MARKET WRAP – 1 July 2022
The last day of trading for the quarter has seen some big moves. German bunds rallied hard, led by the short end on a combination of factors, including relief from no upside surprise to French CPI inflation, month-end buying, and safe-haven flows as the Euro Stoxx 600 fell 1½%. Germany’s unemployment rate shot up by 0.3 percentage points to 5.3% which looked alarming at face value, but the sharp reversal of trend was explained by refugees from the war in Ukraine adding to jobless claims. Germany’s bond market saw the 2-year rate down a massive 20bps to 0.61% and the 10-year rate down 18bps to 1.33%. The latter has traded a 60bps range of 1.33-1.93% in the past two weeks.
Traders continue to pare back how much tightening the ECB will do, with “only” 140bps of hikes priced for the four meetings left this year compared to 180bps priced two weeks ago. This dynamic dragged rates down right across Europe and spilled over into the Treasuries market. The weaker momentum suggests a lower contribution to Q2 GDP from private consumption, leading economists to revise down their estimates. Some Economists now expects Q2 GDP at an annualised minus 0.5%, following the 1.6% annualised contraction in Q1, reaching the definition of technical recession.
The Atlanta Fed GDP Now index fell to minus 1.01%. Morgan Stanley revised Q2 down from 2% to 0.3%, so whether the US economy prints two negative quarters in a row looks like a close call. Initial jobless claims remained close to a five-month high and yet another regional PMI, this time for Chicago, fell by more than expected. The monthly gain for the core PCE deflator was 0.3%, but 0.348% on unrounded figures which annualises to 4.3%, considered by markets to be too high for comfort. US Treasury yields are lower with the 2 and 10- year rates down 11bps, both now back below 3%. The US 10-year break even inflation rate is down 2bps to 2.37%, near its low for the year after a steep decline and after trading above 3% just over two months ago. This shows increasing confidence regarding the Fed to bring inflation sustainably down, supported by the more hawkish talk and determination in its part to do the job. The S&P500 has been whipsawing, opening on a weak note to be down over 2% at one stage, recovering to flat and back down 0.9% as we go to print.
AUD/USD stages a recovery after plunging to fresh two-week lows around 0.6850s, reclaiming the 0.6900 figure, nearly gaining 0.60% on Thursday, after US inflation shows some signs of topping. At the time of writing, the AUD/USD trades at 0.6900 during the Sydney open.
The AUD/USD remains in a downtrend, though slightly consolidating in the 0.6850-0.6950 range. Markets believe the major’s price action on Thursday is rising sharply, and a break above the June 30 high at 0.6920 might open the door for further gains, but markets expect solid resistance near 0.7000 will be challenging to overcome. Contrarily, markets believe a continuation to the downside is in play, though it would accelerate once sellers reclaim 0.6850, which is expected to send the pair tumbling towards the YTD low near 0.6828, followed by 0.6800.
Overnight Currency Ranges