y/Y-comparison rising from 8.6% to 9.1% (highest number since 1981). Core inflation moderated at 5.9% Y/Y (from 6% vs 5.7% expected). While energy & gasoline contributed most to the inflation number, categories like shelter added their fair share as well (0.7% M/M & 5.5% Y/Y). The market reacted fiercely to the inflation beat. US Treasuries sold off in a bear flattening move. Recall that last month’s CPI beat, in combination with rising inflation expectations in the Michigan consumer confidence survey, prompted a last-minute change of heart at the Fed, stepping away from the flagged 50 bps rate hike and switching to a jumbo 75 bps instead. A similar scenario is playing out this time around with some investors making a shot at a 100 bps Fed move in July instead of the suggested back-to-back 75 bps by the Fed. Keep a close eye at Friday’s July Michigan consumer confidence. A cumulative 150 bps of tightening by September is in any case discounted by now. Changes on the US yield curve range between +4 bps (30-yr) and +14 bps (2-yr) with the curve again being inverted in the 2-10y segment. European bonds joined the sell-off. The German yield curve bear flattens as well with yields adding 4.5 bps (30-yr) to +11 bps (2-yr). Thanks to this move, key support levels manage to hold (eg German 10y 1.15% en EU 10y swap 2%). EUR/USD is currently testing parity for a second session straight. The magic mark holds for now despite an intraday dip at EUR/USD 0.9998. USD/JPY is testing the multi-year top at 137.75. US stock markets fall by up to 2% for Nasdaq at the opening bell. European losses also range between 1% and 2%.
 
News Headlines

Czech inflation in June sped up more than expected by 1.6% m/m to be up 17.2% y/y. That’s faster than the 16% in May and the 17.1% consensus. It also greatly surpassed the Czech National Bank’s estimate of 15%. The same goes for core inflation, coming in at 14.6% vs 12.7% penciled in in the spring forecast. The cost of owner-occupied housing is gaining further strength, the CNB explained. Other components contributing to the price surge are package holidays (11.9% m/m) and domestic fuels (3.9%). Ongoing inflation surprises may twist the central bank’s arm eventually to continue its tightening cycle even though the new governor Michl prefers to keep rates at 7%. The Czech koruna started strengthening in the wake of the release but, just as in the previous days, it had a smell of the CNB intervening. Since last Friday, EUR/CZK suddenly dropped from 24.75 to as low as 24.26 today. The currency pair pared gains in the meantime to trade around 24.39 currently.
 
• The European Commission sees a sizeable risk that Russia will halt fuel shipments this year, Bloomberg reported citing a draft document. To prepare for this, it plans to recommend measures to curb gas consumption including fuel switching, market-based measures where governments incentivize a cut of consumption by large users and information campaigns to reduce heating and cooling as well as mandatory limits. The biggest challenge is to have enough gas reserves to get through peak demand in the winter. In case of a full disruption as early as July, storage levels could be somewhere between 65%-70%, well below the 80% target, the document said. If disruptions occurred at a later stage (from October on), the gap would be lower but there would be less time to address the situation.
 

Graphs & Table

US 2-yr yield adds double digit basis points on new inflation beat

EUR/USD: parity at risk, bis

S&P 500 loses more than 1.5% at the opening bell. Strong sell-on-upticks pattern

Gold price drops to key support zone: Where’s my inflation hedge?

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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