Daily Market Outlook, August 12, 2022

Overnight Headlines

Equities across the Asia Pacific are mostly trading higher with most major indices in the region set to end the week up. Sentiment has been buoyed by prospects of less aggressive interest-rate increases from the US Federal Reserve. However, comments overnight from US Fed member Daly said that further interest rate increases were still warranted, albeit noting that the welcome news from the July US CPI report may mean that a 50bp interest rates increase is more appropriate than another 75bp rise.

Just released UK GDP data showed the economy contract by 0.1% in Q2, largely due to a 0.6% m/m decline in June activity on account of the double Jubilee bank holiday.

The past few days have seen some welcome news on the US inflation front. Most notably, on Wednesday, the latest US CPI print, saw the headline rate drop from 9.1% in June to 8.5% in July, softer than market expectations of a fall to 8.7%, while the ‘core’ rate confounded expectations of a rise to 6.1% and printed unchanged at 5.9%. Yesterday’s Producer Prices report for July, meanwhile, also printed below expectations with both the headline and ‘core’ rates, pulling back more sharply and pointing to some ‘unanticipated’ easing in pipeline price pressures in the US manufacturing sector. The softening in inflation pressures seen in both reports primarily reflected the recent fall in the oil price, but there were also some signs that an easing in supply bottlenecks may also be pushing down on goods price inflation more generally. However, given indications that domestic pressures are pushing up services inflation the Fed will probably want much more evidence before it changes course on monetary policy. More importantly for the US Fed, will be how these developments are impact upon inflation expectations.

Later today, the University of Michigan will be releasing its preliminary estimate for July US consumer sentiment, which is expected to show a modest improvement from 51.5 in July to 52.0 this month on account of the recent fall in gasoline prices. The report will also provide a gauge on US consumers’ expectations for inflation 1yr ahead and 5-10yrs ahead. The reading for the latter fell 0.2% points in July to 2.9% but the distribution remained wide, pointing to ongoing risks that inflation expectations could de-anchor. While the 1yr ahead measure is expected to moderate further, on account of the recent decline in gasoline prices, the greater focus will be on the 5-10yr measure for signs on how longer-term inflation expectations are reacting to recent trends in inflation, although the downside surprise in the July CPI report is likely to have come after the cut-off date for today’s reading.

Elsewhere, it is a quiet day for economic data releases with no major reports due in the UK. For the eurozone, the latest industrial production report is due at 10:00 (BST). On balance, already-released regional reports from Spain, Italy, Germany and France have been better than expected and point to upside risks to the market consensus expectation of 0.2% rise

EUR/USD: 1.0050-55 (2.11BLN), 1.0200-05 (1.2BLN)
1.0225-30 (675M), 1.0265 (326M), 1.0300-10 (2.86BLN)
1.0325 (814M), 1.0350 (841M), 1.0400 (410M)
USD/JPY: 133.98-00 (1.61BLN), 135.00 (266M), 135.45 (300M)
GBP/USD: 1.2100 (462M), 1.2300 (576M)
USD/CHF: 0.9400 (325M), 0.9550 (260M), 0.9700 (300M)
AUD/USD: 0.6950 (358M), 0.7100 (689M)
USD/CAD: 1.2700 (1.45BLN), 1.2795-00 (1.1BLN)), 1.2850 (311M)
1.2975 (425M)

EURUSD Bias: Bearish below 1.0410

GBPUSD Bias: Bearish below 1.23

USDJPY Bias: Bearish below 136

AUDUSD Bias: Bullish above .7050

BTCUSD Bias: Bearish below 25.3K