U.S. equities swung between gains and losses before finishing lower after U.S. inflation was higher than forecast.
Headline inflation rose +9.1% for the 12 months to June, up from +8.6% previously and more than the estimated +8.8%. Core inflation was also higher than forecast at +5.9% compared to estimates of +5.7% but still lower than the prior reading of +6%. Morgan Stanley analysts noted “While core inflation pressures remain uncomfortably high, the outlook points to some inflation deceleration from here. In particular, energy price inflation is likely to reverse sharply in July on the back of falling commodity and retail gas prices, which points to a substantial drop-off in sequential headline inflation next month”. Futures pricing now implies around a 0.9% increase at the Fed’s July meeting, while Atlanta Fed President Raphael Bostic told reporters, “everything is in play” when asked about a larger than 75 basis point increase. Elsewhere, the Bank of Canada surprised economists by raising rates by a full percentage point compared to estimates of a +0.75% increase amid efforts to prevent four-decade high inflation becoming entrenched.
Shorter-dated Treasury yields rose on expectations of more aggressive front-loaded rate increases while longer-dated yields rose on the view such aggressive hikes are likely to significantly slow the economy which will need to be offset by lower rates in the futures. The 2-year yield climbed +9.5 basis points to 3.144% while the 10 and 30-year rates were -3.9 and -4.9 basis points lower inverting additional parts of the U.S. yield curve. The S&P500 finished -0.45% along with the Dow Jones -0.67%, Nasdaq Composite -0.15% and Russell 2000 -0.12% and the VIX traded -1.72% lower at 26.82.
European equities finished lower on Wednesday, tracking U.S. equity futures lower while German and French inflation data was in line with forecasts. German inflation rose +7.6% for the 12 months to June as forecast, moderating from +7.9% previously, while French inflation rose +5.8% as expected from +5.2% previously. The Euro Stoxx 600 declined -1.01% along with the DAX -1.16%, CAC -0.73% and FTSE100 -0.74% with major benchmarks lower across the region.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for another muted open this morning with ASX200 futures down just -3 points or -0.05% to 6,516. The index rose +0.23% on Wednesday with a +0.66% gain in financials offsetting weakness in materials -0.56% and energy -1.78%. Shares in Qantas rose +4.25% after agreeing to remove its vaccine mandate from Tuesday for international travel, inline with Australia’s revised border policy. In focus today is the release of employment data at 11:30 AEDT forecast to show +30k jobs were added in June moderating from 60.6k previously, with the unemployment rate expected to edge lower to 3.8% from 3.9%. The Australian dollar was little changed on Wednesday at 0.6760 while the 10-year yield was -2.9 basis points lower at 3.388%.
Oil prices rose modestly overnight with both WTI and Brent crude +0.75% and +0.43% higher at US$96.56 and US$99.92. U.S. crude inventories for the week ending July 8th unexpectedly climbed by +3.254m barrels versus estimates for a -154k barrel draw, with gasoline stocks also rising +5.825m barrels against expectations for a -357k draw. Elsewhere the International Energy Agency trimmed its oil demand forecast for 2022 and 2033 while warning of great uncertainty noting “A worsening macroeconomic outlook and fears of a recession are weighing on market sentiment, while there are ongoing risks on the supply side”. Iron ore futures rose +3.62% on Wednesday although are -1.49% lower this morning at US$107.15. Gold rose +0.55% to US$1,735.51 an oz, as did silver +1.47% to US$19.22 and Bitcoin +1.10% to US$19,657.
Economic data:
- Australian Employment (MoM Jun) 11:30
- U.S. PPI (MoM Jun) 22:30
- U.S. Initial Jobless Claims (9th Jul) 22:30
- Fed Waller Speech 01:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
