MARKET WRAPS
Watch For:
Germany CPI, ZEW Indicator; UK Unemployment; OECD Quarterly National Accounts/G20 GDP Growth; OPEC Monthly Oil Market Report; no major corporate updates expected
Opening Call:
European equities should start modestly higher Tuesday but with gains capped, as the prospect of aggressive Fed rate hikes continues to hit sentiment. In Asia, stocks were sharply lower, while the dollar, Treasury yields, oil and gold all edged down.
Equities:
Higher stock futures suggest a steadier start for European markets Tuesday following their recent slide.
However, gains are likely to be limited as investors raise bets on aggressive Federal Reserve interest-rate rises that could include a larger-than-expected 0.75-percentage-point hike on Wednesday.
“While the Fed is once again expected to raise interest rates on Wednesday, it’s clear their efforts so far this year are not helping to reduce inflation,” wrote Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence and former adviser to the president of the Dallas Fed.
“The Fed needs to provide more clarity on its willingness to hike interest rates at an even steeper magnitude.”
The U.S. stock market tumbled again Monday with the S&P 500 entering a bear market, ending almost 4% lower. And shares in Asia were a sea of red early Tuesday but losses weren’t as severe.
Forex:
The dollar eased back slightly but hovered around a two-decade higher against a basket of major currencies, while the yen strengthened, as risk-off sentiment driven by Wall Street’s selloff dominated Asian markets.
Monetary tightening expectations are ratcheting higher after the May inflation print was followed by a rise in the University of Michigan’s price expectations measure. Traders have quickly raised their expectations for the size of the Fed’s next interest-rate move.
Late Monday, Fed funds futures, used by traders to bet on central-bank policy, showed a roughly 28% chance that officials would raise rates by 0.75 percentage point this week, up from about 3% a week ago.
Fed Rate Path:
JPMorgan has joined Jefferies and Barclays in calling for the Fed to raise its overnight target rate by 75 basis points on Wednesday, citing the CPI reading the latest University of Michigan consumer sentiment data as catalysts for the shift in view.
JPM has called an even larger one percentage point a “non-trivial risk” for the meeting, and said “after this week we look for two more 50 basis-point hikes in July and September before the Committee slows to a 25 basis point hike per-meeting pace until reaching terminal funds at 3.25-3.50% early next year.”
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AmeriVet said a 50-basis point rate increase remains the most likely outcome this week. AmeriVet argues that although a 75-bp increase can’t be ruled out, the Fed is more likely to avoid surprises. “They will deliver what they said they were going to deliver and then open the door to bigger increases down the road.”
AmeriVet expects inflation to be even higher in June, adding pressure on the central bank.
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Deutsche Bank said it would like to hear from Jerome Powell whether the FOMC still isn’t actively considering a 75-bp increase after May’s surprisingly high inflation. It also questioned what would meet the criteria of “clear and convincing” slowdown in inflation.
“If inflation continues to accelerate, how are you thinking about the next-best policy option? Larger hikes? Stronger forward guidance? Security sales?” Deutsche Bank also seeks clarification about how much higher unemployment can go without triggering a recession, among other things.
Bonds:
Treasury yields inched lower in Asia having closed at their highest levels in more than a decade Monday, with the rate on the 2-year note nearing the 10-year – threatening to invert the yield curve again.
Monday’s surge extended in after-hours trading, which carried the 10-year yield briefly above 3.4%, following a Wall Street Journal report that Fed officials were likely to consider raising interest rates by a larger-than-expected 0.75 percentage point this week to fight inflation.
Read: Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week
“We’re still seeing waves of price pressure crashing through the economy one after another, and while each wave may be ‘transitory,’ they keep on coming and will do so until U.S. demand has softened significantly,” wrote Kit Juckes, global macro strategist at Société Générale.
“The policy challenge is that the Fed has no idea how much monetary tightening is needed and will only find out it has done too much, long after the event. And we know what happens then.”
Energy:
Oil prices consolidated in Asia on possible profit-taking after they ended slightly higher Monday for the first gain in three sessions.
Discussions within the oil complex still revolve around Libya’s drop in production, China continuing to impose measures to slow Covid-19’s spread and worries around a global recession driving demand destruction, said SPI Asset Management’s managing partner Stephen Innes.
On the supply side, a possible trip by President Biden to Saudi Arabia is being seen as a potential effort by Washington to get Saudi-led OPEC to pump more oil.
Other News:
A study by the EIA of 119 publicly-traded, global oil and gas exploration/production companies collectively spent $244 billion last year on exploration and development, down 28% from the five-year pre-pandemic average, 2015-2019.
Despite the lower spending, these companies increased their proved reserves, although this could partly be due to them buying privately-run oil firms and assuming their reserves. The EIA said oil and gas prices can also affect reserve levels. The 119 companies studied “accounted for about 60% of total non-OPEC liquid fuels production in 2021,” the EIA said.
Metals:
Gold futures continued to fall in Asia after they logged their lowest finish in more than 3 weeks Monday, as the dollar surged.
However, OANDA said recession risks are growing and this should ultimately be positive for gold, adding that bullion will eventually attract safe-haven flows but not until the dollar peaks.
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Copper prices steaded on possible technical-related buying following Monday’s drop in base metals.
However, demand worries persist as China has started to reimpose Covid-19-related restrictions in key cities, analysts said. While the restrictions in place are localized and limited for now, concerns are that a further increase in cases will cause restrictions to widen and become stricter, said CBA.
It noted that China accounts for 40%-60% of base metal demand and 70%-75% of the world’s iron ore imports.
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Chinese iron-ore futures fell almost 2%, extending Monday’s weakness.
Demand in the ferrous metals market appears sluggish overall following slowing investment in the property market, said CITIC Futures. Construction material transactions are relatively weak given sporadic Covid-19 outbreaks in Shanghai and Beijing, it added, expecting turbulence in the market to continue.
TODAY’S TOP HEADLINES
Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week
A string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest-rate increase at their meeting this week.
Before officials began their premeeting quiet period on June 4, they had signaled they were prepared to raise interest rates by a half percentage point this week and again at their meeting in July. But they also had said their outlook depended on the economy evolving as they expected. Last week’s inflation report from the Labor Department showed a bigger jump in prices in May than officials had anticipated.
Lawmakers Make Bipartisan Push for New Government Powers to Block U.S. Investments in China
Congress is pressing ahead with legislation that could rewrite the rules for American companies investing abroad, proposing the screening of investments in countries like China seen as adversaries to protect U.S. technologies and rebuild critical supply chains.
The measure, part of broader legislation to bolster U.S. competitiveness with China, would require American companies and investors to disclose certain new outbound investments and authorize the executive branch to form a new interagency panel to review and block investments on national security grounds, according to congressional aides and a revised draft of the bill reviewed Monday by The Wall Street Journal.
Morgan Stanley’s Gorman Is ‘Pretty Relaxed’ About Recession Threat
James Gorman isn’t worried about how a possible recession and bear market will affect his bank.
The Morgan Stanley chief executive said Monday that he is “pretty relaxed” about the impact of a possible U.S. recession, a scenario he called a 50-50 proposition based on historical experience.
U.K. Unveils Brexit Bill to Change Northern Ireland’s Trade Status
LONDON-The British government presented legislation Monday that would allow it to tear up parts of its Brexit agreement with the European Union, stoking fears of a trade war and drawing condemnation from the trade bloc.
U.K. Foreign Secretary Liz Truss said the legislation put before Parliament enables the government to unilaterally alter the terms of a 2019 deal with its European counterparts that placed a customs border within the U.K., between Britain and Northern Ireland.
U.S., U.K. Collaborate to Spur Innovation in Tech Used to Combat Money-Laundering
The U.S. and U.K. governments are teaming up to encourage the development of new machine-learning technologies that could be used to combat money laundering.
(MORE TO FOLLOW) Dow Jones Newswires
June 14, 2022 00:30 ET (04:30 GMT)
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