US EARLY MORNING: US equity futures are flat; bank earnings, US retail sales, CAD inflation ahead

US PREMARKETS: US equity index futures are trading around flat ahead of more key bank earnings due in the premarket, as well as retail sales data, industrial and manufacturing data, as well as Canadian inflation data. Monday's upside was supported by the NY Fed's manufacturing gauge for July, a Goldilocks report – which offset some of the concerns within the University of Michigan's July survey released last week that inflation could reaccelerate – offering some hope that the ISM surveys will paint a similar picture when they are released early August. It also appears that the street is becoming more constructive on the prospects that the US can avoid a hard landing: Goldman Sachs this week reduced its view of the probability of a US recession, while Bank of America's July Fund Manager Survey reveals that projections for a soft landing were much higher than hard landing – we talk about both in more detail below. Treasury yields are lower across the curve, and were given another boost after some uncharacteristically dovish comments from the ECB's Knot, which helped the Bund to rally. The Dollar Index is trading in the red. Crude futures are around flat ahead of inventory data due after the bell.

GS SEES LOWER CHANCES OF US RECESSION: Goldman Sachs says the economic narrative has now turned, and has lowered its estimate of the probability of a US recession in the next year to 20% from 25% due to data supporting confidence in managing inflation without a recession. GS says US economic activity remains resilient, but some deceleration is expected in the coming quarters due to slower income growth and reduced bank lending. Nevertheless, inflationary pressures are easing, with factors like lower used car prices, falling rent inflation, and labour market trends contributing to ongoing disinflation. The bank dismisses concerns about yield curve inversion, citing differences in the current cycle, including a lower term premium and a plausible path to Fed easing. GS looks for a 25bps rate hike at the July FOMC, but says that it might be the last of the cycle, with a cautious approach likely in subsequent meetings. Additionally, other major central banks are further from completing their tightening cycles. Expectations for rate hikes vary across different countries; many emerging market economies have already achieved a soft landing, allowing for potential rate cuts - Brazil and Chile, for instance, are expected to cut rates. On China, Goldman notes that sentiment has stabilised, but long-term challenges remain in geopolitics, property, and demographics. Also, Goldman says that valuations remain a challenge, but near-term news flow is expected to support risk assets, including positive earnings performance, favourable credit conditions, and a weaker dollar, while the oil market rally is seen continuing.

BOFA JULY FMS: BofA July Global Fund Manager Survey suggests sentiment remains bearish, with a net 60% of investors expect weaker global growth. There is the biggest underweight of commodities since May 2020. Cash levels ticked up to 5.3% from 5.1%. BofA Bull & Bear Indicator at the low level of 3.5; ex-the US, BofA says US tech, investor “fear” still greater than “greed,” while “Fearflation” is still positive for risk assets. On macro conditions, the survey finds that most fund managers expect a mild recession to have begun in Q4 2022 or Q1 2023, with 19% see no risks of recession before 2025. The fund manager projections for a “soft landing” were much higher than “hard landing”. Fewer are expecting a reacceleration in China GDP growth this year. On corporate profits, BofA says that EPS expectations are the least pessimistic since February 2022, with global EPS seen rising +0.5% over the next 12 months. On the impact of AI, 42% of fund managers surveyed see higher profits, 1% say more jobs, 16% say higher profits and jobs, while 29% said neither. On policy, the current regime of “loose fiscal-tight money” is the most extreme since 2008; fund managers see the biggest “tail risk” still as an inflation/policy mistake (45%), then credit crunch (18%, but vs 35% in April), Corporate Real Estate(40%) is seen as most likely catalyst for “credit event.” On asset allocation, BofA says there has been capitulation in commodities, with the sector now the most underweight since May 2020, and sees the largest 3-month decline since May 2013. BofA says that allocation to stocks is at a 7-month high, but a net 24% remain underweight relative to global benchmark. On crowded trades, BofA says “long Big Tech” (59%) is still the most crowded trade, then “long Japan” (14%). The bank notes a large short-cover in US stocks, and the first UW Eurozone YTD; biggest OW global industrials since February 2022; biggest drop in healthcare since Jan 2021. It adds that contrarians would go long commodities, banks, REITs & short tech, industrials, Japan.

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18 Jul 2023 - 09:01- Data- Source: Newsquawk

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