US EARLY MORNING: Equity futures continue higher after solid earnings from AMZN, AAPL; traders will be watching key PCE And ECI data later today

SNAPSHOT: US equity futures are continuing to the upside, but are trading off the overnight highs. NQ 1.3%, ES +0.7%, RTY +0.4%, YM +0.2%. The Nasdaq-100 leads gains after index heavyweights AAPL and AMZN posted solid earnings reports after hours on Thursday. Bond yields are mixed, with shorter-dated maturities lower (by around 3bps) and longer-dated maturities higher (by 1-2bps), which is contributing to wider curve spreads. The Dollar Index is lower by around 0.5%; notably, the JPY is rallying heavily against the buck, with technical exacerbating diminishing rate differentials (which this week has moved in favour of the JPY); activity currencies and pockets of EMFX are taking advantage of the USD softness. Crude benchmarks are higher.

EARNINGS SUPPORT: While earnings season has been somewhat mixed, this week, there has been support from mega-cap tech giants like AAPL and AMZN, as well as MSFT earlier in the week, which is helping to ease fears over how high inflation and lower real earnings, combined with a surging USD amid a dimming growth outlook could threaten the earnings of these mega-caps, and by extension major indices given their large concentration. While US growth in Q2 followed Q1 into contraction, officials have been heavily emphasising that it is difficult to describe the US economy in recession when the labour market continues to add jobs (this narrative will be put to the test next week, with the pace of job gains expected to cool again). Nevertheless, the Fed is in now setting policy on a meeting-by-meeting, which is considered dovish given that they are not guiding hefty increment rate hikes. And with the downshift in growth and cooling in other macro indicators, rates traders are betting on a lower trajectory of the Federal Funds Rate than was expected when the June SEPs were published, or even last week; traders expect rates to peak between 3.00-3.25% vs the June SEP’s guiding that rates will rise to 3.75-4.00% next year, and expect the central bank will begin easing rates from around middle of next year, which will likely lead to more easier financial conditions, which traditionally supports stocks. But it may yet be too soon for this narrative; Capital Economics says “financial markets have taken the combination of Wednesday’s FOMC’s announcement and Thursday’s negative US GDP print as confirmation that policymakers will ease off their aggressive monetary tightening cycle before too long,” but the consultancy believes that “such hopes are premature,” and “some of this year’s dominant trends, notably the rise of the US dollar, will reassert themselves before too long,” arguing that the bond and equity rally seen in recent days (which it says mirrors past episodes when the Fed pivoted towards easier policy) will eventually falter, and the weakness in evidence for much of this year will resume.

DAY AHEAD: For today, there will be much attention on the PCE report for June (the monthly core rate is seen picking up to 0.5% M/M from 0.3%, though the annual measure is seen unchanged at 4.7%) and the Employment Cost Index for Q2 (expected to ease to 1.2% from 1.4% in Q1) – both have been flagged as key reports that the Fed monitors, and with the central bank in data-dependent mode, these will likely determine the tone of trading into the end of the week and month. For what it is worth, Treasury Secretary Yellen appeared to allude to the easing in inflation continuing when she made remarks on Thursday. Full Day Ahead here.












29 Jul 2022 - 09:21- Research Sheet- Source: Newsquawk

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