US EARLY MORNING: US equity futures are higher amid a constructive risk environment; ECB minutes, Fedspeak ahead

SNAPSHOT: US equity futures are higher (RTY +0.5%, NQ +0.5%, YM +0.4%, ES +0.4%), while yields along the Treasury curve are higher by 2-4bps, with the shape of the curve modestly steepening. The Dollar Index is a little lower, but still lingering around recent highs. Pro-cyclical FX is rallying, while there are some pockets of strength in EMFX, but not broadly across the entire complex. Crude futures are around the flat mark, with many desks suggesting that recent moves lower may have been overdone. There does not appear to be a specific catalyst for the more constructive tone of trading, although some note that the hawkishness in the Fed minutes may be stale; Friday’s jobs data and next week’s CPI may be more influential in determining the course of near-term policy. There is also focus on the ECB’s minutes, due later today, for any clues about whether it could go big with its first rate hike in July, although markets are still assigning a small chance of this scenario.

CENTRAL BANKS: The FOMC’s June meeting minutes were judged as hawkish, with the Committee clearly concerned over hot inflation data released ahead of the meeting, and are prepared to continue their brand of policy tightening to manage price pressures, even at the risk of slower growth. However, some suggest that the minutes are already stale given the price slides seen in commodities since then, as well angst over the increasing probability of a recession. Going forward, data will likely guide whether the Committee will raise rates by 50bps or 75bps at the July 27th confab; specifically, Friday’s jobs report (watch the AHE data) and next Wednesday’s CPI data. SGH Macro said The Fed was committed to not only restoring price stability, but also to projecting resolve to achieve that objective. “That means in the near-term Fed speakers are likely to continue to follow through with the current expected policy path, which means a 75bps hike in July and another 50bps likely in September,” its Fedwatcher Tim Duy said, “later this year, after the Fed is closer to neutral, and if the tone of the inflation data changes markedly, Fedspeak will become more diverse,” adding that “for now, however, I expect the Fed will hesitate to start feeding into market speculation that it will soon take a more dovish interpretation of the appropriate monetary policy path.” Meanwhile in Europe, the ECB’s meeting minutes will be released at 12:30BST/07:30EDT. The central bank has already guided that it will raise rates by 25bps in July and also raise rates again in September, with some members already arguing for a 50bps rate rise at the latter meeting, depending on how the inflation profile evolves. ING said that the minutes may offer some clues as to whether there is some wriggle room left for a 50bps hike this month, though notes that the market is still attaching a small probability to that outcome. Our primer for the minutes’ release can be accessed in our week ahead note here. 

DAY AHEAD: Other items for the Day Ahead include US labour market metrics (Weekly claims data, Challenger layoffs data), trade data from the US and Canada, weekly DoE inventories. Central bank speak comes via ECB’s Enria (which could have implications for Spanish banks), ECB’s Chief Economist Lane will speak before the release of the ECB’s minutes; stateside, Fed’s hawkish 2022 voting member Bullard and the hawkish Fed Governor Waller. The Treasury will announce auction sizes for next week’s 3yr, 10yr, and 30yr sales. Meanwhile, there is focus on the UK’s continued political woes. PM Johnson is due to make a statement later today, with reports that he could resign following a number of ministerial resignations. This has lent some strength to UK assets; there is a feeling that UK securities have been heavily pricing a degree of political risk premium due to a number of political issues in recent months, and UK assets could see some relief on an announcement. That said, Capital Economics highlights that regardless of whether Johnson manages to stay in office or not, the impact on the UK’s stance towards Brexit and the outlook for the UK economy is still likely to be modest. Full Day Ahead here.

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07 Jul 2022 - 09:31- Fixed IncomeData- Source: Newsquawk

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