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Futures Slide As Snap Forecast Steamrolls Rebound Optimism

Futures Slide As Snap Forecast Steamrolls Rebound Optimism

It’s not every day that a relatively small social media company (whose market cap…

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Futures Slide As Snap Forecast Steamrolls Rebound Optimism

It's not every day that a relatively small social media company (whose market cap is now less than Twitter) slashing guidance can send shockwaves across global markets and wipe out over a trillion in market cap, yet SNAP's shocking crash after it cut its own guidance released one month ago which hammered risk assets around the globe, and here we are. Add to this the delayed realization that Biden was just spouting his usual senile nonsense yesterday when he said Chinese trade tariffs would be discussed and, well, wave goodbye to the latest dead cat bounce as futures unwind much of Monday's rally.

US futures declined as technology shares were set to come under pressure after Snap warned it would miss second-quarter profit and revenue forecasts amid deteriorating macroeconomic trends. Nasdaq 100 futures slid 1.5% at 7:30 a.m. ET and S&P 500 futures retreated 1.0% just as the benchmark was starting to pull back from the brink of a bear market amid fears the Federal Reserve’s tightening could hurt growth. Meanwhile in other markets, Chinese tech stocks fell by more than 4%, while Europe’s Stoxx 600 Index dropped 1%, led by losses in shares of utilities and retail companies. The dollar was little changed, while Treasuries advanced.

Snapchat plunged more 31% in premarket trading, while Facebook Meta and other companies that rely on digital advertising also tumbled amid fears that the sudden collapse in ad spending is systemic. Technology shares have been hammered this year amid rising interest rates and soaring inflation, with the Nasdaq 100 trading near November 2020 lows and at the cheapest valuations since the early days of the pandemic. Social media stocks are on course to erase more than $100 billion in market value Tuesday after Snap’s warning: Meta Platforms (FB US) declined 6.3%, Twitter (TWTR US) -4.1%, Alphabet (GOOGL US) -3.8% and Pinterest (PINS US) -12%.

“It highlights how fleeting swings in sentiment are now and also that investors are running at the first sign of trouble,” Jeffrey Haley, a senior market analyst at Oanda Asia Pacific, wrote in a note. “The market continues to turn itself inside out and back to front as it tries to decide if it has priced all of the impending rate hikes, soft landing or recession, inflation or stagflation, China, Ukraine, US summer driving season, supply chains, the list goes on.”

Among other notable moves in US premarket trading, Zoom Video’s shares rallied as much as 6.3% after better-than-expected guidance. Deutsche Bank said the video-software maker’s continued post-pandemic growth in its Enterprise business is encouraging, though analysts remain cautious on the company’s comments around free cash flow. Tesla shares fell 2.6% in premarket trading on Tuesday, amid news that it may take the electric-vehicle maker at least until later this week to resume full production at its China factory. Also, Daiwa analyst Jairam Nathan lowered his price target on TSLA to $800 from $1150, the latest in a string of target cuts by Wall Street analysts. Nathan cited the lockdowns in Shanghai and supply chain concerns impacting ramp-up of Austin and Berlin plants, and lowered the EPS estimates for 2022 and 2023. Elsewhere, Frontline shares rallied 3.1% after the crude oil shipping company reported net income for the first quarter that beat the average analyst estimate. Here are some other notable premarket movers:

  • Social media and other digital advertisers fell in US premarket trading after Snap cut its forecasts.
  • Albemarle (ALB US) shares may be in focus as analysts raise their price targets on the specialty chemicals maker amid a boost from higher lithium prices.
  • BitNile (NILE US) swings between gains and losses in US premarket trading, after the crypto miner reported 1Q results amid a broader slump across high-growth stocks.
  • Nautilus (NLS US) got a new Street-low price target after exercise equipment maker’s “lackluster” guidance, with the company’s shares slumping as much as 24% in US extended trading on Monday.
  • INmune Bio (INMB US) shares dropped 23% in postmarket trading on Monday after the FDA placed the company’s investigational new drug application to start a Phase 2 trial of XPro in patients with Alzheimer’s disease on clinical hold.
  • Abercrombie & Fitch (ANF IS)  falls as much as 21% premarket after the clothing retailer reported an unexpected loss for its first quarter

Equities have been volatile as investors assess the outlook for monetary policy, inflation and the impact of China’s strict Covid policies on the global economy. Minutes on Wednesday of the most recent Federal Reserve rate-setting meeting will give markets insight into the US central bank’s tightening path.

“With the era of cheap money hurtling to an end the focus will be on a speech from Jerome Powell, the chair of the Federal Reserve later, with investors keen to glean any new titbit of information about just how far and fast the US central bank will go in raising rates and offloading its mass bond holdings,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, wrote in a note.

In Europe, the Stoxx 50 slumped 1.4%. FTSE 100 outperformed, dropping 0.6%, while CAC 40 lags. Utilities, retailers and consumer products are the worst performing sectors. Utilities were the biggest decliners in Europe, as Drax Group Plc, Centrica Plc and SSE Plc all sank on Tuesday following a report about UK plans for a possible windfall tax. Air France-KLM fell after plans to sell about 2.26 billion euros ($2.4 billion) of new shares to shore up its balance sheet. Oil and gas stocks underperformed the European equity benchmark in morning trading as crude declines amid investors’ concerns about Chinese demand, while mining shares also fall alongside metal prices.  Here are some of the biggest European movers:

  • Big Yellow shares gain as much as 4% after what Citi described as a “strong set” of results, supported by structural tailwinds.
  • SSP rises as much as 13% after the U.K. catering and concession-services company reported 1H results that Citi says were above expectations.
  • Adevinta climbs as much as 7.8% after reporting 1Q results that were broadly as expected, with revenue slightly below expectations and Ebitda ahead, according to Citi.
  • Frontline gains as much as 6.4% in Oslo after the crude oil shipping company reported 1Q net income that beat the average analyst estimate.
  • Moonpig gains as much as 8.2%, extending a rise of 11% on Monday when the company announced the acquisition of Smartbox Group UK
  • U.K. utility firms sink after the Financial Times reported that Chancellor of the Exchequer Rishi Sunak has ordered officials to prepare plans for a possible windfall tax on power generators as well as oil and gas firms. SSE declines as much as 11%, Drax Group -19% and Centrica -12%
  • European technology and advertising stocks slump with Nasdaq futures after Snap cut its revenue and profit forecasts below the low end of its previous guidance. Just Eat falls as much as 4.8%, Deliveroo -4.9%, Delivery Hero -4.4%, STMicro -3%, Infineon -2.8%, AMS -3%
  • Prosus drops as much as 6.7% in Amsterdam and Naspers declines as much as 6.1% in Johannesburg as Barclays cuts ratings on both stocks after downgrading Tencent in the prior session.

The latest flash PMI data showed that Europe’s two largest economies kept growing in May as they benefited from a sustained rebound in services that offset fallout from Russia’s invasion of Ukraine. Meanwhile, the pound fell after a report showed the UK economy faces an increasing risk of falling into a recession as firms and households buckle under the fastest inflation rate in four decades. At the same time, the euro climbed above $1.07 for the first time in four weeks as ECB President Christine Lagarde said the currency bloc has reached a “turning point” in monetary policy and rejected the idea that the region is heading for a recession, but said the ECB won’t be rushed into withdrawing monetary stimulus.

Earlier in the session, Asian stocks dipped as traders remained cautious on global growth concerns while assessing the impact of China’s fresh fiscal stimulus.  The MSCI Asia Pacific Index fell as much as 1.2%, with tech names the biggest drags. Lower revenue and profit forecasts from Snap Inc. weighed on the broader sector. Chinese stocks led declines in the region as the government’s new support package including more than 140 billion yuan ($21 billion) in additional tax relief failed to impress investors. Covid-19 lockdowns remain a key overhang, while market participants are looking to major China tech earnings this week, including Alibaba and Baidu, for direction. Hong Kong equities also dropped after the city’s outgoing leader said border controls will remain in place for now.  Hong Kong’s Hang Seng Tech Index tumbles as much as 4.2% in afternoon trading on Tuesday, on track for a second day of declines. 

“Markets have caught a glimpse of the impact of regulatory risks and Covid-19 lockdowns from Tencent’s recent lackluster earnings,” and a potential mirroring of the weakness by big tech earnings ahead “may be driving some caution,” Jun Rong Yeap, a market strategist at IG Asia Pte., wrote in a note

Japanese equities dropped as investors mulled China’s new stimulus measures and amid growing concerns over global economic health.  The Topix Index fell 0.9% to close at 1,878.26 on Tuesday, while the Nikkei declined 0.9% to 26,748.14. Recruit Holdings Co. contributed the most to the Topix’s decline, as the staffing-services firm tumbled 6.6%. Among the 2,171 shares in the index, 1,846 fell, 249 rose and 76 were unchanged. “The markets will continue to be in an unstable situation for a while as the US is still in the process of raising its interest rates and we are entering a phase where the effects of interest rate tightening on the economy will start to be felt in the real economy,” said Hiroshi Matsumoto, senior client portfolio manager at Pictet Asset Management.

Indian stocks also declined, dragged by a selloff in information technology firms, as investors remained cautious over global economic growth.  The S&P BSE Sensex fell 0.4% to 54,052.61 in Mumbai while the NSE Nifty 50 Index eased 0.6%. The gauges have now dropped for four of five sessions and eased 5.3% and 5.7% this month, respectively. All but two of the 19 sector sub-indexes compiled by BSE Ltd. declined on Tuesday, led by information technology stocks. Foreign funds have been net sellers of Indian stocks since end of September and have taken out $21.3 billion this year through May 20. The benchmark Sensex is now 12.5% off its peak in Oct. Corporate earnings for the March quarter have been mixed as 26 out of 41 Nifty companies have reported profit above or in line with consensus expectations. “There is a lot of skepticism among investors over interest rate hikes in the near term and its impact on growth going ahead,” according to Kotak Securities analyst Shrikant Chouhan.

In FX, the dollar dipped while the euro jumped to a one-month high versus the US dollar after the European Central Bank reiterated its plans to end negative rates quickly, bolstering market expectations that rates will rise as early as July. It pared some gains after ECB Governing Council’s Francois Villeroy de Galhau argued against a 50 bps increase. “The single currency is dancing to the tune of ECB policymakers this week as the Governing Council attempts to talk up the euro to insure against imported inflation,” said Simon Harvey, forex analyst at Monex Europe. “The euro’s rally highlights how dip buyers are happy to buy into the ECB’s messaging in the near-term.”

Elsewhere, the pound slid and gilts rallied after a weak UK PMI reading ramped up speculation that the country is heading toward recession. The Australian and New Zealand dollars led declines among commodity currencies after Snapchat owner Snap Inc. slashed its revenue forecast, spurring doubts about the strength of the US economy. Japan’s yen snapped a two-day drop as Treasury yields resumed their decline. Japanese government bond yields eased across maturities, following their US peers.

In rates, Treasuries were richer by up to 4bp across belly of the curve as S&P futures gapped lower from the reopen and extended losses over Asia, early European session. Treasury 10-year yields around 2.815%, richer by 3.5bp vs. Monday close US session focus to include Fed Chair Powell remarks and 2-year note auction. Gilts outperformed following soft UK data. Gilts outperform by additional 1.5bp in the sector after May’s preliminary PMI prints missed expectations. Belly-led gains steepened the US 5s30s by 1.8bp on the day while wider bull steepening move in gilts steepens UK 5s30s by 5bp on the day.  The US auction cycle begins at 1pm ET with $47b 2- year note sale, followed by $48b 5- and $42b 7-year notes Wednesday and Thursday.

In commodities, oil and gas stocks underperformed as crude declined amid concerns about Chinese demand, while mining shares also fall alongside metal prices. WTI is in the red but recovers off worst levels to trade back on a $109-handle. Most base metals trade poorly; LME nickel falls 4.5%, underperforming peers. Spot gold rises roughly $5 to trade above $1,858/oz.

Looking at the day ahead, we’ll get the rest of the May flash PMIs from Europe and the US, along with US new home sales for April and the Richmond Fed’s manufacturing index for May. Otherwise, central bank speakers include Fed Chair Powell, the ECB’s Villeroy and the BoE’s Tenreyro.

Market Snapshot

  • S&P 500 futures down 1.3% to 3,920.75
  • STOXX Europe 600 down 0.9% to 432.44
  • MXAP down 1.1% to 163.24
  • MXAPJ down 1.3% to 531.58
  • Nikkei down 0.9% to 26,748.14
  • Topix down 0.9% to 1,878.26
  • Hang Seng Index down 1.7% to 20,112.10
  • Shanghai Composite down 2.4% to 3,070.93
  • Sensex down 0.3% to 54,148.93
  • Australia S&P/ASX 200 down 0.3% to 7,128.83
  • Kospi down 1.6% to 2,605.87
  • Gold spot up 0.3% to $1,859.38
  • US Dollar Index down 0.11% to 101.96
  • Brent Futures down 0.2% to $113.15/bbl
  • German 10Y yield little changed at 0.99%
  • Euro up 0.2% to $1.0713

Top Overnight News from Bloomberg

  • Social media stocks are on course to shed more than $100 billion in market value after Snap Inc.’s profit warning, adding to woes for the sector which is already reeling amid stalling user growth and rate-hike fears.
  • The US must be “strategic” when it comes to a decision on whether to remove China tariffs, Trade Representative Katherine Tai said a day after President Joe Biden mentioned he would review Trump-era levies as consumer prices surge.
  • China rolled out a broad package of measures to support businesses and stimulate demand as it seeks to offset the damage from Covid lockdowns on the world’s second-largest economy.
  • China’s central bank and banking regulator urged lenders to boost loans as the economy is battered by Covid outbreaks that have threatened growth this year.
  • President Joe Biden is seeking to show US resolve against China, yet an ill-timed gaffe on Taiwan risks undermining his bid to curb Beijing’s growing influence over the region.
  • Europe’s two largest economies kept growing in May as they benefited from a sustained rebound in services that offset fallout from Russia’s invasion of Ukraine.
  • Russia’s currency extended a rally that’s taken it to the strongest level versus the dollar in four years, prompting a warning from one of President Vladimir Putin’s staunchest allies that the gains may be overdone.

A more detailed look at global markets courtesy of Newqsuawk

Asia-Pac stocks mostly declined after Snap's profit warning soured risk sentiment and weighed on US tech names. ASX 200 was rangebound but kept afloat for most of the session by resilience in tech and mining stocks, while PMIs remained in expansion territory. Nikkei 225 fell below 27,000 although losses are stemmed by anticipation of incoming relief with Finance Minister Suzuki set to present an additional budget to parliament tomorrow. Hang Seng and Shanghai Comp were pressured after further bank downgrades to Chinese economic growth forecasts, while the recent announcement of targeted support measures by China and reports of the US mulling reducing China tariffs, did little to spur risk appetite.

Top Asian News

  • Shanghai will allow supermarkets, convenience stores and drugstores to resume operations with a maximum occupancy of 50% before May 31st and 75% after June 1st, according to Global Times.
  • Hong Kong Chief Executive Carrie Lam said they are unlikely to lift the quarantine in her term, according to Bloomberg.
  • US President Biden said there is no change to the policy of strategic ambiguity regarding Taiwan, while Defense Secretary Austin earlier commented that he thinks US President Biden was clear that US policy has not changed on Taiwan, according to Reuters.
  • USTR Tai said the US is engaging with China on Phase 1 commitments of trade, while she added they must be strategic on tariffs and that President Biden's team believes trade needs new ideas, according to Reuters.
  • China's push to loosen USD dominance is said to take on new urgency amid Western sanctions on Russia and some Chinese advisers are urging the government to overhaul the exchange rate regime to turn the Yuan into an anchor currency, according to SCMP.

European bourses are subdued following the Snap-headwind, further hawkish ECB rhetoric and disappointing Flash PMIs; particularly for the UK, Euro Stoxx 50 -0.7%. US futures are similarly subdued and the Nasdaq, -1.7%, is taking the brunt of the pressure as tech names are hit across the board, ES -1.1%. Snap (SNAP) said the macroeconomic environment has deteriorated further and faster than anticipated since its last guidance issuance and it now believes it will report revenue and adjusted EBITDA below the low end of its Q2 guidance range, according to the filing cited by Reuters. Samsung (005935 KS) is to reportedly invest USD 360bln on chips and biotech over a period of five years, according to Bloomberg. Tesla (TSLA) could take until later this week to restore full production in China after quarantining thousands of workers. Uber (UBER) has initiated a broad hiring freeze across the Co. as it faces increased pressure to become profitable, according to Business Insider sources

Top European News

  • UK Chancellor Sunak ordered officials to draw up a plan for a windfall tax on electricity generators' profits, according to FT.
  • ECB's Nagel said it seems clear that the wage moderation seen for 10 years in Germany is over and they think they will see high numbers from German wage negotiations.
  • Germany's Chambers of Commerce DIHK cuts 2022 GDP growth forecast to 1.5% (vs prev. view of 3% made in Feb).

FX

  • Yen outperforms on risk off and softer yield dynamics, USD/JPY at low end of wide range stretching from just above 128.00 to just over 127.00 and multiple chart supports under the latter.
  • Franc and Euro underpinned as SNB and ECB pivot towards removal of rate accommodation, USD/CHF sub-0.9650, EUR/USD 1.0700-plus.
  • Dollar suffers as a result of the above, but DXY contains losses under 102.000 as Pound plunges following disappointing UK preliminary PMIs; Cable recoils from the cusp of 1.2600 to touch 1.2475.
  • Aussie, Loonie and Kiwi all suffer from aversion and latter also cautious ahead of RBNZ on Wednesday; AUD/USD loses grip of 0.7100 handle, NZD/USD under 0.6450 having got close to 0.6500 yesterday and USD/CAD probing 1.2800 vs virtual double bottom around 1.2765.
  • Lira loses flight to stay above 16.0000 vs Buck as Turkish President Erdogan refuses to acknowledge Greek leader and sets out plans to strengthen nation’s southern border defences.

Fixed Income

  • Gilts fly after UK PMIs miss consensus and only trim some gains in response to much better than expected CBI distributive trades
  • 10 year bond holds near the top of a 118.86-117.92 range
  • Bunds bounce from sub-153.00 lows after more hawkish guidance from ECB President Lagarde, but Italian BTPs lag under 128.00 as books build for 15 year issuance
  • US Treasuries bull-flatten ahead of 2 year note supply and Fed's Powell, T-note just shy of 120-00 within 120-02+/119-18 band
  • Italy has commenced marketing a new syndicated 15yr BTP, guidance +11bp vs outstanding March 2037 bond, according to the lead manager via Reuters; subsequently, set at +8bp.

Commodities

  • WTI and Brent are subdued amid the broader risk environment with familiar factors still in play; however, the benchmarks are off lows amid USD downside.
  • Meandering around USD 110/bbl (vs low 108.61/bbl) and USD 113/bbl (vs low USD 111.70/bbl) respectively.
  • White House is considering environmental waivers for all blends of US gasoline to lower pump prices, according to Reuters sources.
  • Spot gold is modestly firmer though it has failed to extend after briefly surpassing the 21-DMA at USD 1856/oz.

Central Banks

  • ECB's Lagarde believes the blog post on Monday was at a good time, adding we are clearly at a turning point, via Bloomberg TV; adds, we are not in a panic mode. Rates are likely to be positive at end-Q3; when out of negative rates, you can be at or slightly above zero. Does not comment on FX levels, when questioned about EUR/USD parity. Click here for more detail, analysis & reaction.
  • ECB's Villeroy says he believes the ECB will be at a neutral rate at some point next year, via Bloomberg TV; 50bps hike does not belong to the Governing Council's consensus, does not yet know the terminal rate.
  • NBH Virag says continuing to increase rates in 50bp increments is an options, increasing into double-digits is not justified.

US Event Calendar

  • 09:45: May S&P Global US Manufacturing PM, est. 57.6, prior 59.2
    • May S&P Global US Services PMI, est. 55.2, prior 55.6
    • May S&P Global US Composite PMI, est. 55.6, prior 56.0
  • 10:00: May Richmond Fed Index, est. 10, prior 14
  • 10:00: April New Home Sales MoM, est. -1.7%, prior -8.6%; New Home Sales, est. 750,000, prior 763,000

Central Banks

  • 12:20pm: Powell Makes Welcoming Remarks at an Economic Summit

DB's Jim Reid concludes the overnight wrap

These are pretty binary markets at the moment. If the US doesn’t fall into recession over the next 3-6 months then it’s easy to see markets rallying over this period. However if it does, the correction will likely have further to run and go beyond the average recession sell-off (that we were close to at the lows last week) given the rich starting valuations. For choice I don’t think the US will go into recession over this period but as you know I do think it will next year. As such a rally should be followed by bigger falls next year. Two problems with this view. Timing the recession call and timing the market’s second guessing of it. Apart from that it's all very easy!!

This week started on a completely different basis to most over the past few months. So much so that there's hope that the successive weekly losing S&P streak of seven might be ended. 4 days to go is a long time in these markets but after day one we're at +1.86% and the strongest start to a week since January. And that comes on top of its intraday recovery of more than +2% late on Friday’s session, after the index had briefly entered bear market territory, which brings the index’s gains to more than 4% since its Friday lows at around the European close. However just when you thought it was safe to emerge from behind the sofa, S&P 500 futures are -0.84% this morning with Nasdaq futures -1.42% due to Snapchat slashing profit and revenue forecasts overnight. Their shares were as much as -31% lower in after hours, taking other social media stocks with it. Asia is also weaker this morning as we'll see below.

Before we get there, yesterday's rally was built on a few bits of positive news that are worth highlighting. Investors were buoyed from the get-go by remarks from President Biden that he’d be considering whether to review Trump-era tariffs on China. It had been reported previously that such a move was under consideration, but there are also geopolitical as well as economic factors to contend with, and a Reuters report last week cited sources who said that US Trade Representative Katherine Tai favoured keeping the tariffs in place. Biden said that he’d be discussing the issue with Treasury Secretary Yellen following his return to the United States, so one to watch in the coming days with the administration under pressure to deal with inflation. This comes as the Biden administration unveiled the Indo-Pacific Economic Framework yesterday, which covers 13 countries and approximately 40% of the world’s GDP. Conspicuously, China was not one of the included parties, but US officials said there was a path for them to join. The framework reportedly does not contain any new tariff reductions, but instead seems focused on new labour, environmental, and anti-money laundering standards while seeking to build resilience. The 13 involved countries said in a joint statement, “This framework is intended to advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness for our economies.” It is not clear what is binding, or what Congress will think about the framework, but regardless, this is battle to halt or slow the anti-globalisation sentiment so prominent in recent years.

It was not just Biden who helped encourage the rally. We then had a further dose of optimism in the European morning after the Ifo Institute’s indicators from Germany surprised on the upside. Their business climate indicator unexpectedly rose to 93.0 in May (vs. 91.4 expected), thus marking a second successive increase from the March low after Russia’s invasion of Ukraine. This morning we’ll get the May flash PMIs for Germany and elsewhere in Europe, so let’s see if they paint a similar picture.

Ahead of that, equity indices moved higher across the world, with the S&P 500 up +1.86% as mentioned, joining other indices higher including the NASDAQ (+1.59%), the Dow Jones (+1.98%), and the small-cap Russell 2000 (+1.10%). It was a very broad-based advance, with every big sector group moving higher on the day, and banks (+5.12%) saw the largest advance in the S&P 500. Meanwhile, consumer discretionary (+0.64%) continues to lag the broader index. Over in Europe there were also some major advances, with the STOXX 600 (+1.26%), the DAX (+1.38%) and the CAC 40 (+1.17%) all rising. They have lagged the US move since Friday's Euro close mostly because they have out-performed on the downside.

Staying on Europe, we had some significant developments on the policy outlook as ECB President Lagarde published a blog post that basically endorsed near-term market pricing for future hikes. In turn, that helped the euro to strengthen against other major currencies and led to a rise in sovereign bond yields. In the post, Lagarde said that she expected net purchases under the APP “to end very early in the third quarter”, which would enable rates to begin liftoff at the July meeting in just over 8 weeks from now. Furthermore, the post said that “on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter”, so implying that we’ll see more than one hike in Q3, assuming they move by 25bp increments.

Interestingly, Bloomberg subsequently reported that others at the ECB wanted to keep open the possibility of moving even faster. Indeed, it said that Lagarde’s plan had “irked colleagues” seeking to keep that option open, and was “a position that leaves some more hawkish officials uncomfortable.” So according to this, some officials want to keep the option of moving in 50bp increments like the Fed did earlier this month, although so far only Dutch central bank Governor Knot has openly referred to this as a possibility.

That move from Lagarde to endorse an exit from negative rates in Q3 sent sovereign bonds noticeably higher after the blog post was released, with 10yr bund yields giving up their initial decline to rise +7.5bps by the close, aided by the broader risk-on move. Those on 10yr OATs (+7.1bps) and BTPs (+3.3bps) also moved higher, with a rise in real yields driving the moves in all cases. Nevertheless, when it came to what the market was pricing for future rate hikes, Lagarde’s comments seemed to just solidify where they’d already reached, with the amount priced in for the ECB by year-end rising just +5.5bps to remain above 100bps.

Given the ECB’s more hawkish rhetoric of late as well as the upside Ifo reading, the Euro gained further ground against the US dollar over the last 24 hours, strengthening by +1.20% in yesterday’s session. In fact, the dollar was the second-worst performer amongst all the G10 currencies yesterday, narrowly edging out the yen, and the dollar index has now shed -2.64% since its peak less than two weeks ago. That’s in line with what our FX colleagues argued in their Blueprint at the end of last week (link here), where they see the reversal of the dollar risk premium alongside ECB tightening sending EURUSD back above 1.10 over the summer. But even though the dollar was losing ground, US Treasury yields still moved higher alongside their European counterparts, with 10yr yields up +7.0bps to 2.85%. They given back around a basis point this morning.

Over to Asia and as discussed earlier markets are weaker. The Hang Seng (-1.50%) is extending its previous session losses with stocks in mainland China also lagging. The Shanghai Composite (-1.09%) and CSI (-0.80%) are both trading lower even as the government is offering more than 140 billion yuan ($21 billion) in extra tax relief to companies and consumers as it seeks to offset the impact of Covid-induced lockdowns on the world’s second biggest economy. Among the agreed new steps, China will also reduce some passenger car purchase taxes by 60 billion yuan. Meanwhile, the Nikkei (-0.51%) and Kospi (-0.90%) are also trading in the red.

Early morning data showed that Japan’s manufacturing activity expanded at the slowest pace in three months in May after the au Jibun Bank flash manufacturing PMI slipped to +53.2 from a final reading of +53.5 in April amid supply bottlenecks with new orders growth slowing. Meanwhile, the nation’s services PMI improved to +51.7 in May from +50.7. Elsewhere, manufacturing sector activity in Australia expanded at the slowest pace in four months as the S&P Global flash manufacturing PMI fell to +55.3 in May from April’s +58.8 level while the services PMI dropped to +53.0 in May.

While markets try to judge whether or not a near-term recession is imminent and how severe it may be, another external shock to contend with is the growing Covid case count in mainland China and how stiff the lockdown measures authorities will impose to contain outbreaks. As we reported yesterday, Beijing registered record case growth over the weekend. The Chinese mainland on Monday reported 141 locally-transmitted confirmed COVID-19 cases, of which 58 were in Shanghai and 41 in Beijing. So these numbers will be closely watched over the next few days.

To the day ahead now, and we’ll get the rest of the May flash PMIs from Europe and the US, along with US new home sales for April and the Richmond Fed’s manufacturing index for May. Otherwise, central bank speakers include Fed Chair Powell, the ECB’s Villeroy and the BoE’s Tenreyro.

Tyler Durden Tue, 05/24/2022 - 08:08

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The End Game Approaches

The pendulum of market sentiment swings dramatically.  It has swung from nearly everyone and their sister complaining that the Federal Reserve was lagging…

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The pendulum of market sentiment swings dramatically.  It has swung from nearly everyone and their sister complaining that the Federal Reserve was lagging behind the surge in prices to fear of a recession.  On June 15, at the conclusion of the last FOMC meeting, the swaps market priced in a 4.60% terminal Fed funds rate.  That seemed like a stretch, given the headwinds the economy faces that include fiscal policy and an energy and food price shock on top of monetary policy tightening. It is now seen closer to 3.5%.  It is lower now than it was on when the FOMC meeting concluded on May 4 with a 50 bp hike.  

In addition to the tightening of monetary policy and the roughly halving of the federal budget deficit, the inventory cycle, we argued was mature and would not be the tailwind it was in Q4. While we recognized that the labor market was strong, with around 2.3 mln jobs created in the first five month, we noted the four-week moving average of weekly jobless claims have been rising for more than two months.  In the week to June 17, the four-week moving average stood at 223k.  It is a 30% increase from the lows seen in April.  It is approaching the four-week average at the end of 2019 (238k), which itself was a two-year high.  In addition, we saw late-cycle behavior with households borrowing from the past (drawing down savings and monetizing their house appreciation) and from the future (record credit card use in March and April).  

The Fed funds futures strip now sees the Fed's rate cycle ending in late Q1 23 or early Q2 23.  A cut is being priced into the last few months of next year.  This has knock-on effects on the dollar.  We suspect it is an important part of the process that forms a dollar peak.  There is still more wood to chop, as they say, and a constructive news stream from Europe and Japan is still lacking.  The sharp decline in Russian gas exports to Europe is purposely precipitating a crisis that Germany's Green Economic Minister, who reluctantly agreed to boost the use of coal (though not yet extend the life of Germany's remaining nuclear plants that are to go offline at the end of the year), warns could spark a Lehman-like event in the gas sector.  

At the low point last week, the US 10-year yield had declined by around 50 bp from the peak the day before the Fed delivered its 75 bp hike.  This eases a key pressure on the yen, and, at the same time, gives the BOJ some breathing space for the 0.25% cap on its 10-year bond.  A former Ministry of Finance official cited the possibility of unilateral interventionWhile we recognize this as another step up the intervention escalation ladder, it may not be credible.  First, it was a former official.  It would be considerably more important if it were a current official.  Second, by raising the possibility, it allowed some short-covering of the yen, which reduces the lopsided positioning and reduces the impact of intervention.  Third, on the margin, it undermines the surprise-value.  

Ultimately, the decline in the yen reflects fundamental considerations.  The widening of the divergence of monetary policy is not just that other G10 countries are tightening, but also that Japan is easing policy.  A couple of weeks ago, to defend its yield-curve-control, the BOJ bought around $80 bln in government bonds.  The odds of a successful intervention, besides the headline impact, is thought to be enhanced if it signals a change in policy and/or if it is coordinated (multilateral).  

There are a few high frequency data points that will grab attention in the coming days, but they are unlikely to shape the contours of the investment and business climate.  The key drivers are the pace that financial conditions are tightening, the extent that China's zero-Covid policy is disrupting its economy and global supply chains, and the uncertainty around where inflation will peak. 

Most of the high frequency data, like China's PMI and Japan's industrial production report and the quarterly Tankan survey results, and May US data are about fine-tuning the understanding of Q2 economic activity and the momentum at going into Q3.  They pose headline risk, perhaps, but may be of little consequence.  It is all about the inflation and inflation expectations: except in Japan. Tokyo's May CPI, released a few weeks before the national figures, is most unlikely to persuade the Bank of Japan that the rise in inflation will not be temporary.  

With fear of recession giving inflation a run for its money in terms of market angst, the dollar may be vulnerable to disappointing real sector data, though the disappointing preliminary PMI likely stole some thunder.  The Atlanta Fed's GDPNow says the US economy has stagnated in Q2, but this is not representative of expectations.  It does not mean it is wrong, but it is notable that the median in Bloomberg's survey is that the US economy is expanding by 3% at an annualized rate.  This seems as optimistic as the Atlanta Fed model is pessimistic.  May consumption and income figures will help fine-tune GDP forecasts, but the deflator may lose some appeal.  Even though the Fed targets the headline PCE deflator, Powell cited the CPI as the switch from 50 to 75 bp hike.  

In that light, the preliminary estimate of the eurozone's June CPI that comes at the end of next week might be the most important economic data point.  It comes ahead of the July 21 ECB meeting for which the first rate hike in 11 years has been all but promised.  Although ECB President Lagarde had seemed to make clear a 25 bp initial move was appropriate, the market thinks the hawks may continue to press and have about a 1-in-3 chance of a 50 bp move.  The risk of inflation is still on the upside and Lagarde has mentioned the higher wage settlements in Q2.  That said, the investors are becoming more concerned about a recession and expectations for the year-end policy rate have fallen by 30 bp (to about 0.90%) since mid-June.  

A couple of days before the CPI release the ECB hosts a conference on central banking in Sintra (June 27-June 29).  The topic of this year's event is "Challenges for monetary policy in a rapidly changing world," which seems apropos for almost any year.  The conventional narrative places much of the responsibility of the high inflation on central banks.  It is not so much the dramatic reaction to the Pandemic as being too slow to pullback.  In the US, some argue that the fiscal stimulus aggravated price pressures. On the face of it, the difference in fiscal policy between the US and the eurozone, for example, may not explain the difference between the US May CPI of 8.6% year-over-year and EMU's 8.1% increase, or Canada's 7.7% rise, or the UK's 9.1% pace.

There is a case to be made that we are still too close to the pandemic to put the experience in a broader context. This may also be true because the effects are still rippling through the economies.  In the big picture, central banks, leaving aside the BOJ, appear to have responded quicker this time than after the Great Financial Crisis in pulling back on the throttle, even if they could have acted sooner.  Some of the price pressures may be a result of some of the changes wrought by the virus.  For example, a recent research paper found that over half of the nearly 24% rise in US house prices since the end of 2019 can be explained by the shift to working remotely, for example. 

The rise in gasoline prices in the US reflect not only the rise in oil prices, but also the loss of refining capacity. The pandemic disruptions saw around 500k barrels a day of refining capacity shutdown.  Another roughly 500k of day of refining capacity shifted to biofuels.  ESG considerations, and pressure on shale producers to boost returns to shareholders after years of disappointment have also discouraged investment into the sector.  The surge in commodity prices from energy and metals to semiconductors to lumber are difficult to link to monetary or fiscal policies.  

Such an explanation would also suggest that contrary to some suggestions, the US is not exporting inflation.  Instead, most countries are wrestling with similar supply-driven challenges and disruptions.  That said, consider that US core CPI has risen 6% in the year through May, while the ECB's core rate is up 3.8%, and rising. The US core rate has fallen for two months after peaking at 6.5%.  The UK's core CPI was up 5.9% in May, its first slowing (from 6.2%) since last September.  Japan's CPI stood at 2.5% in May, but the measure excluding fresh food and energy has risen a benign 0.8% over the past 12 months.  

Consider Sweden.  The Riksbank meets on June 30.  May CPI accelerated to 7.3% year-over-year.  The underlying rate, which uses a fixed interested rate, and is the rate the central bank has targeted for five years is at 7.2%.  The underlying rate excluding energy is still up 5.4% year-over-year, more than doubling since January.  The policy rate sits at 0.25%, having been hiked from zero in April.  The economy is strong.  The May composite PMI was a robust 64.4.  The economy appears to be growing around a 3% year-over-year clip.  Unemployment, however, remains elevated at 8.5%, up from 6.4% at the end of last year.  The swaps market has a 50 bp hike fully discounted and about a 1-in-3 chance of a 75 bp hike.  The next Riksbank meeting is not until September 20, and the market is getting close to pricing in a 100 bp hike.  Year-to-date, the krona has depreciated 11% against the dollar and about 3% against the euro.  

In addition to macroeconomic developments, geopolitics gets the limelight in the coming days.  The G7 summit is June 26-28.  Coordinating sanctions on Russia will likely dominate the agenda and as the low-hanging fruit has been picked, it will be increasingly challenging to extend them to new areas.  

At least two important issues will go unspoken and they arise from domestic US political considerations.  Although President Biden has recommended a three-month gas tax holiday, he needs Congress to do it.  That is unlikely.  Inflation, and in particular gasoline prices are a critical drag on the administration and the Democrats more broadly, who look set to lose both houses.  And the Senate and Congressional Republicans are not inclined to soften the blow.  Talk of renewing an export ban on gasoline and/oil appears to be picking up. The American president has more discretion here. This type of protectionism needs to be resisted because could it be a slippery slope. 

The other issue is the global corporate tax reform.  Although many countries, most recently Poland, have been won over, it looks increasingly likely that the US Senate will not approve it.  Biden and Yellen championed it, but the votes are not there now, and it seems even less likely they will be there in the next two years.  The particulars are new, but the pattern is not.  The US has not ratified the Law of the Seas nor is it a member of the International Court of Justice. Some push back and say that the US acts as if it were.  That argument will be less persuasive on the corporate tax reform.  

NATO meets on June 29-30.  For the first time, Japan, Australia, New Zealand, and South Korea will be attending.  Clearly, the signal is that Russia's invasion of Ukraine is not distracting from China. Most recently, China pressed its case that the Taiwan Strait is not international waters.  Some in Europe, including France, do not want to dilute NATO's mission by extending its core interest to the Asia Pacific area and distracting from European challenges. NATO is to publish a new long-term strategy paper.  Consider that the last one was in 2010 and did not mention Beijing and said it would seek a strategic partnership with Russia.  Putin's actions broke the logjam in Sweden and Finland, and both now want to join NATO, but Turkey is holding it up.  


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Bonds

HW+ Member Spotlight: Ben Bernstein

This week’s HW+ member spotlight features Ben Bernstein as he shares why it’s an interesting time to be tracking the housing market and all of the…

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This week’s HW+ member spotlight features Ben Bernstein, director at Axonic Capital, an investment firm with a deep focus on the structured credit sector of the financial markets. Prior to that, Bernstein held leadership roles in Odeon Capital Group and JPMorgan Chase.

Below, Bernstein answers questions about the housing industry:

HousingWire: What is your current favorite HW+ article and why?

Ben Bernstein: Logan and Sarah’s Monday podcast is my go to. Logan cuts through all the noise and delivers clear concise opinions rooted in the data. So not only do I get updates on what is going on in the housing market but I learn which data points are relevant and how to analyze them. And Sarah always asks insightful questions. On top of that, it is super entertaining!

HousingWire: What has been your biggest learning opportunity?

Ben Bernstein: My biggest learning opportunity (and weirdest job I ever had) was every job I ever had. I started my career at Bear Stearns on February 23 2008. To say that was an interesting time and place to start a career would be an understatement. Two weeks later I was working for JPMorgan and eventually made it to a desk whose focus was working out of the assets that brought Bear down in the first place.

Think funky bonds linked to housing like subprime RMBS and CDOs. Getting to dig deep into what these bonds were and how the underlying mortgages impacted them was priceless. I started at Axonic, a credit fund focused on investments linked to residential and commercial real estate, in November of 2019.

Another interesting time to join an investment firm! Three months later, I was working remotely and figuring out how to be productive from home. Fourteen years into my career and my biggest learning opportunity is right now.

I’m learning new stuff every single day whether it be about the bond market, housing, trading, macro economics, etc. All I need to do is turn around and ask a question out loud and I’ll learn something new.

HousingWire: What is the best piece of advice you’ve ever received?

Ben Bernstein: The best piece of advice I’ve ever received was what is important is what you do when no one is looking. Your reputation, work ethic, success, productivity and integrity are all linked to what you do because you know you need to do it as opposed to what you think other people want you to do.

HousingWire: What’s 2-3 trends that you’re closely following?

Ben Bernstein: I don’t think anyone will be surprised by the trends I’m following these days: Inflation, credit spreads, housing prices and how they are all intertwined. Fortunately I have smart people around me (including HousingWire) to give me their opinions on where we are headed. It’s my job to put it all together. The past two years have been some of the most interesting times in markets and from where I sit I don’t think that will change any time soon.

HousingWire: What keeps you up at night and why?

Ben Bernstein: What keeps me up at night is the state of the housing market. 35+% home price appreciation since COVID-19 began. Two months supply of housing. Mortgage rates going up faster than they ever have. There’s a lot going on!

One thing as bond traders that we do is we look down before we look up. In other words we look at risk before we look at upside. An overheated housing market is something we pay close attention to because we don’t want prices to go down precipitously but we don’t want inflation to run away either. So it’s really an interesting time to be tracking the housing market and all of the ancillary markets that are impacted by it.  

To become an HW+ member, click here.

For more information on HW+ benefits, click here.

To view past issues of our HW+ exclusive HousingWire Magazine, go here.

The post HW+ Member Spotlight: Ben Bernstein appeared first on HousingWire.

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Economics

Risk Appetites Improve Ahead of the Weekend

Overview: Equities are higher and bonds lower as the week’s activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong…

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Overview: Equities are higher and bonds lower as the week's activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong and South Korea. Japan's Nikkei rallied more than 1%, as did China's CSI 300. Most of the large markets but South Korea and Taiwan advanced this week, though only China and Hong Kong are up for the month. Europe's Stoxx 600 is up 1.3% through the European morning, its biggest advance of the week and what looks like the first weekly gain in four weeks. US futures are trading around 0.6%-0.8% higher. The NASDAQ is 4% higher and the S&P 500 is 3.3% stronger on the week coming into today. The US 10-year yield is virtually unchanged today and around 3.08%, is off about 14 bp this week. European bonds are mostly 2-4 bp firmer, and peripheral premiums over Germany have edged up. The US dollar is sporting a softer profile against the major currencies but the Japanese yen. Emerging market currencies are also mostly higher. The notable exception is the Philippine peso, off about 0.6% on the day and 2.2% for the week. Gold fell to a five-day low yesterday near $1822 and is trading quietly today and is firmer near $1830. August WTI is consolidating and remains inside Wednesday’s range (~$101.50-$109.70). It settled at almost $108 last week and assuming it does not rise above there today, it will be the first back-to-back weekly loss since March. US natgas is stabilizing after yesterday’s 9% drop. On the week, it is off about 10% after plummeting 21.5% last week. Europe is not as fortunate. Its benchmark is up for the 10th consecutive session. It soared almost 48% last week and rose another 7.7% this week. Iron ore’s 2% loss today brings the weekly hit to 5.1% after last week’s 14% drop. Copper is trying to stabilize after falling 7.5% in the past two sessions. It is at its lowest level since Q1 21. September wheat is up about 1.5% today to pare this week’s decline to around 8%.

 

Asia Pacific

Japan's May CPI was spot on expectations, unchanged from April. That keeps the headline at 2.5% and the core rate, which excludes fresh food, at 2.1%, slightly above the 2% target. However, the bulk of that 2.1% rise is attributable to energy prices. Without fresh food and energy, Japan's inflation remains at a lowly 0.8%.

The BOJ says that Japanese inflation is not sustainable, which is another way to say transitory. In turn, that means no change in policy. The fallout though is increasing disruptive. The yield curve control defense roiled the cash-futures basis and the uncertainty about hedging may have contributed to the soft demand at this week's auction. In addition, interest rates swap rates have risen as if the market is seeking compensation for the added uncertainty. Meanwhile, for the fourth session there were no takers of the BOJ's offer to buy bonds at a fixed rate.

The approaching month-end pressures saw the PBOC step up its liquidity provisions and injected the most in three months today. Still, the seven-day repo rate rose 16 bp to 1.17%. In Hong Kong, three-month HIBIOR rose to 1.68%, the highest since April 2020. Australian rates moved in the opposite direct. Australia's three-year yield fell 14 bp today after falling 10 bp in each of the past two sessions. It has fallen every day this week for a cumulative 43 bp drop to 3.20%. It had risen by slightly more than 50 bp the previous week. There was a dramatic shift in expectations for the year-end policy rate. The bill futures imply a year-end rate of 3.17%, which is about 68 bp lower than a week ago. It had risen by a little more than 150 bp in the previous two weeks.

The dollar traded in a two-yen range yesterday, but today is consolidating in a one-yen range above yesterday's low near JPY134.25. The pullback in US yields has been the key development and the dollar is lower for the third consecutive day. If sustained, this would be the longest losing streak for the greenback in three months. The Australian dollar is straddling the $0.6900 level, where options for A$1 bln expire today. It is mired near this week's low, set yesterday near $0.6870. Australia's two-year yield swung back to a discount to the US this week after trading at a premium for most of last week and the start of this week. The greenback was confined to a tight range against the Chinese yuan below CNY6.70 today but holding above CNY6.6920. The greenback traded with a heavier bias this week and snapped a two-week advance with a loss of around 0.3% this week. The PBOC set the dollar's reference rate at CNY6.7000, a little below the median forecast (Bloomberg survey) of CNY6.7008. It was the fourth time this week that the fix was for as weaker dollar/stronger yuan.

Europe

The week that marked the sixth anniversary of the UK referendum to leave the EU could have hardly gone worse. Consider:  The May budget report showed a 20% increase in interest rate servicing costs. Inflation edged higher. The flash June composite PMI remained pinned at its lowest level since February 2021. The GfK consumer confidence fell to -41, a new record low. Retail sales slumped by 0.5% in May and excluding gasoline were off 0.7%. Separately, as the polls had warned, the Tories lost both byelection contests held yesterday. And perhaps not totally unrelated, the Cabinet Secretary revealed that at the Prime Minister's request a position his wife in the royal charity was discussed. This continues a pattern that had included trying to appoint her as Johnson's chief of staff when he was the foreign minister and plays on the image of crass favoritism.

The risk of a new crisis in Europe is under-appreciated. In retaliation for Europe's actions, which in earlier periods, would have been regarded as acts of war, Russia has dramatically reduced its gas shipments to Europe. Many Americans and European who scoff at Russia's "special military operation" may be too young to recall that America's more than 10-year war in Vietnam was a police action and never officially a war. Now, the critics are incensed that Moscow has weaponized gas, while overlook the extreme weaponizing of finance. Aren't US and European sanctions a bit like weaponizing the dollar and euro?  In any event, Putin has ended the European illusion that it would determine the pace of the decoupling from Russia's energy. Germany's Economic Minister and Vice-Chancellor heralds from the Green Party. The gas "embargo" has forced him to swallow principles and allow an increased use of coal. Habeck increased the gas emergency warning system and drew parallels with the Lehman crisis for the energy sector. 

It is with this backdrop that the Swiss National Bank felt obligated to hike its deposit rate by 50 bp last Thursday (June 17). The euro had been trading comfortable in a CHF1.02 to CHF1.05 trading range since mid-April. Judging from the increase in Swiss sight deposits, the SNB may have intervened in late April and early May. However, in recent weeks there was no "need" to intervene and sight deposits fell for four consecutive weeks through June 17. The euro traded at three-and-a-half week lows against the franc yesterday, trading to CHF1.0070 for the first time since March 8. In fact, the Swiss franc is the strongest of the major currencies this week, rising about 1.15% against the dollar and about 0.75% against the euro.

The German IFO survey of investor confidence weakened again but did not seem to impact the euro. The assessment of the business climate slipped (92.3 from 93.0). This reflected the mild downgrade of existing conditions (99.3 from 99.6) and the sharper drop in expectations (85.8 vs. 86.9). This is the most pessimistic outlook since March, which itself was the poorest since May 2020. The euro remains within the range seen Wednesday (~$1.0470-$1.0605). It closed near $1.05 last week. There are options for almost 1.2 bln euros that expire there today but have likely been neutralized. Assuming the euro holds above there, it will be the first weekly gain since the end of May. Par for the course today, sterling is also trading quietly in a narrow half-cent range above $1.2240. If it closes above there, it too will be the first weekly gain in four weeks. Sterling's range this week has been roughly $1.2160 to $1.2325. The US two-year premium over the UK has risen for the Monday and is now around 110 bp, up from about 88 bp in the first part of the week.

America

Bloomberg's survey of 58 economists produced a median forecast of 3.0% for Q2 US GDP. Only five of them see growth lower than 2%. The median has it remaining above 2% in H2 before slowing to what the Fed sees as long-term non-inflationary growth of 1.8% throughout next year. The market does not share this optimism. The shape of the Fed funds and Eurodollar futures curve suggests investors sees the Fed breaking something sooner. Given where inflation is, it is hard to take seriously talk about the Fed front-loading tightening, what it is doing is catching up. But monetary policy impacts with notorious lag, and as several Fed officials have acknowledged, financial conditions began tightening six months before the first hike was delivered. The Fed funds futures strip has terminal rate around 3.5% by late Q1 23. The first cut priced in for Q4 23.

The US reports May new home sales. There are supply issues that are important here, but it will likely be the fifth consecutive monthly decline. Through April, they were off 30% so far this year. New home sales stood at 591k (saar) in April. At the worst of the pandemic, they were at 582k in April 2020. The University of Michigan survey was specifically mentioned by Fed Chair Powell at his press conference following the FOMC's decision to hike by 75 bp. The final report is rarely significantly different than the preliminary report, but it cannot help by draw attention.

Mexico's central bank unanimously delivered the widely expected 75 bp hike in its overnight rate to take it to 7.75%. It was the ninth hike in the cycle that began last June for a cumulative 375 bp. The move followed slightly firmer than expected inflation in the first half of this month (7.88%) and stronger than expected April retail sales. The key is that it matched the Fed's move. It indicated that it will likely move just as "forcefully" at its next meeting in August. The swaps market has almost another 200 bp more of tightening this year. Banxico also revised its inflation forecast. Previously, it saw inflation peaking in Q2 22 at 7.6% and now it says the peak will be 8.1% in Q3. It has inflation finishing the year at 7.5%, up from 6.4%. Separately, reports suggest the US is escalating complaints that President AMLO's energy policies, favoring the state companies, violates the free-trade agreement.

The US dollar rose a little more than 3.5% against the Canadian dollar in the past two weeks as the S&P 500 tumbled nearly 11%. With today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this week, and the S&P 500 is up about 3.3% this week coming into today. The macro backdrop for the Canadian dollar looks constructive:  strong jobs market, better than expected April retail sales reported this week and firmer May price pressures. The market 70 bp hike priced in for the July 13 Bank of Canada meeting. The year-end rate is off four basis points this week to 3.41%. In comparison, the US year-end rate is off about 13 bp this week to about 3.44%. The US dollar is off for the sixth consecutive session against the Mexican peso. The peso is the strongest currency in the world this week, leaving aside the machinations of the Russian rouble, with a 1.8% gain, including today's 0.2% advance through the European morning. The greenback frayed support around MXN20.00 yesterday for the first time in nearly two weeks. It is spending more time below there today with a move to MXN19.96. A convincing break of the MXN19.94 area could signal a move toward MXN19.80. There is a $1 bln option expiring at MXN20.00 today, and the related hedging may have weighed on the dollar. 


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