US EARLY MORNING: US futures are mixed; growth concerns continue to dominate; Powell Part II ahead

SNAPSHOT: US equity futures are mixed. NQ +0.2%, ES -0.1%, RTY -0.3%, YM -0.3%. Treasuries are bid, with yields lower by around 5bps across the curve, which has resumed its flattening bias. The Dollar Index is up, largely as the EUR slides after grim flash PMI data for June flags risks to growth. Crude benchmarks are also lower. The theme remains concerns on growth amid high prices, and policymakers who are behind the curve in their policy responses. 

GROWTH CONCERNS: Economic growth concerns have dragged on equities of late, and this week, Fed officials have been more explicit in acknowledging risks that the US economy could fall into a recession. In his testimony to lawmakers, Chair Powell said that a recession was certainly a possibility, while non-voter Harker touched on this theme ahead of Powell’s remarks. These remarks follow a NY Fed publication last week, which noted that the economic outlook had worsened considerably since March, and its model projected that inflation would remain elevated this year, accompanied by a not-so-soft landing. The model sees modestly negative GDP growth in this year and next, with only a 10% probability of a soft landing (defined as four-quarter GDP growth staying positive over the next ten quarters), while the chances of a hard landing (defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1%) stood at around 80%. These concerns can be seen in energy markets: despite the thin spare capacity of OPEC members and the Russian-related disruptions, crude prices have been sliding, with the demand-side of the equation coming under pressure. ING says that this may help relieve some of the tightness in crude markets in the short to medium term, but it does little to solve the longer-term supply shortfalls. The knock-on to equities is also becoming clearer. The slowdown in growth and elevated level of consumer prices is a threat to corporate margins, and could hit earnings in the quarters ahead – retailers like Target and Walmart have already warned about this. Meanwhile, an analysis by Reuters says that there are few signs that the Street is factoring in the drag from higher oil prices in earnings expectations; the piece cites research suggesting that a USD 10 rise in oil prices cuts 0.3ppts from GDP, and the approximately USD 30 rise in crude prices since February has already shaved 1% from global growth. Reuters noted that around 61% of Q2 pre-announcements for Q2 had been negative so far, which lags the 68.7% negative pre-announcements in the previous quarter. Currently, analysts expect S&P 500 companies to report 5.4% earnings growth in Q2, but once energy companies are taken out, that falls to a 2.2% decline, according to the newswire’s data.

DAY AHEAD: Weekly initial jobless claims data coincides with the BLS’ survey period for the June jobs report, though the street sees little change in the week. Perhaps more interestingly, the S&P Global Flash PMI data for June may give us clues as to how the more-widely viewed ISM data will look when it is released in the early part of July; the Street looks for the S&P PMI data to ease slightly on the month, although there are probably greater fears of a more meaningful slide after the soft showing in the European PMI data today. Fed Powell delivers Part 2 of his semi-annual testimony to lawmakers, which is usually a copy-and-paste-job of his first testimony, and will likely face a similar line of questioning by lawmakers on inflation and growth. The Treasury announces sizes for next week’s 2s, 5s and 7s auctions. Note that the EIA has delayed the release of its weekly crude inventory data due to a system issue, but the NatGas stocks data will still be released. Full Day Ahead here.

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23 Jun 2022 - 09:53- EquitiesData- Source: Newsquawk

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