US stock slumped as the inflation is above expectation, and rebounded on the last day of the week after more comments about 100bps hike is not very possible. The inflation data was a macro shock to the markets. Inflation is not transitory after all. Oil continued to crash, and breakout in the dollar index.
Fed: Fed governor Christopher Waller said he supported another 75bps rate hike despite the disappointing CPI data. The market was pricing in a 100bps rate hike, and the odds of that happening is 83% before Waller’s comments.
Central Banks: Asia central banks remain dovish amid high inflation, including Thailand and Indonesia. Real interest rates of most Asia countries are negative, such as Thailand, Pakistan, South Korea, Philippines, India, Taiwan, Indonesia, and Malaysia. China’s real interest rate is staying barely positive at 0.35%. Meanwhile, a 100bps rate hike is announced in Canada, the biggest one-time hike since 1998 as its annual inflation rose to 7.7%.
US CPI: US inflation report showed a further acceleration to 9.1% last month, exceeding the expectation again of 8.8%. Treasury yield is expected to have a scary spike after the unexpected CPI data while it barely moves and is still staying below 3%.
China: Economic growth of China is slowing down due to the outbreak. China is likely to stick with its zero covid policy, and some areas in Shanghai are still in lockdown. Economists and their forecast models are pessimistic about China’s growth target, which has been downgraded further.
Oil: Biden is meeting the Saudis this week. No increase is announced after all, while there will be a small increase in the coming weeks if there is a shortage. The Saudis are sticking with OPEC+, which means with Russia.
Currency Parity: EURUSD reached its lowest level in 20 years. Strong USD also pushed EURUSD almost to parity - 1.011 on Monday. The market is worrying about whether ECB can control inflation given the severe energy crisis and widening peripheral bond spreads.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: We have reduced the overweighting in US equities as there is a higher likelihood of stagflation. Headwind for valuation due to the negative earnings revisions. Volatility is expected to be rangebound +/- 5% to 10%.
J.P. Morgan: The labor market is consistent and strong, reinforced by the job report in June. Job growth is widespread in different areas, especially in manufacturing which has returned to the pre-covid level. Unemployment keeps at 3.6% for four consecutive months.
Morgan Stanley: Fed usually only ends a tightening cycle until the rate is above inflation, while inflation is still staying high. Fed is not going to halt the hawkish policy unless there is a significant impact on the labor market, which there is no evidence supporting yet.
UBS: The dollar index has jumped 12% YTD and hit its highest level since 2002. Under the risk aversion environment, USD is expected to climb further in short term but is not likely to be sustained over the long term.
Goldman Sachs: US dollar index hit a new high against a basket of currencies. Euro depreciates due to the ECB's soft monetary stance. In the environment of slow growth, disruption of energy pipeline, and widening monetary policies, investors tend to put their money in the safe-haven greenback.
Morgan Stanley: 2Y/10Y US Treasury yield has experienced the most inversion since 2008. The high yield bond spread widened by about 300 basis points. The 2Y/10Y yield curve is typically negatively correlated with fed funds futures while the correlation has changed to positive recently, and this recession indicator curve inverted by 3 times in the last 3 months.
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