US Market Wrap: Stocks, bonds plunge after US CPI climbs to the highest in 40 years

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  SNAPSHOT: Equities down, Treasuries down, Crude down, Dollar up


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  REAR VIEW: Hot CPI stokes fears of aggressive Fed action, University of Michigan sentiment plunges to record low, Biden again pledges to take action on inflation.


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  WEEK AHEAD: Highlights include FOMC, BoE, BoJ and China activity data. To download the report, please click here.


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  CENTRAL BANK WEEKLY: Previewing FOMC, BoE, BoJ, SNB, BCB; reviewing ECB, RBA, RBI, CBR. To download the report, please click here.

MARKET WRAP

Stocks and bonds plunged after data showed US headline inflation rising to the highest in 40 years in May, raising the prospect that the Federal Reserve will need to lift rates agressively at its meeting next week as it tries to place a lid on surging consumer prices. Analysts at Barclays became the first major bank to predict that the FOMC will hike the Federal Funds Rate target by 75bps, rather than the 50bps that officials have alluded to recently. The fear is that the Fed will eventually need to lift rates to above the so-called neutral level, which will put activity into restrictive territory, potentially triggering a recession, something that Chair Powell is undoubtedly be quized at his post-meeting press conference. Compounding the grim CPI data was the prelim University of Michigan sentiment data for June, where headline sentiment slumped to a record low, while expectations of year-ahead and longer-term inflation expectations also picked-up.

US

CPI: The rate of annual US headline inflation climbed to a 40-year high in May (+1.0% M/M vs exp. 0.7%; +8.6% Y/Y from 8.3%). While the annual rate of core inflation eased from 6.2% Y/Y to 6.0%, the monthly rate of core inflation rose by 0.6% M/M again, above the consensus expectation. Capital Economics said the data raises the risk that the Fed will need to extend its series of 50bps rate hikes into the Autumn, and even opens the door to a 75bps move at next week's meeting. "The bigger increases in core prices a year ago means that core inflation still edged down to 6.0%, from 6.2%, but there is very little in the details of this report to suggest that inflationary pressures are easing," CapEco wrote. "The surge in energy prices this month means that headline inflation will remain close to 8.6% in June. Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bps rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings."

US PRESIDENT BIDEN: US President Biden said inflation was not coming down as sharply and as quickly as he wanted to see, and urged Congress to pass laws to lower energy and pharmaceutical costs for consumers, also calling for legislation to lower shipping costs to help lower the price of goods. Biden also said that the US was on track to produce a record amount of oil next year, and he was working with the industry to accelerate this output, adding that energy companies should not use the challenge created by the war in Ukraine as a reason to make things worse for families; he also took a pop-shot at ExxonMobil (XOM), complaining that it was not making new investments, and also called on corporations to pay a tax on share buybacks. Biden said his administration would do everything it could to lower prices for Americans.

UOM: The June University of Michigan consumer sentiment data saw the headline plunge to 50.2 from 58.4; analysts were expecting a smaller fall to 58.0. The conditions sub-index fell to 55.4 from 63.3, beneath expectations of 62.5, while the expectations sub-index fell to 46.8 from 55.2, beneath the 54.5 analysts were looking for. The story in the inflation measures was similar to the firm reading in the earlier released May CPI data, where year-ahead inflation expectations rose to 5.4% from 5.3%, while the longer-term 5-10yr expectations rose to 3.3% from 3.0%, a new cycle high. "Soaring energy and food prices, coupled with falling stock prices, are a toxic combination for consumers’ sentiment, and the Michigan index is now at a record low," Pantheon Macroeconomics wrote. But the consultancy notes that The Conference Board's gauge of consumer confidence is not abnormally low, which PM says is likely since it places more emphasis on business conditions rather than just people’s own finances. Noting the sharp declines in the sub-indices, it says that these levels would usually be consistent with a large decline in real consumer spending, but it is not seeing signs of that at the moment, which it says may be a result of consumers sitting on large reserves in their bank accounts relative to what would have been expected before the pandemic. "More broadly, sentiment and spending parted company back in 2015, for reasons which are unclear, and they now a long way apart," PM writes, adding that "sentiment matters to politicians, but spending matters to the economy.

FIXED INCOME

Treasuries saw heavy bear-flattening as problematic CPI paired with higher UoM inflation expectations ramps calls for another hawkish Fed pivot. 2yr yields +23.6bps, 3yr +22.3bps, 5yr +19bps, 7yr +15.7bps, 10yr +11.9bps, 20yr +5bps, 30yr +2.9bps.

TOKYO/LONDON: T-Notes hovered a few ticks lower than their prior settle (117-29+) through the APAC Friday session with trepidation in markets ahead of CPI. A choppy London open (for stocks) and continued curve flattening in EGBs post-ECB benefitted T-Notes to see the contracts reclaim 118-00 before paring a few ticks into NY trade.

NEW YORK: T-Notes entered the CPI print unchanged in what was initially a very choppy reaction for duration to the alarmingly high print. The contracts spiked lower in a knee-jerk reaction to 117-14+ before heavy curve flattening was seen to reverse the move to fresh session highs at 118-06. But, as the front-end selling became more acute, that pressure moved its way out the curve through the session to flip the long-end cheaper. The moves were only emboldened after the move higher in the prelim UoM June consumer inflation expectations ramped up the hawkish Fed expectations. T-Notes lost the 117-00 support before noon in NY, while 2yr yield rose above 3% for the first time this cycle.

AHEAD: No Treasury coupon auctions next week but FOMC Wednesday serves the highlight. On the US data front, PPI on Tuesday, Retail Sales and Import prices on Wednesday, and Philly Fed Mfg. on Thursday. Globally, Chinese production data Wednesday is on watch, while the BoE and SNB next Thursday could provide some transatlantic pressures, ahead of the BoJ on Friday.

STIRS: Eurodollars and SOFR strips saw heavy bear-flattening as Fed hike pricing over the next year ramped, as did the implied terminal rate (now implied above 3.5% in June 2023). Barclays now sees a 75bps hike at next week's FOMC meeting. Option flow saw an unsurprisingly large amount of puts/bearish structures. US SOFR declined to 0.75% from 0.76%, the lowest since May FOMC hike, and now at the lower bound of the FFR range as abundant front-end liquidity (as seen in record high RRP usage) makes its mark on monetary transmission.

CRUDE

WTI futures (N22) settle USD 0.84 lower at 120.67/bbl; Brent futures (Q22) settle USD 1.06 lower at 122.01

Crude tilted to the downside after data showed US inflation picking up to the highest levels in 40yrs, which many now speculate will see the Federal Reserve tighten policy aggressively in order to contain surging prices, which could potentially drag the US economy into a recession. The prospect of increased Fed aggression sent government bond yields higher, lifting the buck with it, also acting as another headwind for the crude complex. Elsewhere, trading desks note concerns that China intends to lockdown 14 of its 16 districts in Shanghai over the weekend for mass COVID testing, which is another factor that could weigh on global activity, and hence oil demand. Nevertheless, some desks are sanguine that Shanghai will navigate the testing without too much disruption, and crude markets were fairly resilient to the news.

EQUITIES

CLOSES: S&P 500 -2.9%, Nasdaq-100 -3.6%, Dow Jones -2.7%, Russell 2000 -2.7%.

SECTORS: Cons Disc -4.16%, Cons Stpl -0.37%, Energy -1.7%, Financials -3.65%, Health -1.63%, Industrials -2.96%, Materials -3.05%, Real Estate -2.4%, Technology -3.89%, Communication Svs -2.85%, Utilities -0.77%.

EUROPEAN CLOSES: Euro Stoxx 50 -3.53% at 3,592; FTSE 100 -2.34% at 7,301; DAX -3.09% at 13,760; CAC 40 -2.83% at 6,178; IBEX 35 -3.80% at 8,380; FTSE MIB -5.06% at 22,573; SMI -2.48% at 11,042.

STOCK SPECIFICS: UK CMA is planning a market investigation into mobile browsers and cloud gaming; Apple (AAPL) and Google (GOOG) "hold all the cards" with interventions needed to give innovators and competitors a fair chance. Without intervention, Apple and Google are likely to maintain/extend their grip on the sector, further restricting competition and reducing incentives. DocuSign (DOCU) plummeted after missing on profit as well as cutting billings guidance, but it did beat on revenue. Previously, DocuSign had warned that a return to post-COVID working conditions could cut into its business. Illumina (ILMN) CFO Sam Samad is to depart the Co., effective July 8th and is to join Quest Diagnostics (DGX), with Joydeep Goswami named interim CFO, as the Co. conducts a search for a permanent CFO. Tesla (TSLA) cancelled three online recruitment events for China scheduled for this month, without giving a reason, after Musk previously threatened job cuts, saying it was "overstaffed" in some areas. Vail Resorts (MTN) beat on the top and bottom line. Co. noted it benefited from an easing of COVID-related restrictions and noted successful efforts to attract visitors outside of its peak skiing season. Stitch Fix (SFIX) posted a deeper loss per share than expected and also missed on revenue. Q3 active clients of 3.91mln, a decrease of 200K, or 5% Y/Y. Q4 revenue view was also light. As a reminder, Thursday evening co. said it is laying off 15% of its salaried employees. Netflix (NFLX) downgraded at Goldman Sachs to ‘Sell’ from ‘Neutral’. Goldman said it was focusing on a number of factors, including an increased focus on profitability and lower investor tolerance for long-term investments as Netflix and other web-based businesses mature. Elsewhere, in the piece GS downgraded Roblox (RBLX) and eBay (EBAY). Amazon (AMZN) intends to pull out of the USD 7.7bln race for IPL cricket rights, according to Bloomberg. Tesla (TSLA) likely faces a shareholder vote on its labour-rights policy, according to Bloomberg sources. TSMC (TSM) and Samsung (SSNLF) are grappling with a manufacturing equipment shortage, and analysts believe shortfalls of the most advanced chips could be as high as 20% by 2024 and later, according to WSJ. US President Biden makes negative remarks on ExxonMobil (XOM), said it is not making new investments, also said that corporations should be required to pay taxes on share buybacks. Meta (META) is scrutinizing Sheryl Sandberg’s use of facebook resources over several years, review focuses on the extent to which staffers worked on her personal projects. Apple (AAPL) CEO Cook urges US lawmakers to advance privacy legislation as soon as possible, Reuters reports. Micron (MU) to make cutting-edge '1-beta' memory chips in Japan this year, according to Nikkei.

WEEKLY FX WRAP

DXY hits a three-week peak as US inflation accelerates to a 40-year high; next week sees a plethora of G10 central banks

USD - The Buck is poised to clock in another week of gains after US inflation accelerated to its fastest pace in 40 years – the internal breakdown showed increases in all items for the first time since November 2021. Money markets at the time of writing point to the year-end implied Fed rate at over 3.00% vs 2.92% pre-CPI. DXY was boosted from 103.52 ahead of the release, to print above 104.00 before the Wall Street open. The Index sets its eyes on 104.23 (May 17th high), 104.64 (May 16th high), and then 105.01 (YTD high). Earlier in the week, the index experienced see-saw trade from Monday through Wednesday (within a 101.840-102.840 range in DXY terms) on fluctuating risk sentiment and US Treasury undulations from an outright yield and curve perspective. US data was sparse throughout the week ahead of Friday’s CPI and Fed speak was non-existent during the pre-FOMC blackout period. Next week, the highlight will be the FOMC announcement in which Fed officials have heavily guided towards a 50bps rate rise, although many market participants are now of the view that the Fed will need to hike rates more aggressively further down the track to manage price pressures, and after the hot May CPI data.

AUD, NZD, CAD - A week of losses for the commodity currencies, namely a function of China’s COVID woes as Beijing and Shanghai reintroduced COVID measures to stem some local outbreaks and conduct mass tests – with commodities hit by the slowdown in demand as a result. Earlier in the week, the Aussie was boosted by a larger-than-expected 50bps RBA hike (vs +25bps priced in and some calls for +40bps), but only briefly vs the Greenback and intermittently thereafter due to bouts of risk aversion and key technical resistance on either side of the semi-psychological 0.7250 level (Fib and 200 DMA). However, the Aussie appreciated vs the Kiwi via the AUD/NZD cross as the RBA augmented its rate aggression with hawkish guidance, to the detriment of NZD/USD. AUD/USD fell from a weekly 0.7247 peak to a current trough at 0.7059 heading into the European close. AUD/NZD was interesting as it hit a fresh near-four-year high at 1.1163 post-RBA before recoiling back to under 1.1100 – with the cross still on course for a week of modest gains. The Loonie was supported by strength in crude and other commodities, and more hawkish BoC rate expectations relative to Fed, but hampered by angst between China and Canada on top of downturns in risk sentiment. The Canadian jobs data on Friday was overshadowed by the US CPI metric at the same time. USD/CAD looks set to end the week around the top of its current 1.2517-1.2794 weekly range.

EUR, GBP - All eyes were on the ECB, but steeper declines in EGB futures/soaring yields provided a prop for the Euro along with gains in crosses - EUR/JPY and EUR/CHF especially - on prospective widening policy divergence to the BoJ and SNB (both meetings next week). At the ECB event, Euro knee-jerked lower as a 25bps July hike was flagged but rebounded strongly when a larger rise was put on the agenda for September with gradual and sustained tightening signalled after the end of Q3. The EUR was then further pressured by the post-CPI dollar and fell below 1.0568 – the 50% Fib of the May low and high. Meanwhile, Sterling was somewhat sidelined in the absence of top-tier UK data or BoE commentary and largely indifferent on return from the four-day Jubilee holiday weekend to find PM Johnson facing a vote of no confidence. The Pound was also nonchalant when he saw off the revolt as the 211 vs 148 result still represented a hefty loss of support from within his party. Cable looks set to the European week towards the bottom of its 1.2375-1.2600 weekly range as traders look ahead to next week’s BoE confab.

JPY, CHF - The Yen was a major driver via the USD/JPY rally before EUR/JPY picked up the baton on the eve of the ECB. BoJ Governor Kuroda maintained that a weaker Yen has economic benefits, while Japan's Finance Minister noted pros and cons, adding no comment on what sort of moves are rapid or not. Further, Friday’s session saw a joint release from Japan’s BoJ, MoF, and FSA, which expressed concern about the rapid JPY weakening seen recently and suggested they will respond appropriately as needed in the FX market based on the G7 agreement – which underpinned the Yen at the time. USD/JPY looks set to end the European week towards the top of a 130.42-134.55 weekly range ahead of the BoJ announcement next week. Meanwhile, the Swiss Franc was mostly weaker amidst a ramp-up in yields and perceptions that SNB will stand pat next week (although Citi expects a 25bps hike) and divergence to other Central Banks (bar BoJ) gets wider.

SCANDI/EM - Hawkish remarks from Riskbank's Bremen, not ruling out a half-point hike this month gave the SEK a lift, while the NOK was underpinned by Brent intermittently. Elsewhere, RBI raised rates 50bps vs 40bps consensus to offer the INR some protection from rampant crude prices and keep it off record lows vs USD. NBP matched expectations with a 75bps hike, but PLN wanted more. CZK took new CNB appointments largely in stride, whilst HUF held off 400.00 vs EUR as Hungary sold USD and EUR-denominated bonds. ZAR extended its winning streak with support from Gold holding around USD 1,850/oz and near DMAs, plus a wider than forecast SA current account surplus. Conversely, TRY fell even further on investor angst over the easy monetary policy approach to try to curb inflation and geopolitics. RUB gained to a two-week high vs the USD as CBR cut rates to the pre-crisis level of 9.5% and eased some capital controls. Finally, the Yuan was propped up by encouraging Chinese trade data in contrast to the setback on the COVID front as areas of Shanghai and Beijing returned to restrictions. Meanwhile, US Treasury's semiannual currency report refrained from designating any currency manipulators but placed twelve economies on its “Monitoring List” of major trading partners that merit close attention to their currency practices and macroeconomic policies - China, Japan, South Korea, Germany, Italy, India, Malaysia, Singapore, Thailand, Taiwan, Vietnam, and Mexico. The US Treasury said China’s failure to publish foreign exchange intervention data and broader lack of transparency around key features of its exchange rate mechanism makes it an outlier among major economies, and Treasury will closely monitor the foreign exchange activities of its state-owned banks.

10 Jun 2022 - 21:08- EquitiesData- Source: Newsquawk